Can multi-country airline brands achieve growth in foreign markets? asks Chris Tarry. Analysis from Antonio Panariello
One of the interesting features of a recent visit to Asia was the increased evidence of what might be described as "multi-country airline brands", including Tiger Australia and AirAsia Indonesia, plus a plethora of others.
While this provides a route for airlines to increase market access and market presence outside their home bases, and reflects a necessary response in a still regulated operating environment to attempt to realise structural growth opportunities that exist in the wider geographic region, there are a number of issues and questions that arise to an observer from outside the region. Although it might be possible to argue that the parallel is a European carrier opening a new base in its non-home country, it is slightly different as each new operation faces a whole series of additional start-up risks.
Perhaps the similarity is that there is a route and market risk and it will similarly take time for the activity to be profitable. Although there may be evidence of first mover advantage when the routes did not immediately attract competitors, the strength of this brand in a competitive situation may be insufficient to overcome the price effects of competition in a market where air travel is already in effect a commodity.
In the short-haul market there appears to be little evidence that brand alone conveys any pricing power. For carriers in Asia, unless the dots can be joined up and some economies of scale realised, each independent operation is likely to find it a challenge to generate what are generally regarded as adequate returns. It is worthwhile recalling that even in the low-cost sector, the number of airlines (from any region) producing a return greater than the cost of capital can be counted on the fingers of one hand. At the end of the day, the pertinent questions remain: What are the likely returns? How certain will they be? When will they arise? And will they be material to the business?
Notwithstanding these issues, with regard to more local airlines their modus operandi for expansion does give rise to the question of whether it should be an approach that North American and European airlines should adopt to increase their presence in individual countries in Asia?
There are clear opportunities for structural growth in Asia, in particular if the alliance to which the airline belongs to is not fully represented. Virgin already provides evidence of brand extension in the airline industry and its challenges with Virgin America have been well documented. Elsewhere there has been Continental Micronesia and British Airways Comair franchise in South Africa.
In theory it would be possible to establish a series of participating franchises. The extent of the participation or investment would determine the degree of financial exposure (both negative and positive) - but would be at a level which satisfied local ownership and control requirements to ensure that route rights were granted. The franchise agreement would or should overcome the generally recognised weaknesses in respect of holding a minority stake in any business.
It all appears reasonably straightforward: identify which markets you consider offer good growth opportunities identify local investors acquire the aircraft, crews and licences and begin operations.
However, there are a number of start-up risks, including those associated with over-estimating the strength in terms of traffic attraction of a non-regional brand in a new market.
Furthermore, unless the activity is of some size, its impact will be more of the flag planting variety than being financially material. However, in the absence of a deregulated global market, will this approach or some variant represent a suitable approach for legacy carriers to project their presence into countries that offer structural growth?
Source: Airline Business
