Asia-Pacific Low-Cost Carrier Strategy: Holding Pattern or Cleared for Landing?

Low-cost airline carriers must move quickly to respond to the demands of the growing East Asian middle class.

By Clay Moran
Contributing Writer
October 28, 2014

The middle class population in Asia is projected to increase substantially over the next two decades. Size of the middle class and amount of disposable income share a direct relationship, so as Asia’s middle class becomes richer and more mobile, the more vacations and trips abroad the middle class will take. As a result, demand for transportation—particularly air travel—will continue to increase. Low-cost carriers (LCCs) are poised to fill the emerging market void between air travel demand and supply.

The Asia-Pacific region already represents the fastest growing airline market in the world, both in terms of aircraft orders and passenger volume. Boeing reports that by 2032, almost half of the growth in airline passenger traffic will be attributable to transportation to, from, or within the Asia-Pacific region. Airbus concurs that “Asia will be the key driver of growth” for commercial aircraft over the next 20 years.

Given this information, some general trends about the emerging middle class can be established in the region. This demographic is composed of younger consumers who are sensitive about social status, favor upward mobility, and support market competition. Though they have attained a certain degree of discretionary spending, they are still very price-conscious and worried about money. This new consumer class is not concentrated in major cities, but rather lives in urban second- and third-tier cities.

Rising disposable incomes of the middle class are prompting an increasing demand for air travel. Between 2012 and 2017 alone, airlines expect that air passenger traffic in the Asia-Pacific region will rise by 5.7 percent, and the region’s worldwide regional share of total global passengers will reach 31.7 percent. The growth of the Asian middle class is the largest in the world. Incomes have increased significantly in a short amount of time, with commercial airline transportation experiencing a major upsurge in consumer demand. Asian airline fleets are expected to triple between 2012 and 2017. Asian legacy carriers are already ordering more planes to increase fleet capacity. Yet given the high volume of orders for planes, current industry production capacity, and existing order backlog, LCCs are “set to boom” in Asia.

While Asian consumers are getting richer faster, their levels of disposable income are still considerably lower than those of their counterparts in Europe and North America. For an emerging middle class that remains conscious about its social status, the LCC model provides intrinsic value to the consumer. Experts suggest that the LCC model may function better in Asia than in other parts of the world, demonstrated by the many companies already boasting substantial increases in profits. For example, South-Korea-based Jeju Air posted profits of 960 percent from 2012 to 2013.

But Asia-Pacific is not a homogenous market; it encompasses diverse cultures and economies. Thus, LCC market penetration varies across the region. While Southeast Asia is experiencing LCC penetration rates of over 50 percent, legacy carriers continue to dominate the North Asia airline market. LCCs currently account for only 17 percent of all intra-Asian traffic, but their presence is forecasted to increase substantially.

Bureaucratic regulations comprise the principal challenge to LCC expansion. Because most legacy carriers fly the “national flag,” governments closely regulate new private airline competitors. For example, airline routes usually cross multiple national airspaces; to do so, airlines must receive independent clearance from each country. Legacy carriers are given priority over LCCs for airspace clearance, since they are seen as an extension of state sovereignty.

To overcome the impediment of government bureaucracy to LCC expansion, LCCs should build strategic alliances with government officials to minimize regulatory resistance. In China, for example, good relations with government officials can equate to an opportunity to gain preferential access, often the only way to conduct business in countries with overbearing economic and political regulatory systems.

Second- and third-tier cities offer promising opportunities for LCC business development. Since bases of operation for legacy carriers are located in hub cities, second- and third-tier cities offer more flexibility, as more space is available. This subjects the lower-tiered cities to less regulation. Air travel growth in these cities will match pace with major hubs in the next decade.

LCC companies should focus on engaging the new middle class in Asia while recognizing that regional differences exist across countries. Segmenting stakeholder engagement should become an industry strategy based on their varied interests and degrees of influence. This approach would offer LCCs a greater chance of successfully meeting market demand and expanding operations in Asian countries.

Clay Moran is an MA candidate in International Affairs, concentrating in Political Risk at the Elliott School of International Affairs. His research highlights the intersection of business risk and economic development. He also is a Project Manager at CollaborateUp, a consultancy that accelerates collaboration among civil, private, and public sectors.

AirAsia Airbus Industrie A320 departing Kuala Lumpur International Airport by Jyi1693 is licensed under CC-BY-SA-3.0.

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