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Discount airlines change air travel in Asia

Carriers such as Jetstar, AirAsia and Tiger Airways are driving demand by rolling out flights to underserved Asian cities. They’re forcing full-service Asian airlines to lower fares and, in some cases, launch their own discount airlines. U.S. carriers, in an effort not to be left behind, are beefing up their long-haul services to the region and striking alliances with their Asian counterparts.

The moves come as booming economies such as China and India lift hundreds of millions of people out of poverty. From 1990 to 2008, the middle class more than tripled to 1.89 billion people in developing Asia, which includes China and India. This population, defined by the Asian Development Bank as those spending $2 to $20 a day, is increasingly demanding middle-class trappings: televisions, refrigerators, cars and travel.

At the same time, once tightly regulated air markets in Japan, South Korea and China have begun opening to foreign carriers, which could lead to as many as 300 million more people traveling between these countries each year, estimates the CAPA Centre for Aviation in Sydney. That would be 20 times more than now.

“What is happening is a once-in-history change,” says Peter Harbison, executive chairman of CAPA. “The numbers simply defy traditional forecasting.”

Already, Asia’s appetite for air travel has made the region the largest, most-profitable and among the fastest-growing markets in the world. And demand is only beginning.

Swelling demand 

To understand the potential of this market, consider this: While China and India account for a third of the world’s population, the average consumer in China takes only one flight every five years, and the average consumer in India takes one flight every 20 years, according to the International Air Transport Association, or IATA. In a developed country such as the U.S., the average is nearly two flights per person per year.

Last year, Beijing Capital International Airport overtook London Heathrow to become the second-busiest airport in the world, behind Atlanta. Nearly 74 million travelers passed through the Beijing airport last year.

As demand for air travel swells in Asia, it’ll generate orders for thousands of passenger jets and create thousands of airline and airport jobs.

It’ll also be a boon to other industries by increasing revenue for hotels, restaurants and retailers. And it’ll boost real estate prices in some cities as airlines launch service to them.

Overall, air travel will grow 1.5 to two times faster in Asia than gross domestic product, predicts Rigan Wong, a transportation analyst at Citigroup in Hong Kong. GDP in developing Asia will expand 8.5% next year, much faster than advanced economies’ 2.6% growth and the global economy’s 4.5% growth, the International Monetary Fund estimates.

When per-capita GDP rises above $3,000 a year, it usually means “the population is well-off enough to travel by air, and that’s when we see acceleration in air travel,” Wong says.

China, Malaysia and Thailand have surpassed that threshold, while Indonesia is at the cusp and the Philippines is approaching it, Citigroup’s anal- ysis shows.

Rowena “Neneth” de Vera, a rice farmer in the northern Philippines, began flying five years ago when competition between airlines lowered the cost of a ticket from the north to the south to $44 one way.

De Vera, 58, used to take a boat 28 hours each way to visit her family once a year. Now, her journey takes about a quarter of the time. From her hometown in rural Cabalayangan, she takes a five-hour bus ride to Manila, then hops on an hour-and-a-half flight offered by budget airline Cebu Pacific Air to Zamboanga City in the south.

“It saves time, and it’s really affordable,” De Vera says.

A good U.S. idea goes global 

Southwest Airlines, based in Dallas, was the world’s first budget airline. Its business model of low operating costs and low fares has been copied in Europe and Asia. In Asia, analysts were initially skeptical about whether the model would catch on, because infrastructure and airports had to be built in developing countries such as the Philippines and Indonesia to accommodate budget carriers, according to Eric Lin, Asian transport analyst at UBS Investment Research.

Also, budget carriers had to fly farther than their counterparts in the U.S. or Europe, because of the distance between Asian countries, says Randy Tinseth, a vice president of marketing for Boeing Commercial Airplanes. And they had to grapple with Asian economies that were slow to open their markets to foreign carriers.

Despite those barriers, budget airlines have taken off in Asia because “mass-market affordability” is important to a population that is just starting to have disposable income, says Michael Wesley, executive director of the Lowy Institute, a think tank in Sydney.

In June, Malaysia-based AirAsia — whose motto is “Now everyone can fly” — ordered a record 200 A320 Airbus jets for its flights of four hours or less. The planes, valued at $18.5 billion, will be delivered over the next 15 years. Its fleet now numbers 95 planes.

More than 100 million people have flown on AirAsia, more than three times the size of Malaysia’s population. AirAsia’s most popular routes include those from Malaysia to Southern China, Indonesia, East Malaysia and Thailand. Recently, the airline also added flights to Danang, its third destination in Vietnam.

“Every year, we see a surge in the number of guests flying with us despite harsh market conditions,” says Kathleen Tan, regional head of commercial for AirAsia, one of the first budget airlines in the region.

Taking a page from European budget carriers, AirAsia offers a twice-yearly “free seats” deal, in which passengers pay only airport taxes for tickets to locations such as Phuket, Thailand.

