CAPA's LCCs and New Age Airlines in North Asia summit highlights
CAPA held its 'LCCs & New Age Airlines in North Asia' and 'Financing the Asian Aviation Revolution' summits in Macau this week, attracting 40 executive level speakers and some 220 delegates drawn from across Asia, Europe, North America and the Middle East.
CAPA last held this event in Macau in 2004, and since then the city and aviation in the wider North Asian region has witnessed dynamic change.
CAPA – Centre for Aviation chairman Peter Harbison, speaking on Day 1 of the conference, noted that LCCs in North Asia are taking off as aviation policy reform, full service airline restructuring, airport infrastructure development and rising incomes fuel greater adoption of this new airline business model. CAPA believes the upside of the North Asian market can be measured in the hundreds of millions of travellers this decade.
Below is a selection of highlights from the proceedings:
Air Transport Research Society: President Professor Tae Oum predicted there is room within Asia for six to seven "mega LCCs" bigger than legacy carriers. Currently the region has three competing pan-Asian carriers: AirAsia, Jetstar and Tiger Airways.
AirAsia Group: Region head - customer experience and technology Zaman bin Ahmad stated AirAsia Japan has seen higher than expected demand from the retired segment of the Japanese population since the carrier launched services on 01-Aug-2012. 45% of the passengers who have so far booked AirAsia Japan services are aged 65 years or older, he noted. Mr Zaman stated AirAsia Japan recently carried a group of 16 school children from Tokyo Narita to Sapporo so they could participate in a football match for the day. Meanwhile, Peach has facilitated day trips to Seoul from Osaka Kansai, often for shopping trips. These examples show Japanese LCCs are enabling passengers to take affordable day trips which they were previously unable to do.
AirAsia X: CEO Azran Osman-Rani stated Japan point of sales for its Kuala Lumpur-Tokyo Haneda service has expanded significantly in the two years since it launched the route, growing from initially 25% to "well over 40%" currently. AirAsia X sales in Japan are expected to increase further following the Aug-2012 launch of new sister short-haul carrier AirAsia Japan, which has significantly expanded the exposure of the AirAsia brand in the Japanese market. Mr Osman-Rani says AirAsia X has been able to successfully penetrate the Japanese market using its preferred online channel as travel agents, which are by far the most popular distribution mode in Japan, now accounting for less than 10% of AirAsia X's bookings in Japan.
Mr Osman-Rani added the carrier would be interested in launching service to Tokyo Narita if slots become available. Air Asia X now operates a daily service from Kuala Lumpur to Tokyo Haneda using late night slots at Haneda. A service that turns around at Narita during the day would allow AirAsia X to offer domestic connections operated by new sister carrier AirAsia Japan, which is based at Narita. AirAsia X's Kuala Lumpur-Haneda passengers are now unable to self-connect with any domestic carrier given the late arrival time of the flight. Mr Osman-Rani says there is sufficient demand for Tokyo origin or destination passengers to continue to support the Haneda flight but "if there are daytime slots available at Narita then absolutely we'd be interested".
He added cargo now accounts for over 5% of revenues at the low-cost, long-haul carrier. Mr Osman-Rani said, "cargo is a booming sector for us. It's grown from 2% of our revenue to over 5%. (Cargo) load factors are now well above 50%. It's a significant margin contributor to our business. It continues to grow."
Association of Asia Pacific Airlines: Director General Andrew Herdman stated full service carriers will continue to account for an overwhelming majority of the Asian market. Mr Herdman pointed out globally LCCs account for only 12% of revenues in the airline industry and in Asia this figure is even higher with LCCs accounting for approximately USD7 billion of the USD160 billion in revenues the Asian industry generates. "It's where the revenue is," Mr Herdman said, referring to the full service model. He added premium cabins account for about 27% of international revenues in Asia and airlines continue to invest in upgrading their premium products, which is another indication "the full service model is alive and well".
Mr Herdman said there should be opportunity for AirAsia X to further grow its cargo revenues, pointing out at full service carriers in Asia cargo typically accounts for "close to 10%" of revenues on passenger flights.
