27-Nov-2009 11:30 AM

LCCs in Japan, Korea and China. Massive growth potential to be realised in the next decade

The second decade of the 21st century will see low cost airlines arrive on a massive scale in North Asia. The region has not seen significant low cost airline entry to date – one of the few parts of the world to have missed the phenomenon. It is a major anomaly in this respect, because the geography, economy and demography of the three neighbouring countries of Japan, South Korea and China offer near-ideal conditions for LCC growth.

(This is an adaptation taken from Part II of the Centre’s “Global LCC Outlook Report; The World has changed”)

Even conservatively estimating the potential upside suggests a short haul international market of several hundred million passengers annually over the next decade, given freedom of access - so powerful is this economic global centre.

Domestically too, the opportunities within China, once the market is fully liberalised, are equally phenomenal. This market has barely been tapped.

The main impediment to international expansion of the LCC, or private non-flag carrier model, has been conservative regulatory regimes, with protectionism still widely prevalent. This protectionism has been most apparent in Northeast Asia and China.

In the rest of Asia, Malaysia’s AirAsia, as the leading light, has pioneered short and medium-haul cross-border flights and has begun to explore longer-haul opportunities across the entire region as well as for inter-continental flight. It and low cost carriers like Jetstar, Tiger Airways and Cebu Pacific are steadily making their presence felt in north Asia too now, as they connect northern gateways with southeast Asia, spreading greater consumer awareness of the low cost model.

Ironically, it may be the near-failure of Japan Airlines which provokes the release of market forces; already the prospect of JAL’s restructuring has prompted competitor, All Nippon Airways, to revive its plans to establish a low cost subsidiary. In turn this will stimulate responses from its competitors and, with the possibility of a more liberal Japan-US bilateral (if not open skies), market access regimes may well be tipped in favour of greater openness.

Market Performance sluggish

The Northeast Asian market under-performed over the past decade, rocked first by the Asian financial crisis, then by SARS, and dampened by the sluggish performance of the Japanese economy.

Growth of the Northeast Asian Aviation Market, 2000-2008

Domestic travel hardly changed (up 3% over the eight years). International air travel was up by 11%, but this masked significant volatility. A 20% decline in numbers between 2000 and 2003 was offset by a 23% recovery in 2004, for example.

And a tiny LCC market share

Capacity figures reveal a slowdown later in the decade. Only partly coincidentally, most of the incremental growth elsewhere in the world has come from LCC expansion. Low cost carriers still play only a minor role in the north Asian sector, just 4% of the total, slightly more on international routes.

LCC and Network Airline Capacity Growth, North Asia Jun 2001-Jun 2009

South Korean and Japanese Low Cost Airlines

South Korea was slow off the mark, although several airlines have been established over the last three years, with both the major airlines now supporting their own subsidiaries, albeit not typically low cost.

An apparently surprising thing is that the longer standing Japanese LCCs have had very little impact, despite the fact that the Japanese aviation market has been in the doldrums for most of the decade (and should therefore welcome low prices). This is largely attributable to three factors: the power of the major airlines, the high operating cost base in Japan (which greatly dilutes any cost savings possible) and the dominance of the two capacity restricted Tokyo airports in the Japanese aviation system.

LCCs there lifted their performance slightly in the middle of the decade, but grew only slowly after that, so that they accounted for just 5% of internal capacity by June 2009, despite the fact that domestic traffic was static. In fact, the full service carriers’ capacity was 4% lower in 2009 than in 2001. LCCs still only accounted for 1% of international flights at the end of the period, a direct result of lack of real market access.

Low Cost Carriers, South Korea and Japan

Airline	Base	Commenced
South Korea
Eastar Jet	Seoul	2008
Jin Air	Seoul	2008
Air Busan	Busan	2007
Jeju Air	Jeju	2006
Japan
Air Next	Fukuoka	2005
Skynet Asia	Miyazaki	2002
StarFlyer	Fukuoka	2002
JAL Express	Osaka	1999
Hokkaido International	Sapporo	1998
Skymark	Haneda	1998

Air Busan, South Korea

Air Busan was launched in mid-2007 by the Busan City Government, together with twelve local investors. Asiana acquired 46% of the airline in February 2008. The airline currently operates a fleet of B737s and aspires to become South Korea’s top LCC. It has a code sharing arrangement with Asiana.

Air Busan	Type	In Service	Total
Boeing	737 (CFMI)	3	3
Total		3	3

Air Busan Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/air-busan

Jeju Air, South Korea

Independently owned Jeju Air launched services from Incheon to Osaka, Kansai and Kitakyushu in March 2009, becoming the first LCC to commence international operations from Incheon International Airport. Using B737-800 equipment, the Incheon-Osaka Kansai service operates daily and Incheon-Kitakyushu three times weekly.

