Comments On Asia's Budget Carriers

Interesting article and comments on Asian budget carriers: Crowded skies squeeze Asia's budget carriers ( posting is for personal references)

• SINGAPORE: Asian airlines, particularly budget carriers, may be taking off on a high-risk strategy -- ordering hundreds of aircraft to offer new routes and more flights, just as growth in low-cost travel is seen slowing, according to Reuters.
  
  Over the next five years, budget carriers from Malaysia's AirAsia to Singapore's Tiger Airways will take delivery of over 500 planes, meaning a capacity increase of 15 percent a year -- double what some observers are forecasting.
  
  The real prospect that some budget carriers, and the full-service airlines they compete with, may not survive the dogfight could, in turn, mean billions of dollars of cancelled orders for Boeing and Airbus.
  
  Asia has become the largest market for the two big planemakers, accounting for a third of outstanding orders.
  
  "Not all airlines will survive," said Terence Fan, assistant professor at Singapore Management University. "Mid-double-digit growth is a lot to achieve, and the aviation industry has had a lot of ups and downs."
  
  "We're already seeing Thai Airways, for example, reduce its short-haul flights from Bangkok because of competition from low-cost carriers," Fan added.
  
  Fan, who last year published a paper on Europe's passenger airline industry, noted around 130 airline start-ups there in the 10 years to 2006. Only about 50 survived, and that number has since fallen further.
  
  While Ryanair and Easyjet have thrived and become major players in Europe, others such as SkyEurope, described by consultancy Skytrax as the best low-cost carrier in Eastern Europe, have gone bankrupt, Fan said.
  
  Asian low-cost carriers have grown rapidly over the past decade and now account for 14 percent of intra-Asia travel, according to Airbus estimates.
  
  Indonesia's Lion Air, for example, has outstanding orders and options for over 100 Boeing 737-900s, each with a list price of around $80 million. AirAsia will boost its Airbus A320 fleet to 175 planes by end-2015 from 70 now.
  
  SLOWING GROWTH
  
  But, while budget carriers achieved compounded growth of 38 percent between 2001-09, the overall intra-Asia market expanded at just 6 percent, Airbus figures showed.
  
  Boeing said this week it expects new orders for commercial aircraft to fall short of deliveries, with no increase in demand until 2012.
  
  Boeing had gross orders from airlines for 263 planes last year, but net orders of 142 planes after cancellations. Airbus had gross orders of 310 planes and net orders of 271.
  
  Alex Glock, Asia Pacific managing director for Brazilian planemaker Embraer, said the golden years for low-cost carriers ended with the global financial crisis, when many suffered falling demand, much like the full-service airlines.
  
  In the last two years, the number of low-cost carriers in Asia Pacific fell to 17 from 20, and the number of flights dropped to 11,956 from 12,034.
  
  Glock sees regional demand growing at an average annual rate of 7 percent, following a spike in the next two years as traffic returns to pre-recession levels.
  
  "Even though low-cost carriers grew more than the regional average, the growth spurt has passed," he said.
  
  Many of Asia's budget airlines are also losing money.
  
  In India, a host of low-cost and conventional airlines have emerged to challenge state-owned Air India and Indian Airlines and, in Macau, Viva is seeking financial assistance from the government to stay afloat.
  
  Even so, analysts expect low-cost carriers to do better than the overall industry by opening new routes and picking up market share from second-tier flag carriers such as Indonesia's Garuda.
  
  "This sector will continue to gain market share particularly in Asia's emerging economies. The region is dynamic, has huge populations with vast physical distances and enjoys rising incomes," said Tan Teng Boo, CEO of Malaysian-based Capital Dynamics, which manages $300 million.
  
  But Tan said he does not own airline shares.
  
  "The airline business, though glamorous, is very tough. The industry has loads of players and airlines don't have pricing power. It's essentially a commodity business with very high capital requirements and low margins." - Reuters