CAM Macau International Airport Company: Advisor Antonio Jose Rato stated the airport does not believe in the concept of constructing a separate terminal for LCCs. Mr Rato believes the LCCTs in Singapore and Kuala Lumpur are "now considered a mistake", pointing out the high cost of the new LCCT that is almost complete at Kuala Lumpur International Airport and the recent decision to demolish the Budget Terminal at Singapore Changi. Mr Rato said that while LCC passengers are interested in cheap fares "they don't expect to have low service at the airport". He stated from an airport perspective, having a separate LCCT is frequently more expensive than having one terminal for all carrier types because of the need to duplicate services and systems including check-in, security and immigration. Mr Rato said Macau International Airport expects further LCC growth in Macau but does not believe the airport's LCC penetration rate will reach 50%. The airport is currently serviced by 10 LCCs and has an LCC penetration rate of around 30%.
Cebu Pacific: CEO advisor Garry Kingshot stated he expects the launch of three low-cost carriers in Japan this year will help build awareness of the LCC model in Japan, which will benefit all LCCs operating in the country including Cebu Pacific. Mr Kingshott said it has taken time for the Japanese market to get accustomed to Cebu Pacific's service since it launched flights to Japan in 2010. He says Cebu Pacific's only Japanese route, Manila-Osaka Kansai, is now performing well, but there continue to be "issues" with passengers becoming accustomed to the LCC model. The launch of Peach, Jetstar Japan and AirAsia Japan in recent months should help build awareness of the LCC model in Japan and in particular get Japanese passengers used to the concept of online ticket bookings. "We are delighted to have LCCs in Japan established," Mr Kingshott said, noting, "It will be nice to have some support from local LCCs." Cebu Pacific is interested in expanding its Japanese network but Japanese authorities currently prohibit all Philippine carriers from adding capacity to Japan due to ICAO-related restrictions.
Mr Kingshott added the carrier's ground handling costs at Osaka Kansai, its only Japanese destination, are 10 times higher per turnaround than Singapore Changi. "And that's a heavily negotiated rate, way below what full service carriers are paying," he said. He added LCCs operating to or within Japan have no choice but to pay higher costs than other markets as Japanese airport service providers are less efficient and pay employees more than providers in other Asian markets. "These people are extremely high paid – everyone that touches your airplane or your boarding passes or bag tags are earning a lot of money," Mr Kingshott explained. He added ground handlers in Singapore also pay their staff relatively high wages but "are far more efficient and far more competitive".
Jetstar: CCO David Koczkar stated Jetstar's business today would have been surprising at its founding nine years ago. "One thing we didn’t think we would do was set up a codeshare business,” Mr Koczkar said. Jetstar now codeshares with three airlines, including parent company Qantas, and has 20 commercial arrangements, including Air France-KLM Group. This, Mr Koczkar said, is "not something you would set out to do as a LCC" but Jetstar now has the "amazing nexus" of distribution to construct complex itineraries. In other areas Jetstar started with a slimmed-down model closer to Ryanair but “after a few years we realised that wasn’t a platform for sustainable growth”.
Mr Koczkar stated the Jetstar Group could grow its Chinese presence tenfold within three years. He said the Group could carry upwards of five million passengers p/a within three years, 10 times its carriage of 500,000 passengers in recent years.
He added there is a need to carefully select JV partners to ensure its intellectual property of running a business with foreign partners is protected. He noted the Group is selecting partners "we believe are there for the long term” as that avoids the risk of partners learning the Jetstar model and then establishing a carrier without Jetstar and possibly in competition with Jetstar. China Eastern Airlines' JV partner in Jetstar Hong Kong, has openly stated it is using that JV to learn about the LCC model from Jetstar. Mr Koczkar, however, noted the Jetstar Group's strength in this arena, stating, “There’s only been one full service carrier that has been able to launch a LCC and sustain the growth”. A wholly-owned subsidiary he said, is “very difficult to replicate”. Meanwhile All Nippon Airways, which partners with AirAsia in AirAsia Japan, may consider launching its own LCC or different subsidiaries of Peach in the medium to long term.
Jetstar Japan: CEO Miyuki Suzuki stated direct web bookings account for the majority of bookings. Ms Suzuki reported web bookings account for 90% of all ticket purchases with the remaining coming from its call centre and convenience stores, where it has distribution agreements. Peach Aviation sees 95% of bookings from the web and AirAsia Japan sees similar figures.
Ms Suzuki stated even as Jetstar Japan expands at Osaka Kansai it will not be able to use the LCC terminal that will open at the airport on 28-Oct-2012. "That's a sore point. It's not expandable beyond what they originally designed," Ms Suzuki said, but noted Kansai is eager to expand its LCC accommodation ability.
