Will Asia's Low-Cost Airlines Fly High?

Demand may offset the hurdles faced by the region's new budget carriers

Zuwailiah Jamaludin had been wanting to take her mother and three children on a vacation in Thailand for years, but she just couldn't afford to get there. In early June, though, she and the family spent a week sightseeing in Bangkok and the northern city of Chiang Mai. Why now? Air Asia, the pioneer of no-frills flights in the region, was offering the 2,400-kilometer flight from Jamaludin's hometown of Johor Bahru, Malaysia, for just $45 each way. "We're on a budget," she says. "When Air Asia came along, we didn't want to miss the chance."

Much of Southeast Asia soon will have the same chance. Since Kuala Lumpur-based Air Asia took to the skies in November, 2002, a half-dozen low-cost carriers have opened for business or plan to do so by yearend. One-Two-Go and Thai AirAsia, an affiliate of the Malaysian carrier, have launched in Thailand, Valuair is flying out of Singapore, and Lion Air offers daily service from Jakarta to Singapore, Kuala Lumpur, and far-flung destinations in Indonesia. In response, big carriers, including Singapore Airlines, Thai Airways International, and Australia's Qantas Airways, are setting up low-cost subsidiaries. The boom is being driven by the governments of Malaysia, Thailand, Indonesia, and Singapore, which are granting landing rights to the carriers in hopes of boosting tourism and business travel. The new carriers "will make the market more dynamic," says Air Asia founder Tony Fernandes.


But the rise of Southeast Asia budget carriers may not rattle established airlines quite as much as upstarts such as Southwest Airlines Co. (LUV ) and Ryanair (RYAAY ) have in the U.S. and Europe. A dearth of secondary airports within commuting distance of Asia's capital cities means that low-cost airlines there can't avoid congested and pricey metropolitan airports as easily as U.S. and European budget carriers can. That limits their ability to save on landing fees and to get into and out of airports quickly -- the two pillars of the low-cost model. "The best we can do is 45 minutes turnaround -- and keep our fingers crossed that there's no bad weather," says Valuair Ltd. Executive Director Jimmy Lau.

The new Asian upstarts also face more competition than discounters elsewhere. In Europe or the U.S., no-frills carriers target routes that are dominated by just one or two carriers. But in Asia there's rarely any shortage of competition. In flying between Singapore and Bangkok, Valuair and Thai AirAsia compete with a dozen other carriers. On the Hong Kong-Singapore route, Valuair squares off against seven others. "In the U.S. and Europe, budget carriers have had huge impact on traffic and share," says Richard Stirland, director general of the Kuala Lumpur-based Association of Asia Pacific Airlines. "But I don't see it happening in this part of the world."

Asia's traditional airlines are more cost-competitive than their European and American counterparts, too. The likes of Cathay Pacific, Singapore Airlines, and Thai Airways enjoy lower average costs per kilometer than other global carriers. They're often even as low as no-frills airlines, which typically keep a lid on costs by flying only short-range, narrow-body planes. Cathay Pacific Airways Ltd., for instance, keeps its wide-body Airbus A330s busy by making several daily flights between Hong Kong and Taipei -- and then using the same plane for a 13-hour overnight trek to London. And because full-service carriers have first and business classes -- plus cargo -- they can sell economy seats at a discount. "They have an embedded low-cost carrier at the back of the plane," says Timothy Ross, a UBS analyst in New Zealand. So when Valuair offered a $176 round-trip fare between Hong Kong and Singapore, both Cathay and Singapore Airlines went even lower.

In fact, rather than cannibalizing full-service airlines, the arrival of no-frills rivals could create more business for everyone. As prices fall, full-service carriers say their planes are filling up. Thai Airways International, for example, raised load factors by offering 30 of the 150 seats on daily flights between Chiang Mai and Bangkok for just $25 round-trip, down from its regular fare of $112. "As long as we make a profit, that's good enough," says Chaiwat Chanapai, vice-president of Thai Airways. And as long as fares stay low, it'll be good enough for budget-conscious passengers such as Jamaludin to take more of those cherished trips abroad.

By Frederik Balfour in Bangkok

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