A city state of four million people, Singapore had, until a year ago, a fairly typical aviation market, dominated by a single home carrier Singapore Airlines (SIA) and its regional subsidiary SilkAir. That changed as the low-cost revolution came to town. Three new scheduled airlines have now joined them – Jetstar Asia, Tiger Airways and Valuair – all styling themselves as low-cost, low-fare carriers.
Although these start-ups generally put a brave face on their achievements since launching, the going has not been as smooth as they had hoped. As sceptics had predicted, one big obstacle – a lack of traffic rights in a heavily restrictive marketplace – has been encountered. And not only is there a limited pool of rights Singapore's government can draw from due to restrictions in bilateral air services accords, obtaining landing rights from destination countries has proved difficult for some.
"The regulatory environment here is certainly one of the most challenging aspects of the business," says Jetstar Asia's founding chief operating officer Con Korfiatis, who has just returned to Australia to take up another job with the Qantas group. "Certainly what we are seeing is that once it is established the markets are taking to this business model and the low-cost airlines in the same way they have in the Americas and in Europe and in Australia. The issue is getting it in everywhere."
Low-cost support
Singapore is publicly in support of the new airlines, arguing that they help boost its status as an aviation hub, while the new-starts themselves remain positive about their future prospects. The low-cost concept, although relatively new to Asia, is catching on, largely due to the runaway success of Malaysia's fast-growing AirAsia, and headline-grabbing promotional air fares are starting to be seen.
Liberalisation is also continuing to make its way across the region. Countries such as Singapore and Thailand are particularly forward-thinking in opening up bilaterals, while others such as Hong Kong and Japan have long been criticised for being slow. But virtually all Asian markets are easing restrictions on air services and more are warming to the low-cost concept as they see the economic gains it can bring.
The all-important unknown is whether the market will open up fast enough to give the new players opportunities to grow and improve their survival chances.
Valuair was the first start-up to win an air operator's certificate in Singapore. Backed by a group of Singaporean businesspeople including Lim Chin Beng, a former SIA managing director, it launched services in May last year with two leased Airbus A320s. It now flies four A320s to Bangkok in Thailand, Hong Kong, Jakarta in Indonesia and Perth in Australia. Services to Chinese destinations are due to be added soon.
"We would like to expand a little faster," says chief executive Sim Kay Wee, who joined in August after more than 30 years with SIA, but he notes that growth has been slowed in part by a lack of available traffic rights. As a result it is now looking to lease widebody aircraft for longer-haul services and Sim hopes Valuair will be flying to destinations within a 7-8h range of Singapore by the end of the year. Under consideration are points in eastern Australia, northern China, India and Japan.
"If you go within 2-3h, you are very limited in terms of where you can fly because of the traffic rights situation," says Sim. "We want to ramp up our expansion and some of the opportunities are further away. Some of these traffic rights do exist already."
New models
Valuair's A320s are configured in single-class layouts and the carrier has described itself as a "budget airline with a difference", as light meals are served at no additional cost, some in-flight entertainment is offered, tickets are priced below those of the incumbents – although not dramatically lower – and there is assigned seating. "We are agnostic as far as models go," says Sim, adding that the airline could even introduce a business class for its planned longer-haul services.
"We believe in whatever suits the marketplace," he says. "We want to be low cost in the sense of our operational structure and in keeping our economies really tight, but if the market demands a business class and we feel that we can sell at a fare that can make us some money, we are open to all sorts of ideas."
Valuair was followed to the market in September by Tiger, which is 49%-owned by SIA and 11%-owned by SIA's parent, government-controlled Temasek Holdings. Shareholders also include the family of Ryanair founder Tony Ryan, plus US investors, including former America West chief Bill Franke and David Bonderman, the current Ryanair chairman. Tiger now flies to the Thai cities of Bangkok, Chiang Mai, Hat Yai and Phuket (Singapore and Thailand effectively have an open-skies bilateral) and was due to have launched services to Macau and two points in Vietnam late in March and early in April. Like Malaysia's AirAsia, it has adopted Ryanair's strict no-frills model.
The third of the new-starts to begin operating last year was Jetstar Asia, which launched services in December. Australia's Qantas Airways holds 49.9% and the balance is with two private Singaporean investors plus Temasek Holdings. It now serves Bangkok, Hong Kong and Taipei, having recently dropped Pattaya in Thailand, and has its sights on points in China, Indonesia, India, the Philippines and Vietnam. Its model is also all-economy, but it offers hot meals at a price on the longer sectors and has assigned seating.
Some industry observers believe Singapore is too small to support so many new operators, particularly since they are generally all chasing point-to-point traffic. Because of the shortage of available traffic rights, they are also forced to compete directly against each other on some of the more open routes such as Singapore-Bangkok – as well as with full-service network carriers that have the benefit of business class and cargo revenue to fall back on. This is unlike in the open market of Europe where new low-cost players have often only had to go up against incumbent full-service airlines on given routes and price differentiation worked in their favour.
