Korean Air Lines Co, South Korea's largest carrier, plans to set up a low-cost unit to compete with budget airlines that are gaining market share in Asia.
The unit will start operations within three years, the Seoul-based airline said in an e-mailed statement yesterday. Korea Airport Service Co, Korean Air's ground handling affiliate, may run the budget airline, it added.
Asiana Airlines Inc is also studying possibility of operating a low cost carrier, airline spokesman Cho Yong-moo said in a separate telephone interview yesterday.
The rise of budget carriers spurred a 5.9 percent increase in Asia-Pacific international passenger traffic in the first quarter, according to the International Air Transport Association in Montreal.
Orient Thai Airlines and other Southeast Asian discount carriers have lured more South Korean travelers with cheap packages, according to Korean Air.
"As Korean Air is earning sizeable profit now, it could absorb the existing budget carrier's demand with flexible prices and marketing forces," Yun Hee-do, an analyst at Korea Investment & Securities Co, in a note following the airline's announcement. "That could be a considerable threat to the other low-cost carriers."
Yun rates the stock as "buy."
The new low-cost carrier will operate domestic routes and short and mid-haul international routes using Boeing Co 737 aircraft, according to the statement.
"Korean Air will no longer remain indifferent to the invasion of low-cost carriers from China and Southeast Asia into the Korean market," the airline said, adding that discount carriers make up 20 percent of the air travel market in the US and Europe and are expanding quickly in China and Southeast Asia.
Expanded high-speed rail service in the country also raised the need for Korean Air to find new markets for planes previously used on domestic flights, according to the statement.
Korean Air's domestic flight sales totaled 133.9 billion won (US$144 million) in the first quarter, accounting for 6.5 percent of total sales.
Shares of Korean Air dropped 1.1 percent to 52,000 won at the 3pm close in Seoul while Korea Airport shares dropped 2.9 percent to 72,700 won.
The key Kospi index rose 1.2 percent.
Korean Air's net income in the January-March quarter rose 2.7 percent from a year earlier to 130.8 billion won while operating profit surged 66 percent to 151.4 billion won helped by brisk travel demand.
South Korea currently has two budget carriers, which sell tickets up to 30 percent cheaper than that of full-fare carriers such as Korean Air and Asiana. The airlines don't fly overseas.
Hansung Airlines, based in Cheongju, began a chartered flight to Jeju island in the country's south in August 2005. It added the Seoul-Jeju route last year, according to the company's Web site.
Jeju Air Co began flying between Seoul and Jeju last year. It now operates three routes connecting to Jeju island, the airline said on its Web site.
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