Low-cost carriers take the long view
But in the local aviation industry, Phuket has another meaning. The island is currently the most distant destination of low-cost carriers (LCC), about six-and-a-half hours from Korea.
Local LCCs are now starting to consider whether they should fly beyond Phuket. Industry insiders said that would mean long haul routes, bigger aircraft and a paradigm shift for the industry.
Since Hansung Airlines (now T’way Airlines) started in August 2005, the local LCC industry has taken off and now includes five local carriers that account for 47 percent of domestic flights and 9.4 percent of international flights, according to the latest data from the Ministry of Land, Infrastructure and Transport.
Earnings are also getting better. Jeju Air, the nation’s largest LCC, said last week its first half performance will be its best ever, with an estimated revenue of 205.7 billion won ($182.8 million), up 32 percent from a year ago, and operating profits soaring 940 percent year-on-year to 6.2 billion won.?
Eastar Jet, which has been struggling to be profitable, also was in the black with 420 million won in operating profit for the first half.
However, some experts speculate the local LCCs have may reached their limit in the existing market for frequent short-haul routes of five hours of less using small aircraft like the Boeing 737 and Airbus 320 and 321 which have 180 seats or less.
According to the carriers, these planes fly an average of 12 hours a day. Considering that it takes about 2 hours to go Japan, one aircraft can be used for six trips between Seoul and Tokyo.
Eastar Jet launched a flight to Phuket in April, but until then international routes offered by five local LCCs didn’t surpass five hours of travel time one way and were able to return the same day.
Bangkok, Kota Kinabalu and Guam were considered the outer limit, while routes to China, Japan or Hong Kong that take one to three hours were the lion’s share of LLC schedules.
While Southwest Airlines in the United States and Easy Jet and Ryanair in Europe can rely on short routes, the business environment is different in Korea, experts said. Popular routes to Japan and Southeast Asia are saturated, while developing new Chinese routes is difficult due to the absence of a full open-skies accord between the two countries.
Fierce competition on short routes has led to price wars and threatened profitability. Jin Air, the second-largest budget carrier run by Korean Air Lines, this week reported that its operating profit for the first half dropped more than 60 percent compared to a year ago.
“If you look at our LCC industry, companies only have small aircraft, which limits potential routes,” said Jin Air CEO Ma Won at a press conference celebrating the company’s fifth anniversary. “The competition is getting fierce and how to differentiate service and product is our concern.”
While finding a sustainable revenue source is crucial, local LCCs are under pressure because of the expansion of foreign LCCs.
AirAsia X, the long haul arm of the region’s largest LCC Air Asia, last Monday launched a Busan-Kuala Lumpur flight. The Malaysia-based company started an Incheon-Kuala Lumpur flight in 2010.
Scoot Airlines, an affiliate of Singapore Airlines, started Incheon-Singapore flight last month via Taipei. Both Kuala Lumpur and Singapore are considered profitable routes, but no Korean LCCs are flying to the two destinations.
“We have proven that the long haul LCC is a viable business model,” said AirAsia X CEO Azran Osman-Rani in a press conference in Busan. “There is still room to grow for long haul LCCs.”
Industry insiders expect more foreign carriers to start flights to Korea. Indonesia’s Lion Air announced its intention to fly to Korea in 2011, and Australia’s JetStar Airways already flies to Japan.
However, local LCCs said it is difficult to crack the long-distance market because it would require large aircraft. Both AirAsia X and Scoot operate either the Airbus 330 or Boeing 777 that can fly more than 10,000 kilometers (6,213 miles) and carry 300 or more passengers.
Such planes cost more than 100 billion won, and experts said no Korean LCC will likely to acquire one for long-haul flight.
However, Korean LCCs acknowledge that going long haul should be a part of their long-term strategy. Some have already reportedly considering expansion, but the question is when and how.
“We think there is room for short-haul growth because of China, but long hauls should be ultimate goal,” said an official at Jeju Air.
Industry observers said that if local LCCs go long-haul, they should have a clear business identity to set them apart from foreign carriers. For instance, while foreign LCCs charge extra for almost everything, from meals to baggage, local LCCs offer free meals and free baggage up to 15 or 20 kilograms (33 to 44 pounds).
According to a recent survey by Skyscanner, a global travel site comparing prices on flights, 729 of 1,000 survey participants in Korea answered that they would be willing to pay for meals. More than half of them also said they would accept being charged for beverages and movies if the price of tickets pass gets cheaper.
“Korean LCCs couldn’t lower their fares since most Korean tourists see meals or beverages as basic service offered for free,” an official from Skyscanner said. “The survey shows that local tourists are more sensitive to the price of tickets.”
BY Park jin-seok, Joo kyung-don [firstname.lastname@example.org]