Asiana buys stake in low cost airline, Busan International Air
The buy-in price for an airline that is yet to fly – USD24 million – is an extraordinary outcome for Busan International Air, valuing the carrier at USD53 million. It underscores the threat the incumbent carriers feel from new airline entry.
Rival, Korean Air, is planning to establish its own budget airline, Air Korea, in May-08 after announcing in Jun-07 that it “will no longer remain indifferent to the invasion of low cost carriers from China and Southeast Asia into the Korean market”.
Busan International Air, which is set to change its name to Air Busan, was established in Aug-07 and had planned to launch services in Jun-09, although Asiana is pushing for services to commence later this year, to defend its market share ahead of a surge in new entry.
Tiger Airways signed a deal last month with Incheon City to launch a budget carrier unit, Incheon Tiger Airways, in South Korea, with start-up capital of USD22 million. Based on Asiana’s acquisition of Busan Air, Incheon Tiger Airways has just became a lot more valuable on paper.
Yeongnam Air, PurpleJet and JB Airways and up to four more reported start-ups are preparing for launch in Korea. Hansung Airlines and Jeju Air have been already operating budget airline services in Korea since 2005. As in most industries, the first movers frequently gain an advantage.
Start-ups are currently required to operate domestically in Korea for two years, before being permitted to launch international services.
Asiana’s acquisition of another company could indicate a wish by management to retain some degree of management autonomy at its budget unit, while fast-tracking development and potentially delivering a lower cost base than an in-house venture. It is a strategy that has worked well for Singapore Airlines and Qantas (with their Tiger Airways and Jetstar units, respectively), but not for Thai Airways, which has had running battles over strategy with its 39%-owned budget unit, Nok Air.
Like several other North Asian carriers, Asiana has “remained indifferent to the invasion of low cost carriers” for too long. It now must quickly close the gap with Korean Air, Tiger Airways and others in addressing the high potential point-to-point leisure end of the market in Korea, China and Japan.