16-Sep-2013 4:45 PM

Jin Air aims to balance relationship with owner Korean Air as outbound market prepares for growth

Analysis

As CAPA's LCCs and New Age Airlines Sep-2013 conference in Seoul clearly identified, the wheels are starting to turn in Korea, the home of the first LCCs in North Asia. But more recently it has suffered from stagnation as carriers do not offer a cost base that is competitive with other LCC developments in the region. Jin Air is the country's second largest LCC and wholly-owned by Korean Air. This brings advantages but also disadvantages, as CEO Won Ma said at the CAPA conference. Mr Ma sees that Jin Air needs to improve its cost base and has started to charge for small ancillaries, but not luggage. Jin Air also incurs higher costs from using some Korean Air services.

2012 was Jin Air's third year of profits, which were very respectable given the industry but lagging considering Jin Air's modest network, with limited competition. But the Jin Air-Korean Air relationship is far ahead of Asiana and its partially-owned LCC unit Air Busan, struggling to remain relevant up against Jin Air and the the even larger Jeju Air, Korea's largest independent LCC. If Jin Air, like other LCCs, can make very necessary cost structure reforms, there are increasing opportunities as the Korean outbound market grows, thanks to the strengthening of the won. It is time now more than ever to apply more pressure on the accelerator.

Summary

Jin Air is Korea's second largest LCC, capturing less than 4% of the entire Korean market.
The airline's network is concentrated on domestic routes, with its largest base being Jeju, followed by Seoul Gimpo.
Jin Air operates alongside Korean Air on some routes, but also serves destinations not operated by Korean Air.
The airline's financial performance has been profitable for three out of its five years of operation.
Jin Air is part of the Korean Air Group, which brings advantages but also challenges, such as higher costs for pilot and maintenance programs.
The airline is starting to follow the LCC model more closely by charging for small ancillaries, but has not yet implemented charges for checked luggage.

Jin Air is Korea's fourth largest airline, second largest LCC

Jin Air was established in 2008 following the LCC interest created by Jeju. Jin Air is now Korea's fourth largest airline after Korean Air, Asiana and Jeju Air. It is Korea's second largest LCC, behind Jeju Air.

Jin Air's presence is still relatively small, capturing less than 4% of the entire Korean market.

South Korea system capacity by carrier: 9-Sep-2013 to 15-Sep-2013

70% of Jin Air's scheduled seat capacity is in the domestic market and is concentrated on a single route: Seoul Gimpo to Jeju, a popular island destination that cannot be reached on the country's efficient high-speed rail KTX, which has sharply curtailed continental air services.

Popular tourist destination Jeju is Jin Air's largest base followed by Seoul's convenient downtown airport, Gimpo. Jin Air only offers flights to Jeju from Gimpo, where it is the third largest carrier after Korean Air and Asiana.

Jin Air top 10 hubs/bases/stations ranked on seat capacity: 9-Sep-2013 to 15-Sep-2013

Jin Air offers limited international service from Jeju, where it is the fourth largest carrier by both system seats and domestic only seats. Korean Air, Asiana and Jeju Air are all larger.

Jin Air's third largest base - and only other Korean point - is Seoul Incheon, from where Jin Air operates most of its international services. At Seoul Incheon Jin Air is the 10th largest carrier by scheduled seat capacity. Giving a further indication of its small size and market reach, Jin Air ranks behind six foreign carriers.

Top 10 Airlines at Seoul Incheon ranked on system seat capacity: 9-Sep-2013 to 15-Sep-2013

Rank	Airline		Total Seats
1	KE	Korean Air	346,081
2	OZ	Asiana Airlines	263,440
3	CZ	China Southern Airlines	33,468
4	7C	Jeju Air	31,752
5	MU	China Eastern Airlines	28,050
6	TG	Thai Airways	27,072
7	CX	Cathay Pacific	20,949
8	CA	Air China	20,890
9	SQ	Singapore Airlines	19,754
10	LJ	Jin Air	17,600

Jin Air is part of dual-brand strategy, often serving points not operated by Korean Air

Korean Air uses Jin Air as an effective part of its dual-brand strategy, but on a much smaller scale than is typically found elsewhere in Asia. Korean Air still relies heavily on its flagship mainline brand.

Jin Air's scheduled route network comprises two types of routes: first where Jin Air operates alongside Korean Air but with a fraction of Korean Air's capacity; and second to points Korean Air does not serve. Six of Jin Air's 11 scheduled routes do not see service from Korean Air. Of those six, five have historically never been served by Korean Air, making them entirely new destinations to the Korean Air Group. Only one route, Nagasaki, was previously a Korean Air route handed over to Jin Air. While this sometimes carries a negative connotation, transferring a route to a low-cost unit can give a better return.

