South Korean LCCs Aspire To Long-haul Overseas Routes

 - August 17, 2018, 8:15 AM
Jeju Air has plans to add eight aircraft to secure a larger share of the market and is modifying its loyalty program to attract customers, as it faces competition from other South Korean LCCs. (Photo: Mainbayer Badarch)

South Korean low-cost carriers (LCCs) have grown quickly over the last seven years. In 2011 they accounted for 4.3 percent of international flights and have increased that number to more than 20 percent. Currently, six LCCs operate with a fleet of 125 aircraft.

In terms of the number of routes, LCCs’ international flights make up 88 percent of the total as they become a key growth engine. China and Japan market demand is stable, but Southeast Asian markets look brighter. As wealthy Koreans travel abroad more, LCCs target long-haul international market expansion.

For instance, Jin Air intends to strengthen long-haul routes further. The airline added the Johor Bahru route to Malaysia in January with aim of absorbing travel demand to Malaysia and Singapore. The company plans to use the long-haul route as a growth engine, according to a Jin Air official, noting that the medium-length routes are saturated.  

T’way Air is also considering introducing medium and large aircraft. It hopes hope to operate 30 airplanes by 2020 and 50 by 2025. At least a fifth of the fleet will be larger models capable of flying long-haul flights. Target destinations are the U.S. and Europe, a first for local LCCs as they consider the domestic market has less room to grow. The largest player, Jeju Air, plans to add eight aircraft to further expand routes to China, Japan, and Southeast Asia.

The smallest and newest LCC, Air Seoul, has set a goal to add two airplanes to its fleet every year for at least five years until it has 15 in service.

According to the Korean Transport Ministry, six LCCs collectively earned operating income of 186 billion South Korean won ($166 million) in this year's first quarter. This surpassed slightly Korean Air’s operating income of 177 billion won, down 4.3 percent year-on-year. The LCCs' revenue totaled 1.18 trillion won, up 34.2 percent year-on-year. 

Jeju Air posted a record operating profit of 46.4 billion won in the first quarter, up 71 percent, and sales amounted to 308 billion won.

Competition among LCCs is not the biggest issue facing the industry, according to one CEO. Rather, a bigger issue is “the lack of professional workforce like pilots,” said Ryu Kwang-hee, CEO of Air Seoul. It will also be difficult for new entrants to find service slots at key airports as existing players already have trouble securing new service infrastructure, he added.

Industry analysts conclude that number of airline companies should be kept in line with the market size due to these limitations, and LCCs should find ways to secure less expensive labor from abroad to effectively set up a low-cost business structure and start marketing LCCs’ different levels of service instead of just low prices. 

The Korean Transport Ministry is working to strengthen the requirements for LCC licenses. According to the amendment, the registered capital of the new airline will rise to 30 billion from 15 billion won. In addition, the aircraft number requirement increased from three to five. 

The Ministry explained that there was a rising need to ensure safety and service quality by preventing LCCs from becoming insolvent due to lack of capital and inducing competitors to enter the market.