Emerging Markets in the Airline Industry
Much has been said about Asia Pacific and its importance as an emerging region to the global economy and the wider travel and tourism industry. Asia Pacific is expected to record real GDP growth of 5.7% in 2014, while its population will reach 4.4 billion by 2030, representing an increase of 15.6% on 2010, driven by huge increases in the over 60-year-old population.
By 2024, consumer expenditure in the region will also top US$4,000 per capita (in 2013 prices). This part of the world obviously has its best performers, such as the Philippines, which has the region’s largest number of foreign citizens (12.8 million in 2010), and Karachi, expected to be the region’s fastest growing and biggest city over 2010-2030, attributed to economic migration as rural inhabitants seek employment there. The Philippines’ real GDP growth is expected to come in at 6.5% in 2014, and this rate is expected to be maintained in the medium term. Growth will be driven by reconstruction following Typhoon Haiyan and consumer spending, driven in part by inflows of remittances.
But How is This Economic Development Impacting the Air Category in the Region?
Asia Pacific’s large population, combined with a huge geographical area, makes air travel the most efficient way of travelling around this part of the world. It is also one of the most dynamic regions for air transportation, with the category expected to record 7% value growth over 2012-2017, ahead of Latin America, with 6% value growth over the same period. India and Myanmar are the two main markets anticipated to spearhead the air travel leader board in the region, driven by regulatory changes, the opening of these countries to foreign investment and strong domestic markets, as well as increased international competition.
Myanmar is an interesting example where strong economic growth has been driven by commodities such as gas. The country is also reliant on a few key trade partners; 70% of exports are destined for Thailand, China and India.
China, on the other hand, a major powerhouse in this part of the world, is not to be ignored, with over 14% growth in outbound tourism flows expected over 2012-2017, which will have positive spillover effects on other tourist destinations in the region and on air transportation. Countries such as South Africa and New Zealand are expected to benefit the most from this trend, in addition to countries adjacent to China.
Very Dynamic Low-Cost Carrier (LCC) Category
LCCs are continuing to take share from scheduled operators globally, and they have been particularly favoured by cost-conscious travellers. The LCC category will dominate value growth within the air category in Asia Pacific over 2012-2017, recording a 14% rise in value sales over this period. This in turn will drive demand for new aircraft, which, according to Boeing, over 10,000 new planes will be sold to Asian airlines over the next 20 years.
Players such as AirAsia, Jetstar, Spring, Cebu Pacific, Indigo, Lion Mentari and Tiger Airways are some of the carriers contributing to the increasing popularity of the LLC category in the region, even though the category is, at present, rather geographically skewed. Despite that fact there are close to 50 LCCs operating in the region, most of them have serious fleet order books (e.g. AirAsia placing an order for 100 Airbus A320 in December 2012 while Lion Air ordering 234 A320 aircrafts with Airbus in 2013), and this number is set to rise. Asia Pacific is also home to some of the key countries expected to record significant growth in tourist arrivals over 2012-2017, including Vietnam, Myanmar, Uzbekistan and the Philippines.
Indeed, players such as AirAsia, Jetstar and Tiger Airways are becoming strong contenders and gaining such momentum in the region that they hold almost similar power to that held by their counterparts, such as Ryanair, easyJet and Wizzair, in Europe. A multi-base strategy and intra-regional travel are both contributing to the aggressive expansion of these Asian operators. They are increasingly rivalling established scheduled operators, which could intensify should more Open Skies agreements be drawn up in this part of the world.
The Wave of Change……
In a bid to remain competitive and increase profitability in what is a very competitive business environment, increasing numbers of established LCCs, particularly in Europe, are revisiting their strategies regarding the use of different distribution channels. It will be interesting to see if this trend curbs the business model of budget players in Asia Pacific.
Traditionally, the low-cost business model has been focused on utilising airlines’ own capabilities to achieve direct sales through online platforms, social media and their own websites. However, with the increased blurring of the boundaries between scheduled operators and LCCs and growing competition, LCCs are changing their approaches, especially as they are intensively targeting business travellers, who tend to be higher yield passengers.
LCCs sell their tickets primarily through direct channels, bypassing the Global Distribution Systems (GDS) and hence hindering the growth for GDS providers. However, more carriers are increasingly looking now to GDSs to capture a more international audience for inter-Asian and Latin American flights.
For LCCs, the crucial concerns about using GDSs are whether these platforms support the ancillary revenues on which LCCs heavily base their operations and whether the high charges can be decreased. Not many of the GDS operators have such capabilities, which certainly place limitations on airlines.
Growing Allure for Low Cost Air Travel
Air travel demand globally is high, with viable options for consumers experiencing rises in their disposal incomes. Investment in the aviation industry therefore has been fast-tracked to improve facilities for the tourism boom in sought after regions such as Asia Pacific and Latin America. However, whilst schedule airlines are showing growth, it is the low cost carriers that are trail blazing within the industry and will continue to do so long-term.