Jin Air international scheduled services comparison: 9-Sep-2013 to 15-Sep-2013

Jin Air origin	Jin Air Destination	Korean Air service?	Jin Air market share	Korean Air market share
Seoul Incheon	Bangkok	Yes	6.5%	30.3%
Seoul Incheon	Cebu	Yes	8.8%	24.4%
Seoul Incheon	Clark	No	21.9%	N/A
Seoul Incheon	Guam	Yes	25.8%	46.5%
Seoul Incheon	Hong Kong	Yes	3.0%	28.9%
Seoul Incheon	Macau	No	36.6%	N/A
Seoul Incheon	Nagasaki	No	100%	N/A
Seoul Incheon	Okinawa Naha	No	44.5%	N/A
Seoul Incheon	Sapporo	Yes	27.9%	72.1%
Jeju	Shanghai	No	19.9%	N/A
Seoul Incheon	Vientiane	No	62.3%	N/A

Scale on the network is limited as Jin Air does not serve any international point more than once a day. Only five of Jin Air's 11 destinations see daily service (14 weekly one-way sectors, see graph below).

Jin Air top 10 international routes by frequency: 9-Sep-2013 to 15-Sep-2013

Jin Air's network also includes a growing amount of charter services to mainland China. Whereas most of Jin Air's network caters to the outbound Korean market, the Chinese services are mainly comprised Chinese passengers going on holiday to Jeju. The Korea-China air service agreement is rigid with open skies only existing between Korea and the Chinese provinces of Shandong and Hainan. Shandong is a popular tourist destination and also home to many Korean company offices. Hainan is China's island getaway, as Hawaii is to the US.

The open skies regime has fuelled large growth between Shandong province and Korea but barely any traffic to Hainan, reflective of its distance (further south than Hong Kong) and relatively high local cost as it caters to China's wealthy middle and upper class. Better beach bargains can often be found closer to Korea, or further away in a lower-cost location like Bangkok.

All of Jin Air's international services operate from Seoul Incheon, with the exception of Shanghai (Pudong), which originates from Jeju and brings Chinese tourists to Jeju island.

Jin Air's network will increasingly focus on the Chinese boom as well as outbound demand from Koreans able to travel more due to the strengthening of the Korean won.

Change is afoot - can Jin Air stay relevant?

Jin Air's network strategy has largely been conservative. This had been fine although it meant passing over many opportunities. But the LCC outlook around North Asia is changing. Japan is Jin Air's largest scheduled market but Jin Air has stayed out of the country's two largest markets, Tokyo and Osaka. These are money-spinners for Korean Air.

The Japanese LCCs, with Japanese full service airline heritage, have no qualms about taking on major routes: Peach serves Seoul Incheon three times a day from Osaka Kansai while AirAsia Japan serves Incheon twice a day from Tokyo Narita. There should theoretically be a structural cost base difference between a full-service carrier and a LCC that means a full-service carrier cannot reach markets a LCC can. This discounts the argument some full-service airlines use that their LCC product is called economy class.

Jin Air international seat capacity by country: 9-Sep-2013 to 15-Sep-2013

58% of Jin Air's international seat capacity is within North Asia while 30% is in Southeast Asia and 12% in the Pacific.

Jin Air international seat capacity by region: 9-Sep-2013 to 15-Sep-2013

A new test for the Korean market will arise with the likely entry of Thai AirAsia X, a medium/long-haul low-cost carrier to be based in Bangkok. Seoul will surely be an early destination. The general low-cost economics of the AirAsia Group, combined with the efficiency of a widebody product, will pressure Korean carriers in the Seoul-Bangkok market. Jin Air has one daily flight while Jeju Air has two daily flights that leave within about an hour of each other.

While Korea was the first part of North Asia to receive LCCs, development has stagnated. A wake-up call was delivered in the form of the Japanese LCCs, and another may be given by Thai AirAsia X and any other number of LCC entrants, like VietJet.

Jin Air has been profitable in last three years

In Jin Air's five-year history, it has been profitable for three years. Its only losses were in its start-up year (2008) and the following year (2009). In 2012 Jin Air's operating profits surpassed its operating losses, according to Korean Air's financial reports, which only give top-line figures. Revenue and profits increased in 2010 with international flights, but operating margin was halved in 2011. 2012 saw a rebound but still below 2010 levels, even if the operating margin is solid for the aviation industry. But no doubt the figure could be higher when considering the niches Jin Air is in as well as opportunity to take further costs out of the business.

Jin Air's financial figures, although limited, are the most thorough and consistent from the Korean LCC sector, and are also the most encouraging.

