Make no mistake. This is a big deal. It is a battle of airports and of airlines in a landscape that is shifting faster than the tectonic plates of the Ring of Fire that circumvents our world.
Changi loses, Dubai wins. Could Kuala Lumpur emerge a winner in the battle for the Kangaroo Route? Will the Camel route strategy pull Qantas out of the abyss it’s found itself in the last couple of years?
The room, full of airline executives, was abuzz with speculation. Was this a desperate measure by Qantas’ CEO Alan Joyce to shore up his airline’s ailing fortunes? “They are entering this from a position of weakness, Emirates is going to swallow them up,” pronounced one airline CEO.
Who will British Airways partner now for the Australian market? BA and Qantas had looked like they were married till death do us part although I guess in business, it’s always better to do something before you’re dead.
In the history of aviation in Asia, there’s never been as much change as what is happening today. And it is important for us to understand the changes because even though sometimes it feels like airlines operate in a world apart from the rest of travel and tourism, our fortunes are inextricably linked.
So first the good news: Asian airlines rule the skies. They account for 25% of global passenger traffic, 40% of cargo, US$159 billion revenue and carry 655 million passengers.
The most valuable airlines are here, said Andrew Herdman, secretary general of the Association of Asia Pacific Airlines (AAPA), the top five being Air China, All Nippon Airways, China Eastern, Cathay Pacific and Singapore Airlines.
Having said that, aviation is a thin margin industry. This year, the entire industry will make US$3 billion profit with a 0.5% nett margin, said Herdman. “That’s barely breakeven and half of that will come from Asian airlines.”
And so the bad news – the global economy is moderating. While passenger growth has been maintained, air cargo demand remains weak and is “in a terrible state”, said Herdman. This means airlines with wide-bodied aircraft are not faring as well compared with those with narrow-bodied jets – by that, read low cost airlines.
And those are the game-changers to watch as a slew of low cost carriers come into the picture. There are varying estimates about how big low cost will become.
CAPA, which organized the Macau event, has predicted that half of all air seats will be low cost in Asia in 10 years time. Herdman threw out the figure of 15-19% in a decade, saying, “global network carriers are expected to thrive”.
Kei Shibata, CEO of Venture Republic, went out on a limb and predicted that low cost will form 50% of the market in Japan in five years time. He is that confident that the Japanese, long hampered by the highest transportation costs in the world, will snap up the low fares and young people, in particular, will be induced to put down their video games and get out and experience the real world.
There was also a prediction made that the future would see five or six mega low cost carriers in Asia.
The changes will be most profound in North Asia the next few years. From Korea to China to Hong Kong which will get its first low cost airline, Jetstar, next year, the democratization of travel through low fares is set to transform these markets.
And everyone’s jostling for position – from AirAsia, Jetstar and Scoot to local airlines such as Peach, Jeju Air and Air Busan. From the Philippines, you have carriers such as Cebu Pacific and Zest Air eyeing a piece of the pie.
In a panel featuring Cebu Pacific, Scoot (CEO Campbell Wilson in middle) and Zest Air (pictured), we learnt that Cebu Pacific is strong in Korea, commanding a 30% share of the market, according to Garry Kingshott (right), chief executive advisor of the airline which started as a charter operator to Korea in 2008.
Today it flies about 25 times a week, carrying 500,000 passengers on the route. “Korea is the biggest market to the Philippines,” he said.
Brian Hogan (left), CEO of Zest Air, believes that in a decade, low cost airlines could form 80% of the market in the Philippines.
In Korea, Jeju Air has a new CEO Ken Choi who clearly wants to shake things up at the largest LCC carrier in the market, and he needs to.
With foreign LCCs coming into the market – such as AirAsia and Jetstar – he admits the foreign competition is a concern. “It may have been a scalability game in the beginning but the second phase is online and partnership game.”
But before we dismiss full service airlines as dinosaurs, Herdman states, “The full service model ain’t broke. Full service network carriers are still investing heavily in premium services. And point-to-point low cost models are also evolving. Easyjet is rolling out seat allocation – this is now a standard feature and there are further signs of convergence (of models).”
Whatever term you give these new airlines that are shaking up the market and playing with different models – at AirAsia X, cargo forms 2-5% of revenues with CEO Azran Osman Rani (left) saying, “The sector’s been lazy, we came in and shook things up using price points and online customer service models – one thing is clear, everything’s changing.
And the winner will be those that manage to play at “the lowest net cost position”.
Said Azran in his session with CAPA’s Peter Harbison *right), “No matter what industry you are in, the critical question is, are you the lowest net cost position? It’s those guys in the middle that are squeezed, the middle ground is unsustainable.”
The winner will also be those that anticipates customer needs and give them what they want and it’s these new players that are absolutely shaking up online distribution.
Scoot’s CEO Campbell Wilson (centre) believes disintermediation will be a game changer in the years ahead as more low cost airlines enter the market and sell direct to the customer. While Scoot is channel-agnostic, something he stresses, more than 90% of his business now comes direct through the website.
“Disintermediation of the Internet will happen, with price transparency and cutting of the middlemen. LCCs are at the forefront of that and the story is not finished yet.”
Spring’s direct web business is now at 85% when the industry average is 10%, saidJonathan Hutt, responsible for ecommerce, and while it has given some fares to Ctrip to capture last minute business travellers, he said, “We don’t want to be beholden to GDSs, and their outrageous charges, and taking away from our website.”
His focus is clearly customer direct. Mobile’s share at Spring has grown from 5% in 2012 to 8.5% in 2011, when the industry average is less than 1%, said Hutt.
So blend everything together – low cost airline revolution, technology adoption, customer transformation, market evolution – and what do you have? To quote the words of Al Green, a change is gonna come, and you’d better be prepared in your business to either be ready for it or be overwhelmed by it.
