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Asia Takes To Cheaper Skies
 

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24-Aug-2005
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"The immortal gods, when they intend to punish some men for their sins, sometimes grant them temporary prosperity and prolonged immunity to make them suffer more severely from a change of fortune." -- Julius Caesar

From The Far Eastern economics Review
Issue cover-dated February 26, 2004

Asia Takes To Cheaper Skies

Despite their many limitations, low-fare carriers are expanding across 
Asia, providing cheap and quick travel options to millions of people
and giving the major airlines plenty to worry about

By Scott Neuman/BANGKOK

FOR ONT PANNATHORN, a 23-year-old political-science student in
Bangkok, visiting his parents in the northern city of Chiang Mai has
until now meant spending 12 hours in a cramped and dingy railway
coach.

FLY (ON THE CHEAP) WITH ME

Budget airlines cater to the cost-conscious air traveller
• Low aircraft-lease rates have lowered one entry barrier
• Standardized fleets cut maintenance costs
• Internet booking cuts ticketing expenses

But today Ont isn't taking the train. Instead he's stepping aboard an
aircraft for the first time in his life. "I can save a lot of time and
the flights are so cheap now," he says as he waits eagerly at the
check-in for One-Two-Go, one of Thailand's new flock of domestic
low-fare airlines. For $35, or about the price of a first-class
railway ticket to Chiang Mai, he'll be back home in just over an hour.

With his unkempt hair, two-tone T-shirt and backpack slung over one
shoulder, Ont represents an emerging revolution that could transform
the very fabric of the region. Asia, geographically challenged and
hobbled by poor railway and road infrastructure, is about to be linked
by a fast, efficient air network accessible to the masses. Think
telecoms in the 1990s: Much of the region, lacking the millions of
kilometres of cable needed for adequate fixed-line services, instead
made a quantum leap to cheap and widely available mobile networks.

Just a few years ago, most industry observers doubted that Asia would
ever be ripe for no-frills budget carriers similar to America's
Southwest and Europe's Ryanair and EasyJet. So what's changed? "The
key ingredient is liberalization," says Peter Harbison of the Centre
for Asia Pacific Aviation, a Sydney-based consultancy. Governments
whose traditional mindset had been to protect their flag carriers from
competition at all costs have suddenly realized the benefit of opening
up. Low-fare international carriers such as Orient Thai Airlines,
which make it cheap to get "there and away," have an obvious positive
effect on tourist-hungry countries like Thailand. Domestic competition
has also lowered the bar for Asians who otherwise would never have
dreamed of travelling by air.

Liberalization, however, has come slowly in Asia, where old-fashioned
deal-making has sometimes run ahead of government reform. In the case
of Thai AirAsia, CEO Tony Fernandes--a self-styled maverick who has
made his name in the past two years by offering $9 domestic fares in
Malaysia--decided to short-cut the process by forming a joint venture
with Shin Corp., partly owned by the family of Thai Prime Minister
Thaksin Shinawatra. That got him the entry he needed, and the airline
started flying last month with promotional fares few could resist:
$2.50 from Bangkok to Phuket.

Orient Thai and AirAsia aren't alone. In the last few years, more than
a dozen low-fare airlines have taken off. Still more are waiting to
challenge the long-established status quo in Asian commercial
aviation. The shake-up couldn't come at a better time: Incomes are
rising, pushing more Asians into the middle class, and the region's
aviation market is expected to grow at 6% per year, according to
aircraft manufacturer Boeing. "When disposable incomes rise, one of
the first thing people do with the cash is start travelling," says
John Koldowski, a researcher with the Bangkok-based Pacific Asia
Travel Association (Pata), an industry group. "The potential here is
huge."

Ironically, that potential for intra-Asia travel wasn't fully
appreciated until after September 11, 2001, when long-haul traffic
from Europe and North America dried up and airlines, hotels and other
travel-related businesses were forced to look anew at their own
backyard. At about the same time, Beijing started gradually making it
easier for its citizens to go abroad, and waves of them began doing
so.

