Oil Shock! Crude at USD100 per barrel (Part 2)


Late last year, the earnings 'sweet spot' for the full service airline sector was reaching its crescendo as global economic strength pushed load factors and yields higher. Nine months on, the rapidly deflating global economy and falling fuel prices are providing the conditions for an 'LCC sweet spot'. Asia's leadings LCCs are ready to promote structural change in the region, probing the weakness of their full service (and other unfocused 'budget') rivals in short-haul (and increasingly long-haul) markets.

  • AirAsia gives away one million free seats and aggressively expands network, adding key business routes;
  • Cebu Pacific celebrates fourth hub at Clark with zero fares;
  • Thai AirAsia adding major Asian cities, including Hong Kong and Guangzhou to its network;
  • Jetstar rapidly developing short-haul network into Asia;
  • Jetstar Pacific launching services to Bangkok and Siem Reap;
  • Tiger Airways plans 12.5% increase in capacity at Singapore next year;
  • But protectionism could rise in an economic downturn, affecting offshore JV development.

AirAsia is, unsurprisingly, leading the charge. Last month, the airline gave away a million free seats (plus taxes and fuel surcharges) and it continues to aggressively expand its network - and key business routes are in its sites.

Philippine counterpart, Cebu Pacific is celebrating the long-awaited establishment of its fourth hub at Clark with zero fares for services to Hong Kong, Singapore, Macau and Bangkok.

Thai AirAsia - riding high domestically on the shut-down of budget rival One-Two-Go and deep cutbacks by Thai Airways' budget unit, Nok Air, is also adding major Asian cities to its network. Hong Kong will be added to its network in Oct-08 (raising the assault on the city, as AirAsia adds its second daily frequency), while Guangzhou (another AirAsia destination) will be added by the end of 2008. The east-west combination of the Thai and Malaysian LCCs helps lower costs and build scale at key mid-point airports (such as the Pearl River Delta and Vietnam), providing cheaper travel options around the region for passengers in Thailand and Malaysia and beyond.

Jetstar, in the absence of its B787s, is rapidly developing its regional short-haul network, driving into Asia from its new Darwin hub to Bali and Vietnam, the latter the base of its newest offshore venture, Jetstar Pacific. The Ho Chi Minh City-based carrier this week confirmed the launch of services to Bangkok and Siem Reap - key business and leisure destinations, respectively.

Tiger Airways is also on the offensive, unveiling a planned 12.5% increase in capacity at its Singapore operation next year and a second base for its Australian operation at Adelaide. The carrier turned four years of age this week and offered 100,000 seats for SGD0.40 cents (plus taxes and surcharges) across its network.

The carrier's ninth A320 - to be added in Mar-09, will give Tiger the opportunity to "further expand its Asia Pacific paw prints with more frequencies and the possibility of new destinations from the airline's Singapore hub", according to Tiger Airways Singapore Managing Director, Rosalynn Tay.

The Tiger Airways Group currently has a total of 60 new A320 aircraft on order for delivery over the next seven years, but has recently encountered resistance to its plans to enter the Korean and Philippine markets.

Protectionism could rise in an economic downturn, which could throw up some challenges for the region's LCCs. But all three groups, Tiger (Singapore, Australia), Jetstar (Australia, Vietnam and Singapore), Eacbu Pacific (four hubs in the Philippines) and AirAsia (Malaysia, Thailand and Indonesia) have sufficient diversity and untapped potential to redeploy capacity within their networks if offshore expansion opportunities are temporarily closed off. Programmes for greater openness of regional access, such as the Indonesia-Malaysia-Thailand Growth Triangle and Phase I ASEAN open skies (capital cities) should also ensure more opportunities for expansion over the medium term.

Meanwhile, as the well of business and leisure demand dries up as economies slow, fares will inevitably come down. This plays right into the sweet spot of the region's focused LCCs.

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