Meanwhile, Australia’s Jetstar offers “hot fares” to cities including Beijing when passengers travel with only carry-on baggage.

Low-cost airlines spread 

While budget airlines have grown mostly in Southeast Asia, they’re also starting to spread in Japan, South Korea and China.

“The low-cost carrier story in Southeast Asia has been written,” says Brendan Sobie, a senior analyst at the CAPA Centre for Aviation in Sydney. “In Northeast Asia, the penetration rates are still pretty low.”

Spring Airlines, China’s sole low-fare carrier, wants to begin operations in Japan in the near future, according to China Daily, a state-run newspaper. Qantas is partnering with Japan Airlines and conglomerate Mitsubishi to launch Jetstar Japan. Meanwhile, All Nippon Airways is partnering with AirAsia to launch AirAsia Japan to fly within Japan and to South Korea.

“The future will be about travel to and within Asia,” says Alan Joyce, chief executive of Qantas, according to a transcript of the company’s briefing to analysts in August. Asia has “massive untapped potential.”

Qantas already owns budget airline Jetstar and has stakes in Jetstar Asia and Valuair, while Japan’s ANA launched discount airline Peach earlier this year. Peach will begin flying between Kansai, Japan, and other Asian cities by March 2012.

By the end of this year, budget airlines will have a 20% share of total flights in the Asia-Pacific market, estimates Daniel Tsang, founder of Aspire Aviation consulting firm in Hong Kong.

Because much of Asia is separated by water, it’s difficult to travel by rail or bus to certain destinations, giving budget carriers a “tailwind,” says Andrew Orchard, a regional airline analyst at the Royal Bank of Scotland.

Peng Yan, of Changsha, China, prefers the train for short distances within the country even though a plane ticket doesn’t cost much more. But when she needs to travel from Changsha to Guangzhou for work — an eight- to 10-hour overnight train ride vs. a one-hour flight — she goes by plane so she can spend the night at home with her daughter.

“Traveling by plane during the day is a lot more comfortable, and I feel much safer as well,” says Yan, 34, an accounting manager for a water supply company.

A growing number of mainland Chinese are able to afford air travel because of the falling costs, says Zhang Mengping, a marketing specialist in the Asia-Pacific division of Spring Travel, a travel agency based in Shanghai that owns budget carrier Spring Airlines.

As the Chinese start to fly, they’ll travel first within Asia because it’s cheaper than destinations such as the U.S. or Europe, according to Zhang. They’ll also fly within the region to explore other Asian cultures and customs, she says.

Eventually, however, Asia’s emerging middle class will branch out to other destinations, providing a boon to airlines worldwide.

“The fact that we’re seeing some dynamic growth in domestic travel is going to have a knock-on effect to these international destinations in time,” says Brian Pearce, chief economist of IATA.

“Already, we’re seeing strong growth in intercontinental markets based on trade.”

Getting ready to compete 

North American airlines are already preparing for this shift by expanding their flights to Asia and striking partnerships with Asian carriers. For instance, American Airlines has partnered with JAL, Asia’s largest carrier, so it can compete in Asia without having to make major investments in aircraft, crew and operations.

“As the economies in North America and Europe start to really slow down, Asia looks like the holy grail in terms of keeping those business profits up,” says Wesley of the Lowy Institute.

But for now, Asia’s story is largely a regional one. Because North American airlines are generally restricted from making intra-Asia flights — which attract the bulk of middle-class consumers traveling for the first time — they’ll miss out on much of the regional growth in air travel.

“Just as foreign carriers can’t operate in the U.S. market, U.S. carriers can’t operate within certain parts of Asia,” says Andrew Herdman, director general of the Association of Asia Pacific Airlines in Kuala Lumpur.

In the next 20 years, about half of the growth in global air traffic will come from travel to, from or within the Asia-Pacific region, according to Boeing. Short- to medium-haul flights will grow the fastest and account for about 70% of global plane orders, Boeing estimates.

Still, if the global economy dips back into recession, travel could go with it.

Well-run budget airlines tend to be more resilient to economic swings because their low fares keep their planes filled and profits coming. But they’re not immune.

“So many middle-income people hover close to the poverty line that any sustained slowdown in economic growth could push them below,” says Jayant Menon, lead economist in the Asian Development Bank’s office of regional economic integration.

“Demand for services like travel could fall very sharply,” Menon says.

Growth’s hurdles 

Budget airlines’ growth could also stall if governments in Asia don’t build airports and infrastructure quickly enough to accommodate their expansion, according to UBS’ Lin.

Yet, at the moment, the region’s budget travel boom shows little sign of slowing.

De Vera, the rice farmer in the Philippines, prefers the no-frills, low-cost model of flying.

“There’s no need for me to get a more expensive ticket, because it’s only a few hours,” de Vera says. “There’s no need for extra services.”

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