Boom or bust

There is another issue. Where are all these jets going to fly and how much pressure will they ultimately place on supply and demand? Some bankers involved in aircraft financing and aircraft lessors have already expressed concerns the region could be flooded with too many narrowbody aircraft. It’s not as if a single budget carrier is expanding rapidly. Malaysia’s AirAsia also has 450 single-aisle aircraft on order.

All up, other LCCs across the region have more than 250 single-aisles coming off the production lines over the next decade. North, south, east and west, new LCCs are popping up like weeds across Asia Pacific, all of them reciting the mantra that forecast growth in passenger traffic supports rapid fleet expansion.

Certainly, growth is strong – some 6. 7 per cent annually through 2016 according to the International Air Transport Association (IATA). But it’s not quite as simple as that. Geographically, a major proportion of these new aircraft are destined for the tight, already heavily congested skies of South- East Asia. Their owners hope to tap into both internal growth and the fastrising number of flyers on routes to and from India and China.

Clearly a major issue will be airport access. Primary facilities are being overrun. Plans are in place for airport expansion at nearly all major hubs but completion remains years away. The arrival of full-blown open skies with ASEAN (Association of South East Asian nations) in 2015 is likely to create even more pressure as players move to take advantage.

Short to medium-range LCCs aren’t the only problem. There are signs long-haul low-cost could be about to experience another bout of growth.

Reports suggest AirAsia X may re-launch services to Europe which it abandoned in the face of high taxes and poor economic conditions. Lion is planning the launch of a new long-haul LCC, Batik Air, late this year.

There may also be additional capacity arriving from outside the region. The chief financial officer of Germany’s Lufthansa, Simone Menne, told an analysts’ briefing in New York recently the carrier is looking at establishing a long-haul low-cost venture to specifically help sustain its market share on routes to Asia.

The reason? It has been losing traffic from the region to the Gulf trio of Emirates, Etihad and Qatar.

Indeed, it has to be remembered that budget carriers aren’t the only ones throwing more seats into the air. Full-service operators are also ordering more aircraft, both for themselves and their LCC offshoots. All of this adds up to more and more seats, a tougher competitive landscape and, undoubtedly, the potential for serious, profit-busting discount wars. Paper-thin yields will be squeezed further.

There is another interesting trend. According to a survey by consultancy KPMG released in March, the cost advantage LCCs have over legacy carriers is shrinking, having fallen by a third over the past six years.

In 2006 it stood at 3. 6 cents a seat. It is now 2. 5 cents because full-service airlines learned lessons from their budget rivals, significantly trimming their own costs. The study suggests the cost difference may narrow further because budget airlines’ costs are also rising “with upward pressure coming from added complexity as they mimic the legacy carriers – on assigned seating, for example – in an attempt to steal business customers and others put off by the low-cost sector’s reputation”. What it means is that just as they are introducing more capacity, LCCs may also be facing more serious competition from their big legacy rivals.

As for the players, the knives are already out.

AirAsia’s group chief Tony Fernandes says his Lion Air rival “has probably bitten off more than he can chew”. Rusdi Kirana says that’s rubbish, growth supports his plans and he will be buying even more aircraft in the future.

What is certain is that there is going to be a herculean battle across Asia between the major budget players such as AirAsia, Lion and Jetstar.

Inevitably, there will be casualties and if it is not any of those operators it will definitely be several of the smaller players as they are caught in the crossfire.

LCCs across the region have more than 250 single-aisles coming. . .over the next decade.