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Can LFA develop fast in Asia?
2004-04-06
China Business Weekly
At the beginning of 2004, news of the newly established Eagle Airline put the spotlight on China's low-fare airline (LFA) market.
The Chengdu-based airline in Southwest China's Sichuan Province declared that their aim is to be the first Chinese LFA by providing lower fares for domestic flights. Arguments on whether LFA will have a rapid development in China attracted substantial attention from both academic and professional sectors.
The term "low-fare airline" or "no-frills airline" is new to China. However, the low-fare airline market has existed for more than two decades in North America and Europe, and has achieved remarkable success.
LFAs were the result of market deregulation. As a concept of services -- low service level, low cost, hence low fare, it was originally introduced in 1980s in the United States and Europe.
People Express Airlines was the first, launched in 1981 in the US. Not long after, US Southwest Airlines began a similar service in the inter-state market. In much the same way, the entry of Ryanair in 1985 brought radical changes to the UK-Ireland and later the inter-Europe aviation market.
Slowly but steadily, LFA service has occupied more and more of the short- and medium-haul air transport market in North America (currently 20 per cent market share) and Europe (7 per cent market share).
These initiatives not only widened the available choices for air travellers but also had a galvanizing effect on traditional airlines, forcing them to look more closely at customers' needs and to adopt different strategies.
LFAs embraces a series of new strategies and operations to highlight their differences from traditional carriers to achieve their niche market shares.
First, they focus on providing low priced tickets. Contrasting with traditional carriers, LFA companies pay more attention to customers' money value on "what they need most." The phrase "no-frills" itself illustrates the limited service. Normally, no-frills service does not include complimentary meals, tea, coffee or drinks services. Travellers can get these services only after they pay additional money.
They provide one-seating class and few cabin crew services. These "no-frills" steps help airlines not only reduce their operating costs, but also meet the requirement of a new generation who tend to do-it-yourself.
Low-fare carriers explore various approaches to keep their low-cost strategy during operation.
For instance, easyJet, a UK-based airline, favours an informal corporate culture with a very flat management structure, which eliminates unnecessary and wasteful layers of management, thus saving money.
Some researchers and professionals feel excited and optimistic about LFAs' future in China, insisting the concept has been recognized competitive and effective in other parts of the world. LFA services can survive and develop in China.
Based on its observation of the strong tourism growth, air services are being liberalized rapidly in recent years and consumer sentiment is positive in most Asian countries, the Centre for Asia Pacific Aviation (CAPA) predicts that the advent of LFAs will be one of several factors that make 2004 a year of massive opportunity for Asia-Pacific airlines, airports and the tourism industry in general.
Countries such as China have vital ingredients to make a budget airline work -- huge and dense populations, underused regional airports, industry development in satellite towns, expanding upwardly mobile middle class and relatively high Internet usage.
It is also suggested that the success of low-fare airline might not depend only on their ability to keep operation costs low, but also on the implementation of pricing strategies that attract various segments of consumers.
The CAPA believes low-fare airlines have typically targeted leisure travellers, offering low fares on holiday routes.
Currently, the number of travellers to, from and within the Asian region is increasing rapidly. Therefore, from the market demand point of view, LFAs spreading in Asia will be good.
LFAs may be able to capture more first-time flyers than those in the West, given the greater untapped potential in Asia.
The CAPA also held that some business travellers are an important component of the traffic mix for low-fare airlines, particularly for price sensitive business people, by adding facilities and services.
Still, some pessimists emphasize the different situations in Asia.
In contrast to the views expressed by CAPA, the GAIS holds the viewpoint that the most critical element of a successful low-fare airline business is significantly higher labour productivity than traditional network carriers. Unfortunately, some regional network carriers in Asia already operate at a relative low operating cost level.
Some major carriers squeeze more seats into their wide body planes, and use labour that is less expensive when compared to most Western carriers. The operating costs for Cathay Pacific and Singapore Airlines are already similar to that of low-budget Ryanair in Europe.
Meanwhile, it would be a great challenge to create simple and efficient hierarchical structure within an organization, especially for the newcomers.
In addition, Asian nations' air deregulation policies are still far away from what the low-fare market requests. There is no true deregulation or open-skies policy in Asia so far.
Governments in Asia tend to provide a high degree of protection and favour home-based carriers.Also, they still control many of the major players and regulate airline consolidation and foreign investment. Bilateral aviation agreements between countries and alliances among current network carriers make it hard for newcomers to make any headway. These factors could be the reasons why LFAs in Asia mainly fly to domestic destinations.
The GAIS believes macro economic and social elements would slow down the LFA industry's development in Asia. The volume of business air travel demand in Asia has decreased on a whole due to the overall economic downturn. The reasons for less air travel include the war in Iraq, SARS, as well as the popularity of tele-conferencing and Internet business.
Another barrier affecting the introduction of low-fare air services spreading in Asia is the customer behaviour differential between Asian and Western cultures.
Consumers in Asia are less likely to buy and compare air ticket prices online; instead many still use traditional travel agents.
LFA economics rely on service high-density, short-haul (two-hour) routes. Europe and North America have lots of cities relatively close to one another that can be linked profitably in such a low-fare way. Asia is different geographically. Its big cities tend to be separated by vast distances -- average four-hour flight for international routes. That would make the no-frill service more difficult to become popular. Meanwhile, navigation and landing charges are always expensive and prohibitive in Asia. These technical barriers would also cause certain difficulties on LFA's development in Asia.
General economic theory suggests that consumers benefit from more choices of products, services and firms. The emergence of LFA industry in China will definitely increase passengers' travel choices. The only problem would be how far and to what extent Asian consumers can obtain the real benefit from the air market diversity.
The author is a PhD candidate with the Hong Kong Polytechnic University.
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