Jeju Air

South Korea-Japan airline market sees structural change from LCCs, political tension & weakening yen

The once tidy and highly profitable Japan-Korean market is undergoing fundamental change – accompanied by double-digit yield declines.

It is difficult to identify precisely which ingredients are provoking the greatest change in the South Korea-Japan airline market. First, in mid/late 2012 the market was transformed as new airlines entered and others added capacity; these were mainly LCCs with unprecedented low fares. Then late 2012 saw Japanese outbound tourist numbers fall sharply due to political tensions between South Korea and Japan over largely uninhabited but disputed islands.

In 2013 the Japanese outbound market remains soft as the yen weakens. While the international political situation will eventually cool down, the Korean response has been to target individual tourists rather than tour groups, a change that was long overdue in any event.

But the difference now is that those individuals have LCCs to provide for their needs. These carriers are here to stay, and they will grow – for the usual reasons, but also due to the weakening yen. While the economic and political factors favour the Korean side, it is the Japanese side that has a larger share of the market.

Korea’s Jeju Air signals it must change from hybrid to pure LCC model as it seeks partnerships

Change may finally be coming to South Korea’s low-cost carrier scene. Once the home of innovation and the only notable examples of LCCs in North Asia, the numerous LCCs stagnated under a “Korea-style” LCC model that reduced some costs, making them lower-cost than the full-service legacy incumbents, but far from being internationally competitive. There were bouts of unprofitability and plenty of unexploited opportunities for expansion.

Independent Jeju Air, Korea’s third-oldest carrier (now eight years old) and first LCC, is more acutely aware than its mainline subsidiary LCCs of the changing dynamics in North Asia and is looking to respond.

Japanese low-cost carriers as well as those from Southeast Asia have a growing presence in Korea, and the Korean market is increasingly warming to them. With a new CEO, Jeju Air is looking to move away from its hybrid model to further reduce costs, and is also open to partnerships and alliances. If Jeju is able to achieve these goals, Korea’s other LCCs will be pressed to respond – creating a very dynamic North Asia LCC scene.

Foreign LCCs line up for JVs in South Korea as aviation market changes

As liberalisation and more progressive thinking spreads across North Asia, the region's pan-Asian LCCs are looking at how to have a local presence in South Korea. While South Korea in the middle of last decade became the first North Asian country to see the launch of LCCs, there has been stagnation at the expense of cost bases, creating room for a new LCC with a lower cost base to enter. An effort in 2008 from Tiger Airways to establish Tiger Incheon backfired, which, combined with weak performances at some incumbents, has caused foreign LCC groups to look at acquiring an existing carrier.

AirAsia is understood to have looked but left, leaving Tiger as most likely Asian LCC group to enter the South Korean market because Jetstar is now bedding down growth elsewhere and following from its Vietnam experience does not take a positive view towards acquiring another carrier. Indeed, global examples of LCC mergers are few, but this may be the platform necessary for South Korea.

It has no domestic market like Japan but a thriving international market with surprising numbers of liberalised air services, the spark to generate growth. Whether an acquisition pans out or not, South Korean aviation is in need of a shake-up.

Eight North Asian low-cost airline trends to watch in 2013

It certainly took North Asia some years to have momentum for low-cost airlines that was anything like booming Southeast Asia. 2012 delivered on that with three new LCCs launching in Japan and plans underfoot in Hong Kong for Jetstar Hong Kong as well as a possible transformation of Hong Kong Express into a LCC. While elsewhere the region may not have gone as far as producing LCCs, there is active discussion of having LCCs and the reforms needed to welcome and support them.

Talk is strongest in Taiwan, which has seen considerable growth from LCCs in North and Southeast Asia. South Korea is considering how and when its LCCs can become better competitors, shedding some of the comforts they have been unwilling to charge passengers. Japan will see growth, from existing LCCs and new ones, a challenge for incumbents. Reforms in China may enable LCCs in the future to launch, while all LCCs are watching how to be hybrid and chase yields. These are eight North Asian LCC topics to watch for in 2013.

Jeju Air, under new management, looks for partners and considers IPO as it weighs LCC transition

South Korea's Jeju Air has undergone a management changeover, with new CEO Kyu Nam Choi at CAPA's LCC and New Age Airlines conference on 05-Sep-2012 giving the message that he brings the wheels of change but with an endpoint that is undetermined and open to influence, be it from airline partners or investors as it considers an IPO in the medium-term.

Such an open tabula rosa strategy is revolutionary but welcome in the stagnating Korean LCC market where carriers, some second-fiddle to parent company interests, are showing a lack of direction as they confront high cost bases and lack of liberalised access. That combination will place the carriers under pressure as foreign LCCs – namely from Japan – enter, likely resulting in the LCCs transitioning from hybrid to more barebones LCC models. The timeframe of this is uncertain, and while it seemed Korea, the original market for LCCs in North Asia, would not promulgate further innovation, Mr Choi may set out to change that – with implications for all the country's carriers.

In Korea’s independent LCC market, Jeju Air soars while Eastar Jet is still coming of age

The nearly 20 year duopoly on South Korean air services held by Asiana and Korean Air was broken in 2006 with the launch of Jeju Air. That gave Korea its first low-cost alternative, establishing the country as a vibrant ground for potential new carriers, but only two made it to market and amassed scale: Jeju Air and Eastar Jet. More recently, t'way – rebranded from Hansung Airlines – has launched, but with a rocky experience and uncertain future as the airline remains for sale.

The experience for Eastar Jet and Jeju has not been equal. Jeju Air had to forge a path as a new carrier, and so encountered typical resistances, but has been rewarded with the status as Korea’s third largest carrier, larger than the LCC spin-offs from Asiana and Korean Air. Eastar Jet, the last of the new carriers to launch, has found it difficult to secure a position. Jeju Air is closer to being a hybrid carrier and both must re-define themselves and their cost base as regional competition increases. No position is guaranteed or forced.