Outlook 2007: Full frontal attack on flag carriers begins

"It is clear that the role of LCCs and other start-up airlines enters a new phase in 2007", said the Centre's Executive Chairman, Peter Harbison, launching the report in Sydney today. "From being unlikely arrivals three years ago, to quickly becoming an obviously serious long-term force, recent developments suggest that the new breed of LCC will quickly dominate the entire airline agenda in Asia".

According to the Outlook study, LCCs are expected to take a 20% market share in Asia by the end of this decade - or a doubling of their current market penetration. Asia Pacific LCCs increased their capacity by 55% in 2006 and will increase seat capacity by 230% by 2012 - or a 40-50% capacity increase p/a over the next five years.

"The balance of power in Asia is quickly shifting, especially as LCCs take delivery of huge amounts of new capacity and set their sights on intercontinental markets. As this occurs, the future of the incumbent flag carriers will now be confronted more directly, prompting further urgent restructuring. Long-haul markets have been their unique preserve and underpin the advantage they have at their home hubs", said Mr Harbison.

But many flag carriers are confronting the challenges head-on, with several also entering rapid expansion phases. Asian airlines have planned deliveries over the next five years that represent almost 59% of the current fleet - well ahead of the global average of 31%.

The rapid take up of new aircraft could exacerbate airline staff shortages in the region. The Centre predicts 154,000 airline staff will be required in Asia over the next 5-7 years. With consequent shortages and cost pressures, some airlines will need to develop alliances or outsource certain functions.

"The upshot of these pressures, as well as continued high fuel prices, is airline earnings in Asia will be depressed over the next two years. The impact of fuel surcharges on revenue will diminish in 2007, as competitive pressures intensify, which will also cause yields to resume their long-term downward trend in many markets from late 2007", said Mr Harbison.

Long-haul profitability will be weakened by rising competition from Middle East carriers and an intensified focus on Asia by European and North American airlines.

"But there is a window of opportunity for carriers in the region seeking fresh funds", he said. "Up to 23 Asia Pacific/Middle East carriers are seeking to raise funds in the next few years. The generally favourable mood of equity markets could provide an opportunity for some".

Asia Pacific airports are predicted to be the key beneficiaries of these conditions in 2007. But the provision of enough capacity, funding development, and matching appropriate facilities to a rapidly segmenting airline sector are key challenges facing Asia Pacific airports.

Mr Harbison also predicts an acceleration of aviation liberalisation by governments in 2007.

"The prospect of a momentous opening up of the Singapore-Kuala Lumpur route - provoked, significantly, by tourism interests - would have repercussions right around the region, as ASEAN States prepare to open their skies between capital cities in 2008. Until now considered more of a concept than a serious reality, ASEAN 2008 would take on genuine meaning", he said.

This would put many Asian secondary cities on the cusp of rapid growth, in turn creating pressures to quickly develop new capacity. The synergy between tourism and airline liberalisation will also continue to drive change in the region, with significant, widely distributed benefits. Overall, Asian tourism will report a very positive year in 2007", concluded Mr Harbison.

The Centre's Aviation Outlook report is available for purchase online at centreforaviation.com