Special Focus

Asia Set for low-cost Boom

Driven by booming economies, high Internet usage as a distribution channel, low-cost labor, easy access to debt, and lower lease rentals, the Asia Pacific low-cost carrier (LCC) market is slated for strong growth in the years to come. Favourable macro economic indicators and the prosperous inbound tourism market have buoyed prospects for this sector. With rising disposable incomes, the demand for aviation services will pick up steam. Moreover, the increasing average load factor will rev up profitability for airlines operating in this space.

New analysis from Frost & Sullivan’s Asia Pacific Low Cost Carrier Market - Market Outlook and Investment Opportunities, reveals that the LCC market in Asia Pacific is expected to witness an increase in the number of passengers from 116.0 million in 2008 to 217.0 million in 2012 at a compound annual growth rate (CAGR) of 16.9 percent. The total aircraft fleet is expected to increase from more than 450 in 2008 to more than 830 in 2012 at a CAGR of 15.9 percent.

“Decreasing lease rentals and aircraft market values are major triggers for growth in the LCC market in the Asia Pacific,” says Frost & Sullivan Financial Analyst R. Madusudanan. “The decrease in lease rentals/value of aircraft reduces the aircraft holding cost of airlines and enhances the profitability of LCCs.”

Market penetration of the LCCs has increased from 1.1 percent in 2001 to 14 percent in 2008. There is a high level of positive correlation between the demand for air services and the level of economic activity. The per capita income in purchasing power parity (PPP) terms for Asia Pacific is one of the lowest in the world. It is expected to grow from $4,181 in 2008 to $6,426 in 2014.

Although the outlook for the market looks bright, there are some challenges reining in market progression. High expenditure on fuel and oil has impacted the profitability of LCCs to a large extent. The fuel and oil expenses account for nearly 40 percent of the revenues of LCCs; therefore, a hike in the price of crude oil will have ripple effects on the profitability of LCCs. Apart from crude oil price volatility, the lack of infrastructure has adversely impacted market participants.

Typically, LCCs operate from secondary city airports, which offer a cost advantage to them as ground-handling charges in these airports are lower than those in primary ones. Airport charges account for approximately 20 percent of the total cost of LCCs in Asia Pacific. The absence of low-cost terminals in the region increases the overheads of LCCs. The presence of numerous participants has led to the rapid increase in fleet capacity, leading to a situation where demand outstrips supply.

“In the short-to-medium term, price reductions and pressure on yields of all participants are likely to be witnessed,” says Madusudanan. “This would lead to consolidation within the market, with smaller companies being acquired by larger ones.”

In such a scenario, maintaining high load factor and managing capacity is likely to ensure better business outcomes.

Most of the LCCs maintain a strong balance sheet because of tight control of capital cost and lesser debt, expediting cash flows and ramping up the attraction quotient for the equity markets. Besides LCCs, investment could flow into other segments that are expected to benefit from the growing LCC market, such as infrastructure support (low-cost terminal); aircraft leasing; maintenance, repair, and overhaul (MRO); and support services.