What crisis? Budget carriers thrive amid gloom

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KUALA LUMPUR: Budget airlines have found a silver lining in the global recession.

 

As travelers pinch pennies and opt for cheaper alternatives, AirAsia, Europe's Ryanair and other low-cost carriers are adding routes and buying new planes to grab a larger slice of global aviation at the expense of their more established rivals.

 

Major players such as British Airways and Hong Kong's Cathay Pacific Airways have reported full year losses for the first time in years despite cutting costs and flights to cope with a downturn in premium air travel.

 

Full service carriers, which once completely dominated the skies, are banking on an economic recovery to restore their fortunes but they may find it tough to return to the growth levels they enjoyed before the crisis.

 

"Full-service airlines have a bit of conundrum on their hands," said Derek Sadubin of the Sydney-based Center of Asia Pacific Aviation.

 

"We think low-cost carriers will become so much more entrenched in airports and corporate travel that it will be difficult for them to claw their business back" when the economy recovers, he said.

 

To be sure, all airlines have struggled as oil prices soared in the last two years.

 

Oil prices have since tumbled and despite a rally early this year, are still half the level of a year earlier.

 

But major industrialized economies continue to contract and economic conditions are likely to remain tough even when a recovery is under way.

 

The International Air Travel Association in June predicted airline losses worldwide to swell to US$9 billion this year, nearly double its previous forecast.

 

Full service carriers are the worst hit as the downturn has hammered business and first-class travel, which make up a small percentage of seats but account for up to 40 percent of their revenues.

 

Their smaller, no-frills rivals are weathering the recession better with a low-cost model that relies on high passenger volumes, stripping out costs through strategies such as taking the cheapest landing slots at airports and turning full service features like meals and check-in baggage into profit-making extras.

 

In Asia, budget aviation has seen exponential growth since the start of the decade and now has a 16 percent market share, Sadubin said.

 

The market share of low cost carriers could cross the 20 percent mark in the next one to two years, he said, as they open up new routes across the region and give travelers an option to fly at a fraction of the cost charged by full service airlines.

 

Malaysian-based AirAsia, the biggest low-cost carrier in the region, posted a record profit of 203.2 million ringgit ($56.4 million) for the quarter through March, up 26 percent from a year earlier.

 

Passengers soared 21 percent to 3.15 million during the period while falling at regular airlines.

 

It has ordered new planes, made its debut in Europe with flights to London in March and is eyeing plans to enter the U.S. market.

 

"We are in the McDonald's, Wal Mart category. Business is booming as people are looking for value," AirAsia Chief Executive Tony Fernandes told The Associated Press in a recent interview.

 

AirAsia's success has generated rivals, the best known of which are Singapore-based Tiger Airways and Qantas Airways-owned Jetstar.

 

Tiger, which is 49 percent owned by Singapore Airlines, is rapidly expanding and has a total 56 new aircraft on order for delivery through to 2016.

 

Tiger expects business travel to account for 15 percent of its total traffic by March 2010, more than triple from current levels.

 

Budget aviation has put down even stronger roots in the U.S. and Europe, with about a one-third market share in both regions, analysts said.

 

In Europe, Irish discount airline Ryanair remained on an expansionary course and forecasts a net profit of up to 250 million euros ($350 million) for its 2010 fiscal year.

 

It is eyeing plans to order up to 300 more aircraft in a deal that would make the Irish carrier more than double the size of British Airways.

 

In the cash-rich Middle East, analysts said budget aviation penetration is still low at less than five percent but new carriers have sprung up in recent months.

 

FlyDubai, based in the United Arab Emirates, was launched last month and has unveiled ambitious expansion plans after ordering 50 Boeing 737 aircraft.

 

The intense competition from budget carriers has changed the rules of the game for some major airlines.

 

Many full service carriers are regularly churning up promotional offers - with tickets at a discount of up to 80 percent - in an effort to protect their market share.

 

Others like India's Jet Airways, Korean Air, and Malaysian Airlines have set up low-cost offshoots, relying on a two-brand strategy to cushion earnings.

 

Some carriers have taken more drastic steps to focus on lower-fare volume business.

 

British Airways has announced it won't configure any new planes to offer first-class cabins.

 

Qantas has also scrapped first-class service on several long-haul routes and is considering reducing the 72 business seats in its Airbus A380 superjumbo jets.

 

But Singapore Airlines, one of Asia's top carriers, remains confident of a recovery in the premium market.

 

It has cut fares and capacity this year but said it would not crop the 60 business seats in its A380 planes.

 

"It's a cyclical business and positive growth will return. We are not going to fundamentally change our business focus overnight just because of the downturn," said spokesman Nicholas Ionides. - AP

 

 

Source: http://biz.thestar.com.my/news/story.asp?file=/2009/8/5/business/20090805150757&sec=business