North Asian aviation in ascendancy-the explosion of low cost air travel: CAPA North Asia LCC report
Asian aviation is undergoing a transformation that is not merely once in a generation – it is a once in history change. There is no precedent for the scale or scope of what is happening in the region.
And finally, many years behind the rest of the world, low cost carriers are making their presence felt in the highly populated northeast corner, as Japan, South Korea and China start to open their skies and broaden their strategies away from the old protectionism.
CAPA - Centre for Aviation has today released a 400-page report on low cost and new age airlines in the North Asian region. This is free for download as a CAPA contribution to furthering understanding in this exciting new area.
North Asia in ascendancy; the explosion of point-to-point air travel as a new wave of airlines enters the market
This region’s aviation revolution is occurring now thanks to a confluence of events:
- The very large populations of Asia have reached an economic threshold that allows enough disposable income to permit air travel; and
- Governments are relaxing trade barriers and airline entry rules. Freer market access and new airlines mean more competition and more variety.
Combined, these two promise at least a decade of outstanding expansion. It has only just begun.
CAPA has estimated a potential for growth within the northeast Asian triangle of as many as an additonal 200 million passengers annually, as markets are opened up.
1 - Economic and demographic developments
In more affluent areas GDP growth will reach levels that accelerate take up of international travel far sooner than the overall national averages would suggest. For China, these high growth levels are to be found along the east coast adjacent to its Japanese and Korean neighbours – making the conditions ripe for short haul international connections between regional centres. Meanwhile, Korean and Japanese consumers are being presented with ultra-cheap individual fares, which promises to change travel patterns and frequency.
2 - Population distribution and geography also influence travel expansion
Opportunities for airline operations are not just an outcome of overall populations, but also of the way they are distributed. The concentration in urban centres, as an industrial economy replaces the agrarian, will be a major factor in this. McKinsey for example has projected that, by 2025, China’s urbanisation will produce 219 cities with over 1 million people (Europe has 35) and 24 with over 5 million.
As these major cities develop, they will rely on transport links for their commercial and social development. Some hubs will form, helping to distribute the transport load, for example as High Speed Rail and airline networks develop. Many of them too will be within a short flight of Japanese, Korean and Taiwanese centres.
Geographical and topographical factors also influence the opportunities for air services. Two of the biggest point-to-point markets in the world, each North Asian island markets, are South Korea’s Jeju Island and Japan’s Hokkaido. In each case low priced LCC operations are quickly increasing the size of those markets.
For this reason too, the potential for expanding traffic on the North Asian triangle of China, Japan and South Korea is vast. Until very recently, market access – by new airlines and on new city pairs – has been heavily constrained by regulation. As those restrictions are removed and new low fares become available, enormous opportunities are unlocked.
3 – Liberalised market access; evolution from hubs to direct transport services
Commercial experience in economies like the US and Europe strongly suggests that transport connectivity relies on hub operations in its early growth phases, using major cities and large transport entities. As economies mature and market access is liberalised (allowing a proliferation of new entry), so the tendency to bypass hubs and establish direct transport services also grows.
Assuming liberal entry and operating access, along with adequate infrastructure, expansion of low cost air services will greatly accelerate this process.
The key factors behind a “once in history change”:
- Massive numbers reaching the travel inflection point by 2020 – In Asia 2.5 billion people will reach middle class economic status - In China alone, over 200 cities will reach this threshold in the coming years
- Much lower fares – In Japan some of the new LCC subsidiaries are offering fares at one fifth the level of their parent airlines’ prices
- A flurry of new entrants and low cost subsidiaries will drastically change the profile of the region’s industry over this decade - For decades there was almost no new airline entry into Asian airline markets, so that usually-protected national flag carriers, operating hub-based models dominated the market.
- Innovation – These new airlines will add new city pairs, introduce long-haul low cost and generally seek models that are more financially sound than the
- An explosion of intra-regional trade - Asian countries have until recently imposed significant barriers on internal trade (as well as air services). As a consequence, relaxing trade barriers will act like a release valve for demand which has not been exploited.Aviation is an intrinsic part of the integration of the Asian urban economies, for example through the ASEAN multilateral agreements.
- Timing is everything – The confluence of liberalisation and economic growth is infectiously making itself felt across the region – and being catalysed by generally improved cultural and social linkages between Japan-Korea-China.
Are North Asian LCCs different?
There are both similarities and differences in the evolution of North Asian LCCs as compared with the rest of the world.
The differences largely echo those already seen elsewhere in the region, notably:
- The important role of full service airline LCC subsidiaries; and
- The establishment of cross-border joint venture operations (where a foreign LCC owns up to 49% of the locally established airline and operates services for it using the foreign brand).
In addition, another feature has crept into the equation. Because it has taken so long for the North Asian countries to adopt the model, many are already evolving into offering some frills – just as a number of newer airlines, while low cost, offer a much broader product, often similar to the established full service operations.
But otherwise, the fundamental tenets of low cost operations - essentially substantially higher efficiencies - remain at their core.