Rise of Budget Carriers

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1. Introduction

1. Concept & Background
For many years the Airline industry in the Asia Pacific region has been tightly regulated and consequently stable as national governments had control over operations of their national carriers and bilateral agreements between states meant that full-fledged airlines could operate without facing any competition at all. With the reform in airline licensing and access to air routes highlighted in the report[1] of the Pacific Economic Cooperation Council (PECC) conference, new rules meant intra-Asian open skies and relaxation of ownership rules. This in turn led to the boom of low-cost carriers in the region. With the skies now clear of restrictions, low-cost or ‘budget’ carriers could now prey on air routes once dominated by full-fledged carriers. With business models based on low fares and no frills, meaning the absence of meals and the comfort of using aero-bridges at airports among others, low-cost carriers took the region by storm with Virgin Blue and Air Asia leading the pack.

1.2 Advantages & Disadvantages
The rapid ascent of destinations offered by low-cost carriers meant that budget conscious travellers could now travel to more places inexpensively. With increased visitor arrivals in the region, governments spruced up their cities and aggressively expanded to attract the crowds. Singapore and Hong Kong improved airport facilities while Indonesia released hectares of space along the beach for resort development. This helped close the gap among Countries but the preference of tourists for low-cost carriers compared to flag carriers on short-haul flights proved to be a bane for full-fledged airlines. Unlike low-cost carriers, the cost of labour among others meant that full-fledged airlines could not offer competitive prices like their counterparts. Japan Airlines and Malaysia Airlines took the hardest hit with the latter almost becoming bankrupt if not for the collaboration[2] with Air Asia in 2006.

Pollution, which tags along with increasing visitor numbers, is an unearthing note for environmentalists and policy makers alike. The sustainability of eco-tourism in the World today remains unproven but in an effort to stop global warming, it is one of the most economically viable solutions available.

2. Analysis of Industry in Asia Pacific Region

2.1 Barriers of entry
While full-fledged airlines have long dominated the market, the potential new entrants face numerous difficulties and challenges. Some of which are highlighted below: Product Differentiation[3]: This refers to customer loyalty enjoyed by companies that have advertised, provided customer service and differentiated their product. Customer loyalty requires time as well as large investments. Common Costs[4]: Airlines operating from state-owned airports worldwide face handling, fuel and parking among other surcharges. Unlike full-fledged carriers, budget carriers cannot afford to price their tickets expensively. Capital Requirements. The need to invest large amounts of capital to compete with airlines already in the industry such as purchasing/leasing aircraft, research and development and advertising requires a substantial amount of money.

2.2 Budget Carriers in Region

2.2.1 Outline of Air Asia
Air Asia was established in 2001 after current CEO Tony Fernandes bought deeply indebted company DRB Hicom for a token sum of one Malaysian Ringgit. It is the pioneer low-cost carrier in Asia and also the largest with 86 airplanes in its fleet[5] and with orders for another 136 to be delivered within the next 3 years. Operating about 400 flights daily, Air Asia together with its subsidiaries Air Asia Thailand, Air Asia Indonesia and Air Asia X, flies passengers to 85 destinations worldwide. In line with the company’s slogan “Now everyone can fly” Air Asia is making budget travel more convenient and affordable. It was recently awarded ‘World’s Best Low-Cost Airline 2009’ by Skytrax[6]. 2.2.2 Outline of Jetstar...
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