Shake-out seen soon for Asia's budget airlines

Passengers board a no-frills AirAsia plane in Bangkok earlier this year. PHOTO: EPA

Stiff and rising fuel prices will force a shake-out among Asia's budget airlines, and some are likely to be permanently grounded, analysts say.

The success of Malaysia's AirAsia, Southeast Asia's biggest low-cost carrier, has sparked a slew of other budget operators to take to the skies, including spin-offs from major airlines which scrambled to cash in on the phenomenon.

But after a tremendous start which revolutionized travel in the region, a changing business environment may mean an end to the boom, as happened in Europe where no-frills carriers suffered a bloodbath that only the strongest survived.

"Competition is tough. I foresee a drop-out soon," OSK Research aviation analyst Chris Eng told reporters.

Singapore's carriers are considered the most vulnerable because without a domestic market to fall back on in the tiny city-state, they are forced to fight with the major airlines in the international market.

Eng there would be a struggle for survival between privately owned Valuair, Qantas-backed Jetstar and Tiger Airways which is 49-percent owned by Singapore Airlines.

As most budget airlines have to stick to routes within a three-and-a-half hour flying time due to their smaller planes and limited cargo space, flying further afield is "less cost-effective and makes it more difficult to compete," he said.

Bryan Lim, aviation analyst with securities firm ECM Libra said it did not seem possible for all three to perform well in the competitive market, and that eventually consolidation was inevitable.

"In Singapore, there is a possibility that one budget airline will fold," he said. "International flying rights are done on a government to government basis, so most of Singapore's flying or landing rights would naturally go to Singapore Airlines."

The Singapore government's investment vehicle Temasek holds stakes in both Tiger and Jetstar, giving them more financial muscle, he said.

"But Valuair has its own strategy," he said, referring to its market position as a mid-range carrier between the ultra-cheap and premium airlines, offers passengers assigned seating and serving food.

Imtiaz Muqbil, executive editor of the Bangkok-based Travel Impact Newswire, said that if another global crisis strikes the industry, like another outbreak of SARS or bird flu, "there is bound to be a collapse."

"We are all victims of the bubble mentality. There was the dot.com bubble and then the house prices bubble, and now the current flavor of the month is the low-cost carrier bubble. We Asians never seem to learn," he said.

The budget aviation industry is also coming under pressure from spiralling oil prices, which affect them more than their global counterparts which enjoy huge financial resources and purchasing power.

"Too many people rush in, the scales are tipped, and then diminishing returns sets in, then we are susceptible, particularly with fuel costs hovering at around US$55 a barrel. Now which of these guys have factored in for an oil price hike like that?" Muqbil said.

"Those that are backed by major airlines may be able to survive but those who have not got the firm financial backing are bound to go down. That's a given," he said.

ECM Libra's Lim said the sector's biggest player, AirAsia, was on a firm footing as it operates an extensive domestic network and had gained access to Thailand and Indonesia's domestic markets.