Budget Airlines and Open Skies: Double Trouble or Lucky Pair?

very soon. Once fully implemented, this will create unprecedented opportunities – and challenges – among the different industry stakeholders including passengers, airlines and airport management and authorities.

Of particular interest are the emerging airports that serve a specific community or geographical niche. These airports typically don’t have the same scale of resources that a major airport would normally have. However, they possess some unique advantages which, when used smartly, puts them in the best position to generate growth and drive value over a long term. This paper looks at the two biggest trends – ‘Budget Air’ and Open Skies – in Asia and the kind of impact it will create to the emerging airports in the region.

www.emergingairportsasiapacific.com

‘BUDGET AIRLINES’ AND OPEN SKIES:

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hen Cebu Pacific, one of Asia’s largest airlines, first announced its 1 Peso fare (USD 0.20) a couple of years back, it caught everyone’s attention. Not because of the absurdity of such claim – after all budget

fares are already making some headway in Asian air travel at that time – but because everybody knows that it is absolutely, mind-bogglingly possible. It’s just a matter of when and who will be bold enough to start such a trend. Indeed, Cebu Pacific’s slogan, “It’s time everyone flies” took a whole new dimension from that day onwards.

Fast forward to 2012 and we can see that the landscape of Asian air travel has undergone a dramatic shift. There has been a consistent increase in passenger and cargo traffic in the region and we see no signs of slowing down anytime soon. This is due in large part to the rise of low cost carriers (LCC’s), the so-called ‘budget airlines’ that have permeated the skies of the Asian region lately. From domestic to regional to full-blown international flight, Asian LCC’s are picking up a considerable share of the market, enough for full-service airlines to relook at their strategy and revisit their respective pricing schemes.

In addition, the ASEAN Open Skies agreement, a concept that calls for the liberalization of the rules and regulations of the international aviation industry within ASEAN countries, is set to kick in

Contributor:Darwin Jayson Mariano, IQPC Singapore

A low cost carrier or ‘budget airline’ is a no-frills airline that generally has lower fares and fewer comforts. As such, other extras like food, priority boarding, seat allocation and baggage allocation may not come as a standard. In Asia, the strong demand for low cost airfare has fuelled the increase in the number of LCC’s operating in the region. Some of the biggest LCC’s in Asia Pacific include:

‘Budget Air’TAKES OFF

Destinations

4SCOOT

Fleet SizeDestinations

6534JETSTAR

28Fleet SizeDestinations

34SPRING AIRLINES


28TIGER AIRWAYS


20BANGKOK AIRWAYS

3 3Fleet Size Fleet SizeDestinations

5MANDALA AIRLINES

(2 Domestic, 3 International)


13HONG KONG EXPRESS

Fleet Size

(excl. subsidiaries)54

Destinations

(incl. subsidiaries)79

AIRASIA


CEBU PACIFIC

3952


JEJU AIR

1014 +6 orders


s expected of a dynamic industry, a slew of mergers and consolidations are happening lately. In the early part

of the year, Tiger Airways acquired 33% stake in Mandala Airlines. A couple of months thereafter, AirAsia acquires Indonesian domestic carrier Batavia Air for US$80 million. Through the new partnership, AirAsia and Batavia’s market share in Indonesia will stand at 20% and by the end of the year both companies aim to transport 14 million domestic passengers.

Tiger Airways, a Singapore-based budget carrier, has also completed the purchase of a 40-percent stake in Philippines firm, Southeast Asian Airlines, for US$2.5 million, a deal which is expected to bolster both airlines’ growth and job-creation potentials.

Joining the fray, new Hong Kong budget airline, Jetstar Hong Kong recently applied for a license to operate air services; and in Singapore, new kid on the block, Scoot, a no-frills offshoot of the high-end Singapore Airlines took its first flight in June this year.

With renewed vitality in the aviation sector, particularly among the LCC’s operating in the region, it is no wonder that recent data revealed a year-on-year increase of 7.1%* in passenger traffic. This trend is expected to induce further consolidation in the sector and in turn, spur regional economic growth, a fact that many believe is tied to the airport’s economic growth,

“I think the economic growth of the airport relates to the economic growth of the region it serves. I think all airlines will continue to come as the passengers come,” says Bill Burke, CEO of Mildura Airport in Australia.

As airports primarily generate revenue from the airlines, which in turn, depends highly on the volume of air travellers, it is clear that all the ingredients for a virtuous cycle of growth and opportunities are in order.

In fact, one of the important ways for an emerging airport to sustain growth and development is having a keen understanding of the key drivers of the region (the rise of LCC’s, for example).

Karl Valentin, Airport Manager at Paraburdoo Airport, an emerging regional airport that has generated 10 years of consecutive growth in revenue passengers from 2001-2011, has this to say:

“Knowing what is happening in your region, and ensuring capacity for projected growth is critical. Not doing this will result in an airport that continues to struggle with the demands on terminal capacity to handle passenger numbers as well as airside limitations to deal with larger and more frequent aircraft operations.”

And if knowing what’s happening around is important, one would certainly not miss the impending full implementation of the ASEAN Open Skies Agreement.

