Adrian Schofield Low-cost model will likely be better suited to new landscape than full-service carriers, at least for the short term.
Adrian Schofield
IndiGo is continuing to take delivery of Airbus A320neos as scheduled despite the pandemic. Credit: BriYYZ/Wikimedia
The low-cost-carrier (LCC) model is widely expected to hold significant advantages over full-service carriers (FSC) in the Asia-Pacific region in the immediate aftermath of the COVID-19 crisis. FSCs were already under severe pressure from the LCCs in many markets before the pandemic, and the legacy carriers could find competition even tougher over the next few years.
The LCCs will likely be in a better position due to their fleet composition, business models and network structures. The financial stability and longer-term prospects of these carriers are of vital importance to the major manufacturers given that seven of the largest Asia-Pacific LCCs account for more than 2,000 narrowbody orders.
Fleet plans may be set back in the short term, but the bulk of the LCC orders will remain on the books. Narrowbody aircraft are likely to be more useful in the initial post-pandemic phase, as they will be easier to fill and short-haul international routes should recover more quickly. Further ahead, new narrowbody types could give the long-range, low-cost model better tools to prosper.
LCCs accounted for 29.7% of seats within the Asia-Pacific market in 2019, according to data from CAPA – Centre for Aviation and OAG. The LCC share of seats within the region has generally followed an upward trend since 2011, when it was at 20.5%. Within South Asia, LCCs flew 69% of seats in 2019, the highest share for any of the world’s subregions. Southeast Asia was also relatively high at 56.2%.
It is entirely possible that the LCC share for the broader Asia-Pacific region will climb higher—at least for the medium term—during the pandemic recovery phase. Airline executives from both business models offered some insights into this potential trend during the latest CAPA Live event on July 14.
AirAsia Group CEO Tony Fernandes agreed that LCC business models will be best suited to the post-pandemic market. “I think long-haul hub carriers will not recover as quickly as low-cost carriers, not because we’re better, but just [because] the market is going to change,” he said.
Fernandes noted that business travel will be slow to rebound, in part because it will take a while before conventions return and people have become used to virtual meetings on online platforms. He said that while some LCCs have been moving to attract more business traffic in recent years, AirAsia will be keeping its focus squarely on leisure travel.
Intercontinental travel will also take a hit in the medium term, although it will come back eventually, said Fernandes. At least initially, leisure travelers from Southeast Asia will be more inclined to jump on an aircraft to short-haul international or domestic destinations, he said. This will benefit the short-haul LCC networks most.
Malaysia Airlines views the same issue from the opposite perspective of a full-service carrier. The airline has to compete in a Malaysian domestic market where LCCs account for about two-thirds of capacity, said Bryan Foong, Malaysia Airlines Group chief strategy officer.
There is space for both models in this market, but LCCs will have an edge during the recovery, Foong said. Travel demand may have to be stimulated in the early stages of the recovery, so low prices and lower cost structures are going to be important for airlines.
On the other hand, the FSCs still have the traditional inducements of a more premium offering, such as comfort, greater choice and flexibility. “I think LCCs have an advantage, but not for long,” said Foong. “At some point [the market] will normalize.”
In the meantime, FSCs “will probably have to work harder during the recovery,” Foong said. They “will need to be very clever, and will have to be lean and agile in terms of how they capture the recovery market.”
The FSCs also must be “a lot smarter in terms of product offering. . . [and] sensitive to what customers need,” Foong said. To this end, Malaysia Airlines is looking to revamp its products and services, including refurbishing its narrowbodies. It is also introducing narrowbody jets into its Firefly subsidiary to target more point-to-point, short-haul traffic flows.
LCC IndiGo is the largest player in the Indian domestic market by a wide margin, and it has increased its share during the pandemic. It accounted for 54.7% of domestic passengers in India in June, according to data from India’s Directorate General of Civil Aviation.
In India, the domestic market shares of FSCs such as Air India and Jet Airways “have steadily diminished over the years, and the LCC models have taken off,” said IndiGo Chief Commercial Officer Willy Boulter. The LCC model is going to be the “most prevalent” during the recovery, but “there’s room for both models.”
Boulter noted that IndiGo does not worry too much about market share or its competitors. Rather, it is focused on its LCC model “and enhancing it as time goes on.” To that end, it is developing new digital products to increase self-service capabilities for customers.
IndiGo has also been pushing further into the international market, traditionally the domain of the FSCs. Before the pandemic it had expanded its international network to 24 destinations and international services accounted for 25% of its capacity. IndiGo is very keen to resume flying its pre-COVID overseas network and also expand into new markets, Boulter said. Prospects for such moves include Moscow and Jakarta, Indonesia.
The IndiGo and Malaysia Airlines executives are much less convinced about the prospects of the long-haul, low-cost model, at least while it is based on widebody aircraft.
“Many people have tried long-haul, low-cost—thinking it’s the new frontier—but I just don’t think it’s going to work with widebody aircraft,” Boulter said. He noted that widebody aircraft mean higher fuel costs, and it is more difficult to achieve higher utilization than FSCs with these types. This erodes the advantage of LCCs and makes long-haul, low-cost hard to sustain.
However, the advent of long-range narrowbody aircraft such as the Airbus A321XLR will “change the [long-haul] game in favor of the LCCs,” said Boulter. IndiGo has placed orders for A321XLRs, with deliveries scheduled from 2024 onward.
These aircraft will open opportunities for nonstop flights from India to cities in Europe, and to destinations in East Asia such as Beijing or Seoul, Boulter said. IndiGo would have a lower seat-mile cost to compete with the FSC widebody services on these routes.
Foong agreed that the long-haul, low-cost model is still “largely unproven,” and he also concurred that the A321XLR could be a game changer for such airlines. These aircraft will offer “a step change in terms of cost structure” for the LCCs on long-haul routes, a development that will need to be watched, Foong said.
While it appears that LCCs will be structurally better aligned to the prevailing market conditions, FSCs still do have valuable points of difference that they can leverage as demand returns. They will likely have greater success in this regard as more time elapses and the market settles into its new normal. And despite LCC forays into long-haul, the FSC advantages will still be strongest in such markets.
It is also worth noting that many of the LCCs in the Asia-Pacific region are actually subsidiaries of legacy FSC groups such as Qantas, Singapore Airlines, Cathay Pacific, All Nippon Airways, Japan Airlines and others. This helps the groups target a broader range of demand, as well as protecting their flanks from the large independent LCCs.
Many of the large Asian full-service flag carriers have the benefit of significant state support, more so than the LCCs. This should give these FSCs some breathing room to make adjustments and survive until demand for their offerings builds up again. FSCs will recover most—but maybe not all—of their pre-COVID market share. And it is also entirely feasible that after demand is fully restored many LCCs will be in a stronger position than before the pandemic.