She renewed calls for Japanese regulators to adopt global standards instead of being in an "isolate Galapagos". Ms Susuki noted Jetstar Japan recently hired a pilot with 8000 hours of experience but noted the pilot still had to complete 24 hours of training. She added different regulators cover airport runways and terminals. “I’ve never seen a passenger who uses the airport runway but doesn’t use the airport terminal,” Ms Suzuki said. Meanwhile, AirAsia Japan noted 25 minute turnarounds cannot be accomplished, in part because passengers cannot board a flight while the aircraft is re-fueling. Peach is unable to board and deplane from front and rear doors.
Ms Suzuki added direct web bookings account for the majority of bookings. Ms Suzuki reported web bookings account for 90% of all ticket purchases with the remaining coming from its call centre and convenience stores, where it has distribution agreements. Peach Aviation sees 95% of bookings from the web and AirAsia Japan sees similar figures.
Jetstar Japan/AirAsia: Jetstar Japan CEO Miyuki Suzuki and AirAsia regional head Zaman Ahmad called on improvements to be made at Tokyo Narita International Airport, where both LCCs are based. The airport has a curfew, can be congested, and terminals have restricted opening hours, the two executives noted. However, Ms Suzuki said Narita understands the implications. "Its future depends on LCCs using it," she said of international traffic shifting to Tokyo Haneda. She noted Narita is constructing a dedicated LCC terminal for use from 2015.
Peach Aviation: Non-executive director and former Ryanair chairman Patrick Murphy predicted LCCs will increasingly be able to buy out legacy carriers, and will do so. "There will be calamities in the process," Mr Murphy said. Mr Murphy was reflecting on Ryanair's 20% stake in Aer Lingus and a possible but contentious takeover offer by Ryanair.
The carrier's board has approved the commencement of evaluating the ways to expand its fleet beyond 2014. Peach Aviation operates an all-A320 fleet in a 180-seat configuration and has an initial fleet placement of 10 A320s.
Murphy stated the carrier is taking in ancillary revenue above expectations, with growth notable in itinerary changes. These changes include date, time and name changes. “Lots of people insist on changing,” Mr Murphy said.
Scoot: CEO Campbell Wilson stated the low-cost, long-haul carrier would be interested in launching service to South Korea if the Singapore-South Korea bilateral is expanded. "If we get rights we would certainly be interested," Mr Campbell said, pointing out Korea is a popular destination for Singapore residents and Singapore is popular destination for Koreans. Currently there is no room in the Singapore-South Korea bilateral for Scoot because its full service parent Singapore Airlines is now using nearly all the traffic rights available to Singapore carriers (a few weekly frequencies are available during certain times of the year but Scoot is not interested in launching a new market unless it has the ability to eventually grow to daily service). Mr Campbell hopes South Korea liberalises faster and recognises the economic value Scoot would bring to South Korea if it was able to serve the country. Both Busan and Seoul would be potential markets for Scoot.
Mr Wilson stated flight attendants at the carrier share hotel rooms on overnight trips, one of many cost saving measures Scoot introduced when launching services in Jun-2012. "Our crews share rooms. That's a cost savings measure," Mr Wilson said noting the savings from such a measure is significant, particularly on non-daily routes such as Singapore to the Gold Coast, Tianjin and the not yet launched route to Shenyang and Qingdao. Scoot also operates daily flights to Bangkok and Sydney. Bangkok is Scoot's only route that can be operated as a turnaround basis with a single crew while in Sydney all crews stay just a single night as the route is served daily.
Venture Republic: CEO and co-founder Kei Shibata predicted the LCC penetration rate in Japan will reach 50% within five years. At below 10%, Japan currently has one of the lowest LCC penetration rates in the world but the market has seen this year the start of what Mr Shibata sees as a long overdue revolution with the launch of three LCCs – Peach, Jetstar Japan and AirAsia Japan. "We have been suffering the last two decades but finally we see some light at the end of the long tunnel," Mr Shibata said, adding, "It's definitely changing peoples behaviour". Venture Republic owns and runs Japan's leading online travel search engine Travel.jp.
Zest Air: CEO Advisor Brian Hogan predicted low-cost carriers in Asia will eventually account for 70% to 80% of the Asian market. "I believe in the next 10 to 20 years low-cost carriers will have 70% to 80% of the market," Mr Hogan said. He pointed out that in the Philippines, where Zest is based, LCCs already account for 82% of the domestic market. "Talk about an evolution." LCCs now account for approximately 20% of total capacity within the Asia Pacific region, according to CAPA and Innovata data.
