Boom in budget flghts

Korean ‘no-frills’ carriers are enjoying popularity with successful cost-reduction plans

By Jung Sung-ki

The popularity of low-cost airlines is going sky high now in Korea as more and more people look for cheap plane tickets and affordable holidays amid the economic slowdown.

The boom in budget flights comes as domestic low-cost carriers (LCCs) have adopted successful strategies to reduce operational costs but keep service quality after trials and errors for the previous years, according to airline industry sources.

Still, local LCCs are facing a fierce competition with Asian rivals seeking to expand their share of the skies, the sources said.

“The market share of low-cost airlines is expected to continue to grow because of cheaper air fares offered by LCCs as well as the burgeoning demand for overseas trips despite the economic downturn worldwide,” said manager Park Jeong-hoon at the public relations office of Jin Air, one of the five LCCs operating in Korea.

After starting commercial services in 2005, local budget fliers, which normally offer tickets for about 25 to 30 percent lower than traditional fares, accounted for 40.5 percent of the domestic air travel market in the first half of the year.

In addition, Korean LCCs saw their market shares in the international flights rise steadily to 3.6 percent in the first six months of the year.

Last month, about 176,887 passengers travelled to foreign destinations with the four domestic LCCs _ Jeju Air, Air Busan, Jin Air, and Eastar Jet. The figure represents a 50-percent increase from a year earlier.

The four carriers and T’way Airlines flew about 1.47 million travelers to local destinations last month. The figure represents a 26.4 percent increase from the same period of last year.

Priority boarding

Behind this upward trend in the LCC sector, local budget airlines made efforts to provide cheaper tickets to consumers by reducing operational costs.

Jin Air, a subsidiary of Korean Air, has beaten down costs by introducing the priority boarding system

Priority boarding is a common service offered by budget airlines especially in Europe. Under the system, any passenger first on the plane is allowed to pick his or her seat.

Jin Air is the first company that has adopted the “first come, first served” style boarding process, which not only helps lower operational costs but also prevents delays and cancellations of flights, according to manager Park.

On top of this, the three-year-old carrier developed its own reservation/booking online system to eliminate a commission for using an external system.

The company also decided not to equip its fleets with expensive in-flight ovens or microwaves for hot meals as part of efforts to reduce flight costs.

As a result of these cost-reduction measures, the airline has turned a profit over the last 18 months. The airline earned 116 billion won in revenues last year and a net profit of 9.3 billion won.

Between January and June this year, the airline, operating six B787-800 planes, saw its sales reach 72.9 billion won, up 47 percent increase from 49.4 billion won over the same period of last year. The company’s net profit during the period was 2.2 billion won.

Streamlined fleets

Jeju Air, which had suffered deficit since its operations in 2006, finally turned a profit of 2.9 billion won for the six months of this year after streamlining its fleet.

In 2005, the airline, a joint venture between the Jeju provincial government and Aekyung Group, placed an order for five 78-seat Bombardier Dash-8 Q400 turboprop aircraft with options for a further three. It also began operating 189-seat B737-800 aircraft.

But to eliminate redundant costs for the maintenance of the two different models, the airline sold off the Q400s last year. By maintaining a streamlined fleet of B737-800, the airline can save on maintenance, spare parts and training expenses. With such costs driven down, the company can charge lower fares than premium airlines without incurring losses.

“Only a year ago, many people said Jeju Air was pouring water into hollow containers, but now things have changed,” Jeju Air president Kim Jong-chul said in a recent interview with Yonhap news agency. “Efforts to streamline the Jeju Air fleet into a single aircraft type laid the foundation for our firm’s stable growth.”

The company also focuses on “proactive maintenance” efforts, he said, in a bid to help ensure safe flights as well as reduce operating costs. Even if any aircraft part’s expectancy life was left, the company would replace the part immediately when it shows signs of defects. As a result, Jeju Air recorded 0.15 percent of delays and cancellations, the lowest among the domestic carriers, between July 2010 and last June.

The airline has increased its rate of aircraft operation by expanding its Southeast Asia routes into nighttime hours when domestic flights are not possible.