Jeju Airlines recently mandated Airstream International Group to remarket its four 2006 Bombardier Q-400s as it decided to operate an all-jet fleet. The carrier’s other aircraft are B737-800s. To support its international expansion, Jeju signed a contract with Boeing to purchase an additional five B737-800s for delivery between 2011 and 2013.

JeJu Air	Type	In Service	Order	Total
Boeing	737 (NG)	3	5	8
Bombardier)	Dash 8	4		4
Total		7	5	12

Jeju Air Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/jeju-air

Jin Air, South Korea

Jin Air was established as an LCC subsidiary by Korean Air and commenced operations in mid 2008. Having posted USD7.2 million in revenue in 2008, Jin Air expects to report as much as USD115 million annual revenue in 2010.

The carrier is proceeding with plans to launch services to five international destinations in late 2009, including Osaka, Bangkok, and Macau. Within two years, Jin Air plans to expand its international network to 16 international routes in China, Japan and Southeast Asia.

To facilitate these expansion plans, Jin Air aims to add an additional aircraft to its fleet of B737-800s by the end of 2009 as part of a plan to acquire 15 B737-800s over the next six years.

Jin Air	Type	In Service	Total
Boeing	737 (NG)	2	2
Total		2	2

Jin Air Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/jin-air

Yeongnam Air, Hansung Airlines, South Korea

Two South Korean budget carriers suspended services in 2008 due to increasing competition and weak demand (and perhaps questionable business plans). Yeongnam Air, launched in mid-2008, was based at was Gimhae Airport, Busan and Daegu Airport and operated with a single Fokker 100. It failed to gain traction and ceased operations in December the same year.

Cheongju-based Hansung Airlines, South Korea’s first LCC, founded in 2004, ceased operations in October 2008 due to worsening economic conditions, increasing fuel costs, a weakened Korean won, and difficulties in securing funding or finding an investor willing to acquire the carrier.

Domestic market share for Korea’s LCCs continues its dramatic rise

Download the full Global LCC Outlook report at: centreforaviation.com/lcc/report

Eastar Jet, South Korea

Eastar Jet established services from its base at Seoul Gimpo Airport in January 2009. It currently operates two leased B737-600 aircraft, with three B737-700s on order for delivery in 2009.

The airline serves Jeju, Cheongju and Gunsan. Its main shareholder is the South Korean Eastar Group. It plans to operate to China and Japan in the future, and plans to have a fleet of 15-aircraft Boeing fleet by end of 2013.

Eastar Jet	Type	In Service	Total
Boeing	737 (NG)	2	2
Total		2	2

Skymark, Japan

Based at Tokyo’s Haneda Airport, privately owned Skymark commenced operations in 1998. It operates domestic services to Sapporo, Kobe, Fukuoka, and Naha (Okinawa). The airline transitioned its entire fleet to B737-800s from the original B767s in an attempt to boost efficiency, and plans to add seven aircraft by the end of 2011.

Skymark Airlines	Type	In Service	Order	Total
Boeing	767	1		1
	737 (NG)	9	6	15
Total		10	6	16

Skymark Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/skymark-airlines

StarFlyer, Japan

StarFlyer was established in 2002, modelled on JetBlue Airways as a ‘low-cost, high-quality’ carrier aimed at business and leisure travellers. The airline operates a fleet of four A320-200s, configured with 144 seats in a one-class layout, and leased from GECAS.

Star Flyer	Type	In Service	Total
Airbus	A320	4	4
Total		4	4

Air Do, Japan

Air Do (Hokkaido International Airlines) was established in 1996 and launched operations in 1998 and, after what can only be described as predatory pricing by the large domestic airlines, became closely affiliated with ANA, with which it now codeshares actively. It is based at Tokyo International Airport (although it has its headquarters at Sapporo). The carrier offers services from Tokyo Haneda to Asahikawa, Sapporo, Hakodate and Ozara, operating a mixed fleet of B737-500s and B767-300s.

SkyNet Asia, Japan

SkyNet Asia is owned by the Industrial Revitalisation Corporation of Japan (56.9%) and Mera Electric Industrial Corporation (11.7%). It was established in 2002 but did not begin operations until 2008. It is based in Miyazaki City and operates mainly between Miyazaki/Kumamoto/Nagasaki and Tokyo.

Skynet Asia	Type	In Service	Total
Boeing	737 (CFMI)	7	7
Total		7	7

Fuji Dream Airlines, Japan

Fuji Dream Airlines is a carrier launched in July 2009. It aims to challenge the common view that regional carriers are a marginal proposition in Japan. Instead of basing itself in Tokyo, or one of the major regional/business centres such as Fukuoka/Kitakyushu (StarFlyer) or Miyazaki (Skynet), Fuji Dream has chosen to base itself at the brand new Shizuoka Airport, which opened at the beginning of June 2009.

