Low-cost carriers Asian airlines’ top plan

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Low-cost carriers Asian airlines’ top plan

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Korea’s low-cost carrier (LCC) market is likely to continue growing as flag carriers try to beef up operation of their LCCs.

Asiana Airlines, the nation’s second-largest flag carrier, last week revealed that it is reviewing its plan to establish an LCC that will be based in the Seoul metropolitan area, flying out of Gimpo and Incheon international airports. The affiliate of Kumho Asiana Group has already paid a visit to the Ministry of Land, Infrastructure and Transport to ask about the process of establishing an LCC.

Industry insiders said it is likely that Asiana will push for the new LCC as recently appointed CEO Kim Soo-cheon previously headed the LCC Air Busan, of which Asiana is the largest shareholder. But since Air Busan is based in the southern port city, Asiana wants a new LCC to bring in customers living near the nation’s capital.

Asiana’s biggest rival, Korean Air Lines, has been operating its fully owned subsidiary Jin Air out of Gimpo International Airport since 2008.

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If Asiana succeeds in establishing a new LCC, experts say competition will increase in the local airline industry since Korea already has five LCCs - Jeju Air, Jin Air, Air Busan, Eastar Jet and T’Way Airlines.

In 2009, only 20,000 passengers flew on LCCs, but last year the budget airlines served 15.69 million passengers, according to data from the Ministry of Land, Infrastructure and Transport.

In 2013, the five LCCs accounted for 48.2 percent of total passengers in domestic flights. For instance, on the Gimhae-Jeju route, 72.7 percent of passengers flew on LCCs, while on the Gimpo-Jeju route, 59.3 percent used local LCCs. In international flights, the five LCCs take nearly 10 percent of the market share.

For Asiana, which was busy defending itself against the rise of LCCs, finding a new growth engine was necessary. Last year, the company suffered an operating loss of 11.2 billion won ($10.7 million), falling into the red for the first time since 2009. The company cited a drop in Japanese customers due to the weak yen and reduced profits from its cargo business.

Airlines in Asia are now aggressively pursuing LCC subsidiaries as part of a business plan that is gaining popularity, though it has a longer history in the West.

America’s Southwest Airlines is known as the first LCC in the world and has been operating since 1971. Despite the terrorist attacks of Sept. 11, 2001, and the global economic slowdown, the company has stayed in the black for more than 30 years with its low-cost business model.

In Europe, Ireland-based Ryanair and British LCC EasyJet are well-known budget carriers, but LCCs under major airlines have yet to experience much success. Stimulated by the success of Southwest Airlines, air carriers like Delta, United, KLM and British Airways have established their own LCCs, but the subsidiaries were sold or shut down within three to five years. Germanwings, an LCC wholly owned by Lufthansa, and Transavia, which is under the Netherlands’ KLM, are among the few still operating.

“They had difficulty in finding a profitable business structure and instead had a high-cost model that failed to abolish an existing bureaucratic culture,” said Yoon Moon-gil, a business administration professor at Korea Aerospace University.

Despite multiple failures in the West, major Asian air carriers are still rushing to establish LCCs. All Nippon Airways, Japan Air Lines, Singapore Airlines, Thai Airways and Australia’s Qantas each have their own LCC.

“Although we have to wait and see, so far [Asian LCCs] have been successful,” Yoon said. “Exploring a niche market in overseas flights and receiving advice on management, operation and maintenance from their mother companies are two things that differentiate Asian LCCs from American or European LCCs.”

Local LCCs have been growing by significantly expanding their routes. Jeju Air, Korea’s largest LCC, has been reaping rewards with its Incheon-Guam route, which 500,000 passengers flew in 2013.

Asiana also wants to explore new routes and increase efficiency in flight management through its new Seoul-based LCC once it is approved.

“We think establishing an LCC affiliate will be our best option to stay ahead in a fast changing aviation industry,” an Asiana spokesman said.

BY LEE SANG-JAI AND CHOI SUN-WOOK [kjoo@joongang.co.kr]




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