I think the economic growth of the airport relates to the economic growth of the region it serves. I think all airlines will continue to come as the passengers come


he Asian aviation industry is now at the forefront of change. With the tectonic shifts in trends in air travel and the strong push

by ASEAN governments for increased economic growth through tourism, today’s emerging airports are at the center of this development.

OpenThe sky Emerging

AirportsSoar?‘Open skies’ is an international

policy concept that calls for the liberalization of the rules and regulations of the international aviation industry—especially commercial aviation—in order to create a free-market environment for the airline industry. For open skies to become effective, a bilateral/multilateral agreement must be concluded between two or more nations.**

On 20 May 2009, the ASEAN Multilateral Agreement on Air Services and the ASEAN Multilateral Agreement on the Full Liberalization of Air Freight Services were simultaneously approved in Manila, Philippines. The two agreements, which took effect January 1, 2010, essentially allow a gradual implementation of the open skies pact.

The ten countries that are part of this agreement are Singapore, Malaysia, Thailand, Brunei, Indonesia, Vietnam, Philippines, Laos, Myanmar and Cambodia.

While each member countries are at different stages of liberalization, there is no denying that the increased wave of competition is starting to impact the respective airports in these countries in a big way. Whether it is generally positive or negative is yet to be seen.

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The challenges are real. In the words of Leon Burger, an airport services luminary, the challenges that the emerging airports face are extremely unique.

“Because emerging airports do not share the broad revenue base of capital airports, they must ensure that they can continue operations in the face of reduced aviation revenue. Most community-owned airports have a business plan approach in managing their airport, through which the airport should be self-sustainable; i.e., it should generate its own operating and capital development funds and not be a financial burden on the local rate payers.

“This is where the catch becomes apparent. If the international and/or local economy takes a knock, the ripple effect could mean a significant reduction in aviation-based revenue for an airport. In turn, this reduces capital development reserve. It places airport operators between a rock and a hard place.”

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Many believe that the trick for emerging airports to secure economic growth and sustainability is to meet these challenges in a similarly unique fashion. Some industry experts pointed a couple of ways:

As a whole, the recent developments in ‘budget airlines’ and the inevitable full implementation of open skies policy will have a tremendous impact on the region’s emerging airports. Whether these will be an onslaught or a windfall can best be determined by the airport operators themselves. If anything, ‘budget air’ and open skies are like twin opportunities where full benefits can be achieved but some amount of effort needs to be exerted.

“It’s time everyone flies” so the Cebu Pacific slogan says. Indeed, it’s time the emerging airports fly and reach greater heights.

The Emerging Airports Asia Pacific 2012will bring together senior level regional airport operators, airport

authorities and other influential executives to discuss strategies to meet the challenges of passenger growth as well as innovative ways

to raise capital and revenue. To attend this event,email [email protected] or call +65 6722 9388

Understand your Airport and RegionThis may sound straightforward, but to truly develop the economic growth of emerging airport, it is important to understand your airport inside out. This means not only its internal challenges, operations and staff, but also how the airport fits with other external factors and overall regional development, which include the rise of low cost carriers and open skies.

Plan for the UnexpectedWhilst ‘planning for the unexpected’ may seem like an impossible task, if you understand your region well, this is an achievable act. Successfully planning means foresight and truly understanding the demographics of your community.

Beware of Over-expansionKeeping expectations in place is important when it comes to expanding your airport services. Don’t expect major airlines to jump at the thought of a new service to a different destination, many major airlines have stringent planning processes to ensure capacity and therefore profitability.

Honest and Open Communication The days of being smart and tiptoeing around real issues are gone. People need to be frank and open. Maintaining close relationships with regulatory authorities as well as key stakeholders on and off the airport are essential elements in running a successful operation.

Get Community SupportAn emerging airport can be a significant economic driver for regional growth, and vice versa. So it makes any plans for expansion much easier if your regional community is by your side and supporting you.

*ACI Passenger and Freight Flash Reports **WikipediaCombined AAPA + non-AAPA airlines GMT+7 to GMT+12Boeing Current Market Outlook 2011-2030Airbus Global Market Forecast 2011-2030http://en.wikipedia.org/wiki/Low-cost_carrierhttp://www.hotelclub.com/blog/top-10-low-cost-airlines-in-asia/http://en.wikipedia.org/wiki/AirAsiahttp://en.wikipedia.org/wiki/Jetstar_Airwayshttp://en.wikipedia.org/wiki/Tiger_Airways#Financial_performance

http://en.wikipedia.org/wiki/Cebu_Pacifichttp://en.wikipedia.org/wiki/Hong_Kong_Express_Airwayshttp://en.wikipedia.org/wiki/Spring_Airlineshttp://en.wikipedia.org/wiki/Bangkok_Airwayshttp://en.wikipedia.org/wiki/Jeju_Airhttp://en.wikipedia.org/wiki/Scoothttp://en.wikipedia.org/wiki/Paraburdoo_Airporthttp://www.thejakartapost.com/news/2012/07/27/airasia-deal-stirs-budget-aviation-rivalries.htmlhttp://www.abs-cbnnews.com/business/08/14/12/tiger-airways-completes-purchase-40-seairhttp://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1214754/1/.html

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Budget Airlines and Open Skies: Double Trouble or Lucky Pair?