Jin Air financial performance (KRW billion): 2008-2012

Year	Revenue	Operating Profit (Loss)	Operating Margin
2012	247.5	14.5	5.9%
2011	170.7	6.9	4.0%
2010	116.0	9.3	8.0%
2009	60.9	(12.5)	-20.5%
2008	10.2	(12.4)	-121%

Being part of Korean Air brings advantages but also disadvantages

Jin Air CEO Won Ma, speaking at CAPA's recent LCC and New Age Airlines summit in Seoul, acknowledged than Jin Air's strong performance, as Korean Air reports it, is due to Jin Air's ownership structure. Mr Ma said in reference to Jin Air's profit, "behind that does lie that Korean Air is our parent company."

Other Korean LCC CEOs tend to query Jin Air's performance, as they see Jin Air receiving considerable help from Korean Air. But teh benefits of Korean Air affiliation also come with challenges, which Mr Ma did not shy away from. "There are some things we want to do independently," Mr Ma said, pointing to Jin Air having to follow Korean Air's pilot and maintenance programmes, which are more expensive than what Jin Air could source from a third party. "It's a big burden on us," Mr Ma said of having to follow Korean Air's pilot training specifically.

Mr Ma was only four months into the job when speaking of the conference, but already saw that Jin Air needs to be put on a diet to reduce costs. Jin Air does not release full operating and financial statistics, so its CASK can only be approximated at USD6.6 cents with an average sector length of 1,125km.

That sector length is about on par with AirAsia Berhad (Malaysia) but AirAsia's cost base is about USD4.5 cents. Adjusting for sector length, Jin Air's cost is only a little below Skymark based in Japan, where overall costs are considerably higher than in Korea. Korean carriers should be capable of a significantly lower cost base. In some areas Jin Air will be unable to reduce costs given its Korean Air ties, so it must look to gain advantages in other areas if it is to achieve the significant cost reduction that is necessary.

Select Asian airline CASK measured against average stage lengths: 2012*

Jin Air is starting to follow the LCC model more closely, charging for items

As part of Mr Ma's financial initiatives, Jin Air will look to grow ancillaries. Jin Air, like most Korean LCCs, has followed a hybrid model with medium or high costs and limited complimentary service. Checked luggage is offered while onboard service is simple with small snacks rather than meals. That has started to change. Jin Air in Apr-2013 announced that limited snacks would be sold on flights to Guam, Macau, Bangkok, Vientiane, Cebu, Clark and Hong Kong - most of its destinations (notably Japan was excluded). Snack food prices at the time ranged from KRW1000 (USD0.88) to KRW3000 (USD2.67). Water is still complimentary. Charging for snacks was followed in Jul-2013 with the announcement of blankets being offered for sale at KRW15,000 won (USD13.15) each. Jin Air also sells ground transport tickets for buses from Seoul Incheon (these are run by Korean Air).

But so far left untapped is the big ancillary revenue generator - checked luggage. Jin Air is not alone is not charging for this big ticket item. A number of LCCs in the region see charging for checked luggage as a huge leap to make and one that will likely be met with large public outcry. So the strategy is to ease into ancillaries, even if foreign LCCs - including those from Japan - have charged for checked luggage from day one. But as other markets have shown, once one carrier takes the plunge the others follow. The rewards from charging for luggage can be transformational, as the US major airlines have found.

Jin Air has strong potential as the Korean outbound market grows - will Jin Air capture the market?

Charging for ancillaries rather than giving them away is a good start to improve the competitiveness of Korean LCCs. But there are many more steps, some that will be far reaching and inevitably create a clash with Korean Air as Jin Air looks to unhinge itself from full-service ties that are accompanied by full-service costs. Already Jin Air has numerous expansion opportunities - independently or under Korean's control - it has left untried. A lower cost base follows the well-proven rubric of stimulating greater traffic and making more services economically profitable.

It is a good time to be a Korean airline and start to make yourself more competitive. The strengthening of the won has already propelled outbound figures and this will grow - but foreign carriers will be waiting to capture this traffic too. The continuous expansion of China will offer further route opportunities.

Where southeast Asia's LCC proportion of seats on international services is over 57%, the equivalent figure in northeast Asia is below 10%. The upside could not be more colourfully illustrated.

The lower the cost base, the more opportunities Korean carriers will have to target the outbound China market. The bilateral arrangement is limiting, but there is some relief by being able to offer charters. Full liberalisation, probably still some years away, will lead to an explosion of traffic. But by then the Chinese carriers may have their own LCCs. Chinese carriers do not have the strongest of cost bases relative to their potential, but China is recognising the efficiency of carriers like Spring and would probably like to see that efficiency replicated across the sector.

But before a China traffic explosion, there is Japan and likely soon Southeast Asia to worry about. LCC growth out of these markets brings competition - and also a reason to make overdue changes.