But Korfiatis says it is unfair to predict the demise of the new players, in part because they are growing the market rather than taking business away from incumbents.
"First and foremost, we haven't all adopted the same business model. So what is in each of our control is a decision on that factor and if we have got it right then we should do okay and if we have got it wrong we are at risk of failing," he says. "What is not in our control is the speed of regulatory liberalisation, and I think if that was quick then the possibility for many carriers to survive if they have got their business model right is definitely a possibility. But if the speed of liberalisation is very, very slow and you need to grow to achieve economies of scale but are slowed down in doing that, it changes the dynamics."
Tony Davis is firmer in his beliefs. He was just weeks into the job as chief executive of Tiger earlier this year when he said at a low-cost airline conference in Singapore hosted by the Centre for Asia Pacific Aviation that most start-ups in Asia will not survive. However, he went on to say those who believe the region's consumers are different and will not accept the no-frills concept are mistaken.
Davis joined Tiger fresh from running bmibaby in the UK. He is also a nine-year veteran of British Airways, where he says executives used to say similar things during Ryanair's early days: that Europe was different and consumers would not warm to the no-frills model.
"When you hear comments here in Asia such as it won't work here, we are different, in my experience you just take it with a pinch of salt," says Davis. "The best-service airlines in the world are here in Asia and the idea of being not quite as good as them and being slightly cheaper to me doesn't sound a very strong proposition. We have differentiated ourselves significantly from the incumbent carriers, both in terms of product and pricing. You have got to be at one end of the spectrum or the other."
Valuair's Sim does not share Davis's view, however. He believes Asian travellers will continue to expect some in-flight amenities. "There are some who believe aircraft seats or flights are commodities and price is the only answer. I beg to disagree," he says.
Asian expectations
"It is a different market than Europe – it is not commuter traffic, for example. The consumers here expect something and they are prepared to pay a certain amount for what they expect. They find the full-service carriers too expensive, but I am not sure they are prepared to go the other way. Also the national regimes are wary of an all-out air fares war which is very tumultuous for their own national airlines. I would say that while the others may have different reasons for their models we arrived at ours bearing in mind the marketplace that we are in."
The new airlines may disagree on which model is best, but they agree low-cost carriers are most successful in truly deregulated environments – and Asia is not even close to being that. Even Singapore and Malaysia, for example, which boast about how open they are and which are building low-cost terminals at their respective flagship airports, have a heavily restrictive air services agreement that is keeping the new-starts out of the market – one that is considered ideal for low-cost carriers.
But attitudes are changing and opportunities will continue to become more abundant within South-East Asia, with around 500 million people, many of whom cannot afford to travel on full-service airlines. One positive development, for example, is that members of the Association of Southeast Asian Nations, or ASEAN, have pledged to work towards a full liberalisation of air services by early in the next decade allowing unlimited operations and easing ownership and control restrictions.
"It is not a case of it will never happen. It will happen," says Korfiatis. "There are moves afoot in every place for liberalisation to move forward. It is just that some people move quickly on it and others don't."
Davis agrees, but he says opportunities are available now for those willing to take some risks and suggests the new airlines should adopt the Ryanair model of serving secondary airports. There are such airports hungry for business, he says, and it is often much easier to get operating rights to serve these than it is to airports in the capitals. One such example is the former Clark airbase outside Manila, which Tiger is planning to serve and which it aims to market as a service to the Philippine capital, which is around 70km (40 miles) away. Another is Macau, less than a 1h ferry journey from Hong Kong.
"In the long term, the absence of traffic rights is a problem, and in the long term liberalisation will have to occur in Asia if low-cost airlines are able to fully develop their business. But there are rights available – it's a case of being willing to go for them. We are out there looking for perhaps more obscure opportunities," says Davis.
"If you can consistently offer the lowest prices you will develop markets. That is why our model, particularly with scarce traffic rights, is going to be more successful than saying: I want to be in the queue to go to another major congested airport with all its traffic rights restrictions."
The ability to grow rapidly is vital, as low-cost carriers typically require high frequency and traffic volumes along with aggressive aircraft utilisation. All three, however, admit to having suffered from overcapacity due to traffic rights restrictions and observers say the speed at which they can expand may determine the winners and losers.
Davis expects that as the market evolves there will be a shake-out and the Asian market will consolidate around a handful of first-tier players.
"Clearly, AirAsia had first-mover advantage and I think ultimately you are going to see a polarisation where it is AirAsia and ourselves that are the two major players on a pan-Asian basis," says Davis. "The success of low-fare airlines is wholly reliant on volume, and in order to be at those volumes we have got to be, if not the biggest, then certainly the second biggest. That is a clear objective for us – that we should be there at the top of the tree."
It looks like shaping up to be a tough fight, as the new operators are all competing for the same thing.
NICHOLAS IONIDES SINGAPORE
Source: Airline Business