More air passengers translate into more hotel guests. The trickle-down
effect is already being seen in Australia, where the Richard
Branson-backed Virgin Blue has taken nearly a third of the domestic
market from Qantas. For hotelier Accor Asia Pacific, that has meant a
boon for the chain's economy brands in Australia. "In many cases it's
entirely new business that wouldn't have happened if it weren't for
cheap air tickets," says Peter Hook, general manager for
communications at Accor Asia Pacific. Hook says Accor is expanding its
economy brands, such as Ibis, throughout Asia to take advantage of the
flood of new, low-budget tourists. One area of growth that has been
most surprising is business travel. "Small businesses that would have
used the telephone and the mail to keep in touch with clients are now
able to meet them face-to-face," he says.

And for some, budget carriers offer a new-found freedom to mix
business and pleasure. Supachai Moungmanee, who already flies
frequently to Chiang Mai for his engineering and construction
business, can now afford to take his wife and 20-year daughter along
with him. "Usually I go alone," he says, "But the fares were so good
that we decided to make a small holiday of it."

The numbers could be enormous. According to a survey by Axess Asia, a
Bangkok-based aviation-and-hospitality consultancy, for 65% of
budget-conscious travellers in Southeast Asia, low fares make the
difference between going and staying home. Another 20% say they would
otherwise take ground transport. One study suggests that if just one
out of 10 people who now take trains, ferries and buses between
Singapore and Malaysia flew instead, the airlines would pick up an
additional 675,000 passengers a year. "We're talking about a
transformational shift in the way people travel in Asia," says James
Reinnoldt, managing director of Axess Asia.

That promise is something One-Two-Go CEO Udom Tantiprasongchai has
been eyeing for years. Udom, a former textile industrialist, started
up One-Two-Go in December as an offshoot of his low-fare international
airline, Orient Thai Airlines, which flies daily to Hong Kong and
Seoul. Udom thinks Thailand alone holds the potential for 30 million
new air passengers in the next five years--if the price is right.

But that could prove a delicate calculation. Just how price-sensitive
the formula can be is made clear by the patches of blue on a computer
spreadsheet tracking One-Two-Go's reservations in Udom's office. "That
represents people who have cancelled," Udom explains. "When Thai
[Airways] undercut us by 1 baht [about 2.5 cents], we started seeing a
lot of blue."

It's only the latest obstacle on Udom's long and turbulent path to
success in low-fare airlines, which started in 1991 in a chance
conversation with Cambodian Prime Minister Hun Sen. At the time, Udom
was running a garment factory in Cambodia, and he complained about the
lack of direct flights to the capital Phnom Penh. "Why don't you set
up your own airline?" Udom recalls the prime minister asking. A year
later, Cambodia International Airlines began flights between Phnom
Penh and Bangkok, Hong Kong, Ho Chi Minh City, Vientiane, Singapore
and Kuala Lumpur.

By 1994, however, Cambodia was keen to re-launch its own airline,
Royal Air Cambodge, and gave Udom his walking papers. From 1994 to
2002, Udom's airlines, with their ever-changing names, stayed alive by
flying a series of charters shuttling Muslim pilgrims to Jeddah, Saudi
Arabia as well as refugees and peacekeeping troops to places such as
East Timor and Kosovo. "We became a gypsy," Udom chuckles. All the
while, Udom was trying, with limited success, to crack the market in
Thailand, long held as the exclusive domain of government-supported
Thai Airways.

Udom's career illustrates how difficult it is to find a winning model.
Now that government regulations have eased, the competition has piled
in--not only from Fernandes' Thai AirAsia, but also from PB Air's Diet
Jet and soon, Nok Air, Thai Airways' own low-cost entry. And Thai
Airways isn't the first major airline to get in on the act. In a
turf-protection strategy, Qantas Airways, Singapore Airlines,
Indonesia's Garuda and Vietnam Airlines have all either launched
low-fare airlines or announced their intention to do so by the year's
end.

Some big players have also been attracted to the region. Fresh from
his Virgin Blue success, Richard Branson has expressed interest in
investing in a low-fare operation specifically in Asia. Airline
financier David Bonderman and the family that founded Ireland's
Ryanair also have a stake in Tiger Airways, Singapore Airline's budget
venture. So far, Hong Kong-based Cathay Pacific Airways is one of the
few regional heavyweights to say publicly that it is unlikely to enter
the fray.

Meanwhile, India, where outbound travel is growing by 12%-13% per
year, already has its first budget carrier, Deccan Air. There's likely
to be "at least a handful of additional [low-fare] domestic and
regional carriers cropping up there in the next few years," says Ravi
Devagunam, an air-transport consultant with Deloitte Consulting. Add
to the mix China--which said recently it is open to the idea of budget
carriers--and the potential market "boggles the mind," says Harbison.