The carrier commenced operations with a fleet of two brightly painted 76-seat E170 regional jets. Its initial destinations – Komatsu, Kumamoto and Kagoshima – are all secondary regional destinations with “strong business traffic”. Shizuoka is itself a major light manufacturing region. Crucially, there is little competition on the chosen routes, from either ground or air transport. Neither JAL or ANA (the only other domestic carriers at the airport so far) operate to any of Fuji Dream’s initial destinations, and there are no direct fast-rail lines to the cities.

A third aircraft has already been ordered from Embraer, and the carrier plans to expand to five aircraft by 2012. Three other destinations, Toyama, Matsuyama and Sendai, have also been announced for the next two years, but the carrier is avoiding adding major cities such as Sapporo or Fukuoka where there would be strong competition from major carriers.

Fuji Dream Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/fuji-dream-airlines

Ibex Airlines, Japan

Ibex Airlines (formerly Fairinc) is a privately owned Japanese carrier which commenced services on domestic routes from Sendai Airport in 2000. It later reached a cooperation agreement with ANA for the provision of MRO services and crew. It is considering shifting its operational focus to Tokyo Narita Airport, to take advantage of increasing slots at the gateway.

Ibex currently operates two Bombardier CRJ-100s and two CRJ-200s, with order for four CRJ-700s.

Air Next, Japan

Air Next is a wholly-owned subsidiary of All Nippon Airways launched in June 2005 in Fukuoka with two B737-500, with the purpose of providing a lower cost unit. The carrier currently operates eight B737-500s.

(ANA had been scheduled to commence service with a full fledged low cost subsidiary as early as Mar-2009, but postponed plans in light of the difficult economic climate at the time. ANA has recently revived plans for this and the subsidiary is likely to commence operating in the first half of 2010.)

Air Next	Type	In Service	Total
Boeing	737 (CFMI)	7	7
Total		7	7

JAL Express, JALways, Japan

JAL Express is a wholly-owned subsidiary of the JAL Group. It commenced services in 1998 and is based at Osaka International Airport. It operates domestic and international short-haul flights, including routes to China. Services to South Korea are planned.

JAL Express	Type	In Service	Total
Boeing	737 (CFMI)	8	8
Boeing	MD-80	3	3
Total		11	11

JALways, another JAL Group carrier established in 1990 meanwhile looked to have a bigger future. In August-2009 Japan Airlines was reported to be considering separating low-margin international routes into a new company or transferring them to subsidiary, JALways.

The move would have allowed JAL to focus on higher-yielding, business-focused routes and, along with anticipated personnel cuts, expected to result in JPY100 billion (USD1.1 billion) in annual cost savings. However, in light of the parent’s dire straits in late 2009, JALways’ future is uncertain, especially if the restructured JAL develops a specific purpose LCC to compete with ANA’s forthcoming subsidiary.

China's Low Cost Carriers

Despite the massive recent growth of China’s domestic market, LCCs have played a negligible role in aviation, where low cost independent airlines are barely tolerated, as government policy seeks to help establish a strong major airline force, centred around the Big Three, Air China, China Eastern and China Southern. This domestic situation is unlikely to change substantially until the Big Three are fully established and profitable.

In 2009 LCCs accounted for just 3% of total capacity, 5% externally and 3% in the dominant domestic market (including Hong Kong and Macau).

LCC and FSC Capacity Growth, China Jun 2001- Jun 2009

China’s Low Cost Airlines

LCCs have played only a small part in the expansion of Chinese aviation, as the major groups have been progressively rationalised and expanded. There are signs that this may be changing, though, with several LCC-style airlines established later in the period. Individual LCCs generally remain small and operations localised. They are mostly offshoots of the established and dominant airlines.

Low Cost Carriers, China

China
Lucky Air	Kunming	2007
China West Air	Chongquing	2006
Spring	Shanghai	2005
United Eagle	Sichuan	2005
Viva Macau	Macau	2005

Juneyao Airlines, China

Juneyao Airlines commenced operations from Shanghai in 2006. It is 75% owned by Juneyao Group, which also has interests in United Eagle Airlines and a “controlling stake” in Okay Airways, acquired in early 2006.

Juneyao Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/juneyao-airlines

Okay Airways, China

China’s first private airline, Okay Airways began operations out of Tiajin in 2005, primarily as a charter operating with some limited scheduled operations. The airline has struggled to find a strategy to resolve ongoing financial problems and shareholder problems. It focuses on the domestic market.

Okay Airways Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/okay-airways

Spring Airlines, China

Spring was established by Spring International Travel Service Ltd in Shanghai in 2005. It has been highly successful, operating profitably since 2006. Its association with one of China’s leading travel companies has enabled Spring to maintain high occupancy figures even as other airlines struggle. In 2008, a difficult year for Chinese aviation, Spring recorded 3.9 million passengers, a 26% year-on-year increase. Even in the March 2009 quarter, the airline recorded a 37.5% increase on the same period in 2008.