Mr Hogan stated he is concerned the industry is increasingly becoming controlled by powerful "five million pound gorillas" such as AirAsia and Emirates. "Will they just gobble up the rest of the world and give the consumers less opportunity? That concerns me," Mr Hogan said.
Financing the Asian Aviation Revolution
Below is a selection of highlights from the proceedings of CAPA's Financing the Asian Aviation Revolution Conference
BOC Aviation: CEO Robert Martin stated aviation needs to better target the increasing capital in Asia to finance aviation. Mr Martin noted how wealth and highly-capitalised banks are located in Asia. The industry, he said, must "marry growing Asian wealth with aviation business".
He saidthe offshore branches of Chinese banks in recent months have made new inroads in leasing. Mr Martin expects these deals will become apparent around the end of 2012.
Mr Martin said the Asia Pacific region needs to enhance the number of cross-border leases. Excluding Japan, Asian banks tend to lease within their country, Mr Martin said. Notable exceptions include the inroads Cathay Pacific and Emirates have made in Singapore. Critical to improving this is the need for local cross-border currency swap markets.
Citigroup Asia: MD Anup Mysoor stated lessors will be willing to increase the number of widebody aircraft they lease if there is greater standardisation amongst configuration and features. Widebody aircraft have greater cabin configurations and engine options, which makes placement difficult as airlines try to achieve commonality across their fleet. Airbus and Boeing are moving towards standardisation, with Boeing on the 787 limiting the number of suppliers that can supply line-fit furnishings.
Mr Mysoor said he does not expect net aircraft ownership cost proportion to change in the medium term. As a percentage of airline revenue, 6-8% is typically spent on aircraft depreciation, 3% on leasing and 2% on interest. While leasing costs may increase, depreciation costs are expected to decrease. “The 12% ownership cost for airlines is not going to change radically,” Mr Mysoor said.
DVB: MD Vicente Alava Pons stated DVB expects 2013 will see the peak of aircraft deliveries. 2013 will see 60-70% more aircraft delivered (approximately 1300) than in 2012, which will see approximately 750 deliveries. Deliveries in 2014, 2015 and 2016 will so far be less than deliveries in 2013 but higher than 2012 figures. In 2017 deliveries will fall to 2012 levels, the bank expects.
He stated China and Indonesia will take approximately 40% of all aircraft delivered through 2026. China and Indonesia will each take over 500 aircraft based on current orders. India is projected to take approximately 450 aircraft while Malaysia has 350 on order, but this is largely due to AirAsia's backlog, which will be dispersed through its subsidiaries in other regions.
Mr Alava Pons stated there are 18 airlines with over 50 aircraft on order through 2026. Their cumulative deliveries through 2026 represent over 2000 aircraft. "We could argue are all of those aircraft going to be delivered? A substantial number, yes," he said. The Asian airlines with the five largest backlogs are Lion Air, AirAsia, IndiGo, China Southern Airlines and China Eastern Airlines. Also in the top 10 is Kingfisher, but its order book is expected to be reduced.
He added over 50% of aircraft to be delivered to Asian airlines in 2012 and 2013 will be placed with just 10 airlines. China Eastern Airlines, China Southern Airlines and Air China are projected to take 60 or more aircraft each. The other seven carriers in the top 10 include AirAsia, Malaysia Airlines, Shenzhen Airlines, Cathay Pacific, Lion Air, Jet Airways, and Garuda Indonesia. "Most of these names of course are quite good but some airlines might be under pressure," Mr Alava Pons said.
LCCs will take delivery of 46% of aircraft the region has on order. The five largest LCC backlogs are held by LionAir, AirAsia, IndiGo, Jetstar and GoAir. LCCs currently account for 24% of seats available within the Asia Pacific region.
Stephenson Harwood: Global head of aviation Paul Ng stated lessors are now beginning to including clauses in contracts stipulating that airlines must comply fully with EU ETS. Provisions under the EU ETS allow EU countries to seize aircraft from airlines that do not comply with the ETS.
Zest Airways: Chief executive advisor Brian Hogan stated with forecast of Ex-Im financing to increase 10-15%, all but the small top tier of carriers will have to turn to lessors. "If you're not the gorilla, invested-rated airline, how will you compete with everyone else? There is only one way forward. It has to be through the leasing community," Mr Hogan said. However, he noted that even turning to lessors will not be enough to overcome additional costs. "If we're paying 10-15% more – our ticket prices aren't going up. They're going down every year," Mr Hogan said.
CAPA has two more aviation summits in 2012, headlined by numerous airline CEO speakers. Click the links below to find out more: