Competition heating up among low cost carriers in SEA

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AirAsia vs Lion Air… AirAsia is facing competition from Lion Air, Indonesia’s largest private carrier. However, AirAsia is more widely recognised globally, including flights to and from Indonesia (Photo credit: Terence Ong, Wikimedia Commons) AirAsia vs Lion Air… AirAsia is facing competition from Lion Air, Indonesia’s largest private carrier. However, AirAsia is more widely recognised globally, including flights to and from Indonesia (Photo credit: Terence Ong, Wikimedia Commons)

By Zhen M

AirAsia and its inspiring “Now Everyone Can Fly” tagline has been leading the low cost carrier (LCC) charge since 2001, radically transforming the aviation scene in Malaysia as well throughout South East Asia. LCC penetration in SEA expanded from a mere 3% in 2001 to 10% in 2004, 31% in 2009 and thence a whopping 52% last year.

Observers and players alike are bullish on the outlook of LCCs, with many projecting that, with their rising market share, LCCs will become heavyweights once the Asean Single Market (SAM) Open Air policy is fully implemented in 2015. Under SAM, airlines from Asean countries can fly within the region without restrictions, giving them the opportunities to compete neck-to-neck on a regional basis.

Airbus Industries projects that LCC traffic will represent 20% of total global traffic by 2031, with domestic Asean traffic potentially having over 60% of the short-haul market comprising LCC traffic.

RHB Research regional transport analyst Ahmad Maghfur Usman opines that, despite the high LCC penetration in Malaysia and Southeast Asia, the LCC segment still has plenty of room to grow and support more players.

There are currently more than 10 LCC brands in the region – including Singapore’s Tigerair and Scoot; Indonesia’s Citilink and Lion Air; the Philippines’ Zest; Thailand’s Nok Air and Orient Thai; Vietnam’s VietJet, and Australia’s Jetstar together with its subsidiaries/affiliates in other countries. With the SAM, competition will only intensify.

Malaysia’s AirAsia stands ahead of the pack, being the only LCC to have won five consecutive “World’s Best Low-Cost Airline” awards from Skytrax. The brand also enjoys global visibility and recognition thanks to aggressive branding compaigns that include world class sporting properties such as Formula One Grand Prix, Barclays English Premier League, British MotoGP and American football.

AirAsia’s biggest threat is perhaps Lion Air, Indonesia’s largest private carrier. The Indonesian LCC has a massive 600 aircraft on outstanding order to fuel its aggressive expansion plans. Observers believe it wants to take on AirAsia. As Indonesia is by far the largest market in Southeast Asia, Lion Air has been able to quietly surpass AirAsia as a larger airline group based on seat capacity within SEA. But it is predominately a domestic carrier while AirAsia is much larger in the international market, including to and from Indonesia.

AirAsia’s penetration into Indonesia via Indonesia AirAsia, Lion’s home turf in which it commands almost half the domestic market, has encouraged it to enter Malaysia via 49%-owned associate Malindo Air. The airline began operations on 22 May this year. Lion Air has talked about potential affiliates in other Southeast Asian countries and Australia.

Will Malaysia’s pride maintain its leadership amid so many new and upcoming LCCs in the region?

“AirAsia has the scale and route network. It takes a while to build something this big. It has the first mover advantage. I think that as long it sticks to the cost principals, everything should be ok,” says Ahmad.

Studies have shown that in an intensely competitive industry, particularly the budget airlines sector, the first mover advantage is one of the most important factors in sustaining market dominance. This theory is evidenced by the examples of Ryan Air in Europe and Southwest Airline in the United States – pioneer LCCs in their respective markets that have barely been challenged by newcomers.

Currently, the AirAsia Group, which includes long-haul LCC AirAsia X, serves a total of 173 routes through a network of 17 hubs across five countries and an additional “virtual hub” in Singapore. The AirAsia website is one of the most active e-commerce platforms in Asia.

Being the only long-haul LCC operator in Malaysia, AAX has not only been able to take market share from the full service carriers, but also successfully stimulated passenger traffic in the routes it operates. (See chart.) Other long-haul LCCs in Asean include Australia’s Jetstar, Thailand’s Thai Smile, Singapore’s Scoot and Philippines-based Cebu Pacific set to kick off in October 2013. Meanwhile, on the home front, AAX currently faces no competition.

Compared to major Asian airports, Malaysia is a relatively underpenetrated market in terms of long-haul flights. AAX is well positioned to serve the key markets around the world from its hub in Kuala Lumpur. With competition intensifying, notably in the short-haul space, the prevalence of promotional fares to boost traffic feed for long haul LCCs should benefit AAX.

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