Spring Airlines operates 18 domestic routes and recently expanded its fleet to 13 all economy A320 aircraft. It plans to expand to 100 aircraft by 2015. The CAAC recently approved Spring Airlines’ application for rights to operate passenger and cargo services to Hong Kong and Macau by late 2009, where it plans to offer highly discounted airfares, as part of its domestic route network. The airline also plans an IPO late in October 2009.

Spring Airlines	Type	In Service	Order	Total
Airbus	A320	12	7	19
Total		12	7	19

Spring Airlines Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/spring-airlines

Lucky Air, China

Lucky Air, formerly Shilin Airlines, commenced operations in 2004 as a subsidiary of Hainan Airlines and Shanxi Airlines. It rebranded as Lucky Air and commenced scheduled services in 2006.

Lucky Air	Type	In Service	Total
Boeing	737 (NG)	8	8
Total		8	8

Viva Macau, Macau Special Administrative Region

Privately owned Viva Macau was launched in 2006, and currently operates a fleet of two B767-200ERs with a two class configuration. It has announced plans to expand the fleet to 15 aircraft within five years based on additional destinations in Japan, South Korea, Indonesia and Australia, countries where it currently has a presence, and new services to India, Russia and the Middle East.

The airline is aiming to lift monthly passengers from 15,000 to 50,000 in 2009, and double its workforce and fleet size. However, it has been up against a concession framework favouring Air Macau and limiting its ability to secure aviation rights.

Viva Macau	Type	In Service	Total
Boeing	767	2	2
Total		2	2

Viva Macau Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/viva-macau

(Note: there is no LCC based in Hong Kong. Cathay Pacific is one of the few full service airlines in the region which has not established its own low cost subsidiary.)

China West Air

China West Air commenced operations from Chongqing in March 2006 by Hainan Airlines, also as a subsidiary of Hainan. Its domestic services started in 14, 2007.

United Eagle, China

United Eagle commenced operations out of Chengdu as a privately owned airline in 2005 using Airbus aircraft. In March 2009, Sichuan Airlines purchased 76% of Eagle’s shares as the company underwent a reorganisation. Today it operates to twelve domestic destinations using three A319 and one A320 aircraft.

United Eagle Profile: News, Analysis, Fleets, Routes & More:

http://centreforaviation.com/data/profiles/airlines/united-eagle-airlines

North Asia Outlook

Domestic low cost airline operations in Japan and South Korea have found it hard to compete, given a combination of very fast (subsidised) trains and a high cost base where suppliers are in each case dominated by two major international airlines (and fast trains are also emerging as a threat to airline growth in China, as China Southern has recently noted).

China still actively discourages low cost airlines domestically, although it does permit some access to foreign LCCs, such as AirAsia, AirAsia X and Jetstar – usually to secondary gateways, such as Tianjin). There is only one airline in the mainland which, appropriately describes itself as conforming to the low cost airline model, Spring Airlines. But it is often forced to run the gauntlet of fare floors designed to prevent yield erosion.

For China, the LCC model offers the prospect of responding effectively to growing demand and extending services to secondary centres of population. It will also help to build international short haul linkages. As more foreign LCCs are permitted to enter Chinese gateways, the likelihood of more Chinese LCCs operating internationally increases in tandem.

As the model becomes more familiar, South Korea and Japanese LCC operations are gradually becoming a feature. But the major flag carriers still dominate the market, supported by more or less protectionist government policy – for example in Korea, by preventing startups from operating internationally for a period of years; this may be justified by concerns about safety, but in practice it provides a breathing space for the major airlines to establish their own subsidiaries first.

But even then, there are still significant regulatory restrictions on international services. China for example, although maintaining a policy of open skies to non-hub airports, imposes capacity and frequency caps which prevent full exploitation of consumer demand.

With Japan Airlines now undergoing a government-funded restructuring, both JAL and All Nippon Airways are likely to establish their own, genuine low cost subsidiaries in 2010. This will quickly help transform the scenery, both exploiting the openings in the still-confining access regimes and widening them, as LCCs press for regulatory change.

At least 200 million passenger potential annually

This promises to offer a very exciting outlook, as there is a massive potential for short haul growth – between large urban centres, whose economies are either growing quickly, or in Japan’s case are already largely economically mature. Given the close cultural ties between much of the region, despite a patchy history, it has to be assumed too that there is considerable untapped demand for international short haul travel. We estimate the potential numbers to be measured in the hundreds of millions.

This growth will not be seen immediately, but it does appear that 2010 will show a considerable sprouting of the genre, followed by the establishment of one of the largest short haul markets in the world by the end of the coming decade. The impact on trade, regional development and social dynamics will be unprecedented.