Asia's budget airlines facing big challenges after year of strong growth

Budget airlines will find it increasingly difficult to rely on just cheap tickets to entice travellers now that full-service carriers have also slashed fares on the same routes without compromising in-flight service, they said.

"It's never been a better time to travel," said Andrew Herdman, director-general of the Association of Asia Pacific Airlines in Kuala Lumpur.

"Established carriers have been driving up their cost efficiencies, improving their performance and the cost differentials between the established carriers and the new entrants are narrowing."

Andrew Drysdale, the regional vice president of the International Air Transport Association, agreed that the low-cost airlines are coming under sustained pressure.

"They are coming up against some of the best airlines in the world and profitable airlines so it will be tough for them," he said.

Consumers in Asia, home to some of the world's most profitable carriers such as Singapore Airlines (SIA) and Hong Kong's Cathay Pacific, have seen fares tumble dramatically over the past year.

For example, recent advertisements placed by SIA in the local papers here show the carrier charging promotional fares to some of the region's popular destinations that are comparable to its budget rivals.

An economy class two-way ticket to Jakarta on SIA, with the condition that there must be a minimum of two passengers, now costs 128 sgd. The same trip in March 2004 would have set one back by more than 500 sgd.

Valuair, Singapore's first budget carrier which began operations on May 5 last year, charges 149 sgd for a round-trip to the Indonesian capital on condition that the journey is completed within seven days.

SIA's regional wing, SilkAir, also announced this week a similar round of heavy promotional discounts to 12 destinations.

Drysdale said another hurdle that could hold back budget carriers from expanding their reach is that Asia's skies are still highly regulated, which means they need to acquire air rights before they can fly a route.

This is unlike the environment in Europe or the US.

"They have issues of air rights which needs to be overcome ... it needs to be understood that air rights are in fact trade agreements between governments and these governments will trade those agreements," he said.

Singapore, which is investing heavily to promote the city-state as a regional hub for budget carriers, has also listed Asia's regulatory environment as one obstacle facing low-cost airlines.

"While some countries, such as China, Thailand and Brunei have liberalised their aviation markets, most Asian countries are still very protective of their air rights," Transport Minister Yeo Cheow Tong said last week.

"Some prefer to protect their national airlines, foregoing the benefits that increased air travel and tourism can bring to their national economies.

"Others are concerned about the new dimension of competition that LCCs (low cost carriers) could bring to their national carriers."

Of the leading regional budget carriers, Andrew Miller, chief executive officer for consulting at the Sydney-based Centre for Asia Pacific Aviation, said Malaysia's AirAsia looks to be the strongest.

Miller said its founder, Tony Fernandes, recognised the potential of the market earlier than anyone else and has been one of the industry's most creative figures.

"He (Fernandes) has two years ahead of the market and he has been very inventive ... he does stand out in terms of the speed which he has grown the market," Miller said.

In Singapore, Valuair, Tiger Airways and Jetstar Asia now account for 7 pct of all flights at Changi international airport, despite being in the air for barely a year.

Transport Minister Yeo described their growth as "phenomenal", pointing out there are now 175 low-cost flights from Singapore each week servicing 15 destinations, up from 70 weekly flights to six cities six months ago.

However the Association of Asia Pacific Airlines' Herdman said the budget airline industry will inevitably have some failures as they meet the challenges, despite the year of strong growth.

"We just have to see how it evolves but in Europe there have been failures ... that's just the market working, that's what happens in other industries as well," he said.