Asia's budget carriers stalled by price wars

Intense price wars among budget airlines are helping tens of millions of Asian consumers to fly for the first time. Cebu Pacific, for example, is currently offering one-way tickets within the Philippines for 99 pesos ($1.90, €1.68). One of India's top carriers, meanwhile, has been known to offer promotional base fares equivalent to as low as 2 cents.

Cheaper, in some cases, than taking a rickshaw, flying is no longer the preserve of Asia's burgeoning middle and upper classes; it's now in the reach of low-income groups, who typically travel long distances by train or bus — journeys that often take several days.

A potent drug to hook Asian consumers, these ultra-low prices are, however, hurting the bottom line of the region's burgeoning budget airline sector, as it struggles with rising costs in an era of overcapacity.

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In India, for instance, despite between 15 and 20 percent annual passenger growth over the past few years, the country's three biggest budget airlines — IndiGo, SpiceJet and Go Air — still made losses for at least one quarter in 2018.

Elsewhere in the Asia-Pacific region, only six out of 20 publicly traded airlines made a profit in the last reported quarter of the year, the Sydney-based CAPA Center for Aviation revealed earlier this month.

The biggest budget airline market

The lack of profitability, nearly 15 years after most Asian countries deregulated their aviation sectors, is a bitter pill, especially as the region last year became the world's largest low-cost carrier (LCC) market, overtaking Europe, with some 600 million cheap seats on sale.

"It's kind of laughable that the only people in the entire aviation industry not making money are the airlines," Bangalore-based aviation analyst Devesh Agarwal told DW.

Airports, governments (through taxes), onboard food providers and ground handlers are all cashing in on the budget airline boom, he added, while the carriers themselves are struggling to stay afloat.

In India's case, Agarwal, who runs the website Bangalore Aviation, blamed over-bullishness on the part of the budget airlines operating in the country. They have adopted aggressive growth strategies, he said, pointing out that the carriers have therefore been forced to offer ultra-low fares to fill their planes. "I suspect that if they go back to realistic pricing, they'll see load factors drop from the mid-80s percent by at least 10 percent," he warned.

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Rajiv Biswas, APAC Chief Economist at IHS Markit, told DW that India's aviation sector had experienced a "perfect storm" in 2018 due to significantly higher oil prices.

"That pushed up jet aviation fuel costs, and was compounded by the depreciation of the Indian rupee against the strong US dollar," he noted. Fuel accounts for about 25 percent of an airline's operating costs.

Raise prices at your peril

Biswas predicted that rapid growth would continue over the next decade, but unless excess capacity is tackled, Indian airlines will have "limited pricing power to pass on costs to passengers."

A similar picture exists across the rest of Asia where ambitious expansion plans have led to intense competition. Not only have legacy airlines been forced into significant efficiency drives, but whispers grow louder about the need for consolidation within the regional budget airline sector, where 60 carriers currently operate.

"The reality is many can't [survive]. Only a few are doing well, namely AirAsia, Lion Air, VietJet and Cebu Pacific. The rest struggle to make ends meet," warned Shukor Yusof, founder of and analyst at the Singapore-based Endau Analytics.

He sees Nok Air in Thailand, Malaysia's Malindo and a slew of smaller airlines in Indonesia at risk.

India's GoAir was recently reported to be up for sale due to the harsh operating market, while the country's second-largest airline, Jet Airways, was last week rescued by a group of lenders in an attempt to allow it to seek fresh investment.

Jet, a full-service airline, was compelled to offer budget prices in the wake of intense rivalry from LCCs and made losses in all but two of the last 11 years.

Despite airlines already feeling the pinch, this era of high growth is poised to continue. The region's budget carriers plan to more than double their existing fleet, with 2,400 new aircraft on order, according to CAPA.

China lags on budget flights

China is one market where the LCC sector has plenty of room for growth. Domestic traffic is massive — 242 million seats in 2018, albeit on full-service airlines. LCC penetration is less than 10 percent compared to more than 55 percent in Southeast Asia. Even so, airlines may have to turn to bargain fares to tempt passengers.

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"Airlines operating on Chinese domestic routes face increasing competition from high-speed rail networks that are reducing travel times between major cities," Biswas said.

Although consolidation will help to shore up the sector, infrastructure remains a huge issue in many Asian countries as airlines aim to carry 2.35 billion more passengers by 2037, if estimates from the International Air Transport Association are anything to go by.

India's largest cities currently constitute about 60-70 percent of airline traffic, with budget airlines operating out of the same international airports as traditional carriers.

"All of India's airports are operating well above their capacity," Agarwal warned, before endorsing the need for more capacity, alongside secondary airports near major cities.

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Plans for a second airport to serve Mumbai, India's commercial capital, are already years behind schedule, he noted.

China, however, is stealing a march and is investing in dozens of new regional airports that will suit budget airlines best.

Affordable public transport to the nearest city, and food and beverage outlets that appeal to low-income groups are also vital components.

After all, despite their success at tempting passengers on board, airlines still struggle to get them to pay for upgrades, additional baggage allowances and meals.