In the Darwinian environment of commercial aviation, however, at least
some of these airlines probably won't make it. Getting the business
model right is key, but Asia is different enough that industry
observers say some of the rigid rules don't apply. For instance,
Internet booking is generally seen as vital, in that it eliminates the
need for expensive reservation and ticketing staff. But Orient Thai
and subsidiary One-Two-Go run a call centre because Thais, like many
other Asians, are reluctant to conduct business any other way, says
Udom. There are other ways to simplify the process: Udom envisions a
pre-paid card that could be used to purchase tickets at convenience
stores. "The receipt for the purchase would essentially become the
ticket," he says.

But keeping the customer satisfied might not be so easy, even in the
low expectations of the no-frills environment. Queuing for check-in on
AirAsia's Bangkok-to-Phuket flight, Pranom Lousrisupachai was clearly
disappointed. "They advertised these really low fares and when I
called they said 1,700 baht ($45) was the best I could get," she said,
explaining that she had lived in the United States for 30 years and
was used to flying cut-rate Southwest. "I'm flying with them today,
but I don't think I'll do it again."

If the major airlines are counting on that kind of dissatisfaction
luring back lost customers, they might want to think again. Even with
a shake-out down the road, low-fare airlines are here to stay in Asia,
says Pata's Koldowski. Cheap fares will always be a selling point, a
lesson they would do well never to forget.
+++++++++++++++++++++

HAT MAKES A LOW-COST CARRIER TICK

By Scott Neuman

Ask industry observers what it takes to keep a low-fare carrier
airborne and most will rattle off a list: no in-flight meals, a single
aircraft type, use of less-costly secondary airports and Internet
ticketing, to name just a few.

The model in Asia, however, has challenged the conventional wisdom and
is in the process reshaping the budget-airline business model.
"Low-cost carriers come in all flavours, but at the end of the day, if
you can fly between A and B at the lowest-possible cost, you've got a
good chance of making it," says Peter Hilton, head of transportation
research at Credit Suisse First Boston in Hong Kong.

Issuing paper tickets through expensive travel agents is a no-no for
budget carriers. That has prompted many no-frills operations to turn
to technology for the solution: They rely on passengers to book their
own tickets over the Web. But in otherwise Internet-savvy Asia,
consumers have been more reluctant than their North American or
European counterparts to part with credit-card details. So, for the
likes of Orient Thai Airlines and AirAsia, it means running their own
call centres.

Even with the relatively cheap labour available in Asia, low-fare
airlines are looking for ways to cut those costs. One way could be to
use convenience-store chains to sell tickets. Not only would it
eliminate the need for the call centres, but it would further
demystify the process of air travel for first-time passengers. "It's
crucial from the consumer point of view to make the ticketing as
simple as possible," says James Reinnoldt, managing director of Axess
Asia, a Bangkok-based aviation consultancy.

Flying a single aircraft type--typically a Boeing 737 or Airbus
A-320--is considered key to speeding up turnaround times and
simplifying maintenance. However, Orient Thai Airlines recently
launched One-Two-Go using Boeing 757s, with more range and greater
seating capacity than the 737. CEO Udom Tantiprasongchai's rationale
is simple: "If One-Two-Go doesn't work out, I've still got long-haul
planes for Orient Thai," he says.

What about secondary airports versus major hubs? "The cost of landing
in a major airport isn't as big a deal as many people think," says
Axess Asia's Reinnoldt. But time is money, he says, and there are
other advantages to using secondary airports. "At Bangkok airport, you
might have to wait an hour before turning around your aircraft, while
at a secondary hub, you might be able to cut that time in half,"
Reinnoldt says.

Ultimately, the market place will decide how far the budget-airline
model can be stretched in Asia. Says Peter Negline, an analyst with
JPMorgan Securities: "If you were a gambling person, you'd probably
bet that some of these guys won't survive."

http://www.feer.com/

---===============================================================---
Philip Chee <philip@aleytys.pc.my>
Guard us from the she-wolf and the wolf, and guard us from the thief,
oh Night, and so be good for us to pass.
... There is intelligent life on Earth, but we are just visiting