India's Budget Airlines See Gold in New Tie-ups
New relationships are changing the Asia Pacific’s airline landscape as it enters a new stage of maturity with once-fierce opponents forming partnerships for reciprocal gains. Overcapacity in fleet numbers has fueled competition and compelled budget carriers to look at cooperation initiatives despite the budget airline industry’s penchant to avoid complexity. The 47 budget carriers in the region–with 10 startups to be launched this year–have in hand more than 1,600 fleet orders, with around 1,000 aircraft already in their collective inventory.
“There will be no turning back as the momentum that low-cost carriers have steadily built up in Asia over the last decade continues to gain steam,” said a 2014 report by the CAPA Centre for Aviation, a Sydney-based consultancy. Budget carriers have increased their share from 2 percent a decade ago to 15 percent of the region’s fleet, and “slightly over 20 percent of seat capacity but approximately 50 percent of orders,” said CAPA.
Budget carriers, including Scoot, Jetstar and Tiger Airways, AirAsia, IndiGo and Spring Airlines, are starting to shake the confidence of legacy airlines, but they could go further by collaborating. “We will see more alliances between budget airlines in Asia. It is partly being driven by a need for the medium-size and smaller players to create scale so that they can compete more effectively withAirAsia and Lion Air, which now account for over 35 percent of budget capacity in Asia,” said CAPA chief analyst Brendan Sobie.
Even as service routes are adjusted across country borders following partnerships, and budget carriers strategize how to most efficiently operate while analyzing the rapidly shifting market, Carlson Wagonlit Travel (CWT) Solutions Group has recommended buyers prepare themselves for new scenarios and new possibilities in their air travel programs.
As seen in the European experience starting to replicate in Asia, passengers are moving toward the low-cost model primarily based on a willingness to give up service perks for what is often perceived to be a lower fare. In India, for instance, business models are increasingly undergoing change and there is a fine line in fares left between full service carriers (FSC) and budget airlines, which offer over 75 percent of the seats. Often fares of budget airlines are, in fact, higher than FSCs.
A noticeable add-on by many budget carriers is the use of global distribution systems to access sectors such as business travelers, extend bookings to travel agents and also to facilitate interline agreements to give passengers a wider choice of destinations and easier booking. Already, major budget carriers with the exception of the largest, AirAsia, are now IATA members.
“If there is a meaningful, tangible benefit that we can gain from an IATA membership, then we will consider [it]. It has not been an immediate focus for us,” said Azran Osman-Rani, CEO of AirAsia X, the long-haul arm of AirAsia. The airline’s strength in its number of subsidiaries that operate in Indonesia, Thailand, Philippines, and soon in India.
That the dynamics are changing is apparent with major airline alliances not ruling out the inclusion of budget carriers in the future. “There are certain geographic regions where some cooperation could well be feasible. Our aim is to promote a worldwide network as there are some markets where there is little or limited coverage by legacy carriers,” Markus Ruediger, spokesman for Star Alliance, told AIN.
Star is believed to be looking at ways to cooperate with budget carriers to give its customers more connections. “[However], LCCs have a business model that will never fully align with alliance members…There are more opportunities on a regional [sector] on a case-to-case basis. We will need to see what they provide for our members,” added Ruediger. Costs associated with add-ons such as through check-in facilities, lounges and frequent flyer programs may prove a deterrent to low-cost airlines.
However, budget airlines are starting to look at GDS (Global Distribution Systems). The Asia Pacific region’s largest budget carrier by revenue, Australia’s Jetstar Group, which is a wholly owned subsidiary of the Qantas Group, has partnerships in Singapore, Vietnam, Japan and Hong Kong (subject to regulatory approval), and now has an agreement with Abacus Global Distribution Systems. It has partnerships comprising 25 interline agreements and three codeshare partners (American Airlines, Japan Airlines and Qantas) that have helped it expand business and make it competitive.
With the Jetstar product available through Abacus, “an enhanced offering will build on the airlines’ growing interline selling proposition allowing greater accessibility for customers seeking to purchase complex itineraries interlinking numerous destinations and carriers,” said a statement. At a retail airline conference in Hong Kong (now former) Jetstar CCO David Koczkar said interline and codeshare revenue had increased 80 percent in 2012. “We have to work with the GDS…In Indonesia, we wouldn’t be successful unless we were on Abacus and in Japan similarly with Amadeus.”
India’s budget domestic carriers, now flying abroad, are still working strenuously to sell tickets on their own websites vis-à-vis travel agents. A reason, perhaps, budget carriers IndiGo and SpiceJet are both IATA members. For the moment, Indigo continues to follow its business model of not adding complexities such as a frequent flyer program. Recently, at the Bahrain International Airshow, CEO ofQatar Airways Akbar Al-Baker was quoted saying: “We are talking to IndiGo and SpiceJet to do codeshare agreements.”
SpiceJet has already become the first Indian budget carrier to sign a three-year interline agreement with Singapore’s Tigerair to pave the way for greater connectivity between flights operated by both carriers. Fourteen cities on SpiceJets’s domestic network are now connected to Singapore through Hyderabad’s Rajiv Gandhi International Airport on Tigerair. The move has resulted in the participation of an airport, for the first time in India, in facilitating connecting flights through a free porter service for transfer of checked-in baggage for passengers of the two carriers.
In October last year, Scoot, in which SIA, Tigerair and Singapore Airlines each has a 33-percent shareholding, signed a memorandum of understanding, initially marketing joint itineraries between Phuket, Ho Chi Minh City and Kuala Lumpur. This agreement will ultimately include flight itineraries originating from Southeast Asia with a direct connection service and through check-ins. This, believes CAPA, could pave the way for other budget tie-ups.
Consolidation is in the air. In January this year interline partners Tigerair and Philippines Cebu Pacific said Tigerair would divest its 40-percent stake in Tigerair Philippines to Cebu Pacific. “Tigerair and Cebu Pacific…[will] join forces and create the largest budget airline network between Asia and the Philippines… [We] look forward to achieving greater cost savings from the coordinated operations…,” said Tigerair Group CEO Koay Peng Yen. “The partnership is not that deep–at least not initially. But it has broader potential ramifications for Asia’s dynamic and fast-growing LCC sector…More partners will follow, including, potentially, Thai Airways’ LCC affiliate Nok, which has a new partnership with Scoot,” said CAPA.
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