The global airline market is growing fast, especially in Asia, due to a combination of rising affluence in emerging countries, expanding air travel infrastructure and cheaper tickets. Budget carriers have played a big role in this growth by making air travel affordable for the growing middle classes in emerging nations.
After years of rapid expansion, however, discount players are beginning to see their profit engines stall amid fierce price competition. To tap new markets and improve their bottom lines, these no-frills carriers are expanding their services to include longer routes.
Trans-Atlantic for a 10-spot
In a move that could deliver a devastating blow to major full-service airlines, European budget carrier Ryanair announced a plan to offer $10 tickets for flights between London and New York. Big airlines typically charge about $500 for flights between the two cities. The price announced by the scrappy, Dublin-based company is stunning even if it does not include fees for using airport facilities.
But Michael O'Leary, Ryanair's chief executive, claims such rock-bottom prices are nothing new for his company, pointing out that it already offers some European services for less than 1 euro ($1.36).
Rival Norwegian, Europe's third-largest budget carrier, wants to launch London-New York flights this summer. But U.S. civil aviation regulators have been dragging their feet on the approval process in response to vehement opposition from U.S. airlines.
Ryanair's plan to offer a drastic discount on trans-Atlantic flights is probably another sign that the world airline market is in for a violent change. Budget carriers have been the driving force behind the sharp decline in airfares in recent years, which has made air travel affordable for a huge number of middle-class consumers in the developing world. The number of air passengers worldwide reached 3.1 billion in 2013, up more than 30% from 2006, according to the International Air Transport Association. The number of passengers at low-cost airlines in Europe doubled to 216 million during the same period.
In Southeast Asia, discount carriers saw their share of the market surge to 60% in 2013 from 4% in 2003, according to the Center for Asia Pacific Aviation, an aviation industry research company.
In Japan, the impact of budget carriers has been slower to come. Three such airlines were launched there in 2012, but they still control only less than 10% of the country's air transport market.
Think big
In the rest of the world, however, the discount-airline revolution is entering a new stage, with many such carriers starting longer-distance services, including intercontinental flights.
Cebu Pacific Air, the largest discount airline in the Philippines, plans to spend $4 billion by 2021 to buy roughly 50 Airbus passenger jets. The company is positioning itself to meet surging demand for low-cost flights among the some 10 million Filipino expatriates living around the world.
The airline plans to expand its medium-haul operations, including flights to Japan. Recently, Cebu Pacific announced it will start operating four flights per week to Australia and three to Kuwait, possibly in September. The prices will be about 30% lower than those of competing services.
Cebu Pacific CEO Lance Gokongwei said he is confident about the profit outlook for the new services, predicting they will begin generating profits in six to 18 months.
The trend among budget carriers to shift their focus from domestic flights to international services is being driven by their deteriorating earnings. The companies' traditional strategies for sales and profit growth are starting to lose effectiveness amid ever-intensifying competition.
Southwest Airlines of the U.S., which launched a low-cost air travel revolution four decades ago, is also looking to "go long." The carrier has started selling seats for its first-ever international flights, to be launched on July 1.
Chief executive Garry Kelly was bullish when he announced the plan early this year. But the fact is that the company is going international only because its once high-flying earnings are losing altitude. After a decade of double-digit growth, Southwest's sales in 2013 climbed just 3%.
A decade of uninterrupted growth for Ryanair also stalled last year.
Some budget carriers are responding to the changing business environment by upgrading their services in a push to expand their customer bases. Norwegian, for instance, has started offering free in-flight Internet services. And an increasing number of low-cost airlines are offering business-class seats. Flynas, a budget airline based in Saudi Arabia, has added a "premium economy" category to its seat options.
With many full-service airlines struggling to keep their passenger traffic from shrinking, the strategic shift among their smaller rivals may mean that even harsher price battles await.
(Nikkei)
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