Through these efforts, the airline had record sales of 109 billion won and an operating profit of 1.2 billion won in the first six months. This marks a 64.2 percent increase in revenues on-year.

Noticeably, the carrier saw its sales on international flights post 56.4 billion won, a two-fold increase from 27.4 billion won over the same period of last year. The airline’s sales on domestic flights reached 52.6 billion, 35 percent increase from a year earlier.

The airline saw the number of its domestic passengers rise 25 percent during the first half of the year. In terms of the popular Gimpo-Jeju route, it claimed a 14.1-percent share of the market to rank the third behind Korean Air and Asiana Airlines.

Based on these solid results, Jeju Air raised its sales target for this year from 210 billion won to 250 billion won.

The airline opened a slew of new pan-Asian routes over the last 12 months to expand its international flights to 11. It launched services from Incheon to Hong Kong and Manila, and from Busan and Cebu in the latter half of last year. Earlier this year, it opened the routes of Busan-Bangkok, Busan-Hong Kong and Jeju-Osaka.

Small efforts

Air Busan, which began flight services in 2007 as a subsidiary of Asiana Airlines, has come up with small but efficient efforts to reduce costs and lower air fares.

For example, the airline recycles 25 percent of daily newspapers provided during flights to minimize costs and promote sustainable management as well. The company makes its air ticket smaller than other companies’ to save costs as much as possible, said Kwak Ji-yun at the airline’s public affairs office.

The carrier has also streamlined its corporate structure by outsourcing reservation and maintenance works, she said.

“To cut commissions paid to travel agencies or other off-line reservation centers, we’ve expanded ticket sales vial Internet,” said Kwak. “Consumers can get a certain amount of discount as much as we reduce operating costs.”

In fact, Air Busan’s online ticket sales account for 50 to 60 percent, as the company operates several discount events for online ticketing, such as the “early bird fare” program.

Easter Jet chose to “burst the bubble” by bringing down the costs for designing and making cabin crew uniforms.

Departing from the large airline practice of designing luxury uniforms, the company decided to form a partnership with the popular Dongdaemun shopping district to make uniforms.

The LCC also found ways to raise non-ticket-related income. For instance, the carrier only provides water and mandarin orange juice. Instead, they allow passengers to pick and pay for other in-flight beverages and meals.

Challenges

Despite the increasing market share, Korean LCCs are facing some challenges to overcome. First of all, they should compete with rival carriers such as from Japan, Singapore and Thailand.

Strong economic growth, a rising middle class and the lack of reliable land and sea transport infrastructure have been fuelling the growth of budget airlines in Asia, which recently overtook North American as the world’s biggest passenger air travel market, analysts say.

“Entry of Japanese, Chinese and Southeast Asian LCCs into the local market is a clear challenge for us,” Kwak from Air Busan said.

In fact, Japan has long been considered a difficult market for budget carriers mainly because of high labor costs and landing fees, coupled with limited availability of airport slots kept new entrant rants out. But better access in recent years, however, has attracted cheap foreign carriers, forcing Japan’s All Nippon Airways (ANA) to expand into the low-cost market to keep pace.

Last month, ANA and Malaysia’s AirAsia announced last month that they would launch a new low-cost airline in Japan to further tap Asia’s lucrative budget travel market. The new carrier, AirAsia Japan, will be based at Narita airport near Tokyo.

ANA, for itself, launched Japan’s first budget carrier, Peach Aviation, which will be based out of Kansai Airport in western Japan under a joint venture partnership with Hong Kong’s First Eastern Investment Group. Peach will start services next March.

Japan Airlines (JAL), which has been restructuring after filing for bankruptcy last year, has also joined forces with Australia’s Jetstar Airways. Jetstar Japan will start on domestic routes by the end of next year.

AirAsia, the largest low-fare airline in Asia, is also seeking to expand its shares in the regional markets, including South Korea. It recently announced that it would open up a route connecting Kuala Lumpur and Seoul beginning November.

According to the Center for Asia Pacific Aviation, LCCs accounted for 15.7 percent of Asia’s aviation market last year. That was up from just over 14 percent in 2008 and continues the upward trend from the mere 1.1 percent LCC’s accounted for in 2001.