Despite rising oil prices that are placing airline businesses under threat globally, low-cost carriers (LCC) in the region are taking bold steps by expanding their fleet and routes.
Recently, at least two LCCs — Indonesia’s Lion Air and Thai AirAsia — had come out to say that they planned to raise money via initial public offerings (IPOs) in these two years.
Analysts said the LCCs were bullish on the market following Philippines-based Cebu Air’s successful IPO last October. The airline company raised US$538 million (RM1.6 billion) — the largest IPO for a LCC globally.
But, with added pressure from the Japan earthquake and uprising in the Middle East, analysts said LCCs may be compelled to put their expansion plans on hold.
Still, industry observers said the LCC growth story is still sexy, compared with the full-service liners.
“LCCs still have a lot of room for expansion, especially in emerging markets, as they are not as matured as the European LCC market,” an industry observer said.
He added that the growth catalysts for LCCs here would be high demand for cheaper options to travel, given that the Southeast Asian region has a significant young and middle-class population who prefers to pay less for flights.
“Southeast Asia is a great market for LCCs because unlike the European Union, where travellers have the option to cross over to neighbouring countries via land, air travel appears to be a more reliable mode of transportation here. The key driver to LCCs’ expansion is how it manages its pricing,” he said.
For AirAsia Bhd, it may have found a solution to keeping its prices fluctuating from high fuel surcharges. The LCC said it is not likely to impose fuel surcharges as long as its ancillary income grows.
AirAsia, which hedged 21% of its fuel requirements until the second half of this year, said every RM1 in ancillary income would mitigate US$1 (RM3.05) rise in fuel costs.
Competition among regional LCCs is expected to heat up, as the airline companies acquire more planes and embark on route expansion.
Lion Air, which aims to raise more than US$1 billion via an IPO in 2012, has also planned to acquire 178 planes from Boeing Co by 2016. The LCC has already secured loans to acquire 22 planes just this year alone.
Thai AirAsia, which is 49%-owned by AirAsia, plans to sell at least a 25% stake to investors and list on the Thai Stock Exchange by the fourth quarter.
The proceeds from the IPO would be partly used to acquire 20 Airbus 320 planes and expand routes, including to India and the Philippines, the LCC said.
Adding to the increasing number of LCCs in the region is Thai Tiger Airways which is expected to be operational in July.
Thai Tiger is a collaboration with Thai Airways that will have a 49.9% stake in the new LCC, Tiger Airways (39%) and RyanThai Ltd (10%).
An aviation analyst believes that LCCs based in Southeast Asia do not have a major exposure to Japan and are unlikely to be significantly impacted by the earthquake aftermath.
However, rising oil prices remain a concern.
“It’s still a million-dollar question as to where fuel price will head in the next few months. Hence, this uncertainty may cause some of these LCCs to defer their plans,” the analyst said.
Since the beginning of this year, fuel prices have surged more than 15% and are hovering above US$100 per barrel currently. Airlines are sensitive to changes in fuel prices, as oil forms up to 40% of total costs.
While the fluctuations in fuel prices have hit both LCCs and full-fledged airlines, it now appears that the latter have started to feel the pinch.
Last Wednesday, Air Canada said it was suspending unprofitable routes and cutting frequencies in others to battle high fuel prices.
Indonesia’s national carrier, Garuda Air, only managed to raise half the US$1.1 billion it had targeted, after foreign investors were put off by its high pricing and fluctuating fuel prices.
On its debut, Garuda fell 17% to close at 620 rupiah (21.5 sen).
While the aviation industry is still assessing the impact of the global developments, airline companies are already bracing for a challenging 2011.
In a recent interview with the foreign press, Malaysia Airline System Bhd managing director Tengku Azmil Zahruddin said the quake in Japan would weigh down investors and travellers’ sentiment, in addition to the still weak demand from Europe and the US, as well as high fuel prices.
