Prasert Prasarttong-Osoth, the owner of Bangkok Air, plans to take his carrier from being a niche-market operator to flying long haul.'A taxi to Chiang Kai Shek International Airport from downtown Taipei costs NT$1,000, but you can fly from Taipei to Kaohsiung for less. It makes no sense.' JC Jong, sales and marketing manager of TransAsia Airways in Taiwan.
Rapid economic growth in Asia is boosting demand for air travel as governments in the region push to deregulate the sector. But this hasn't brought heaven to earth for fledgling niche-market carriers that still face political restrictions and cut-throat competition.
As demand for domestic air travel soars in Asia, more second-tier carriers are trying to get off the ground. However, despite moves toward deregulation, newcomers risk being downed by political flak and crushing competition.
Bangkok Air's story is a classic lesson in how to deal with the neighbourhood bully who won't let you on the playground: build your own.
The 30-year-old niche carrier could not get permission to fly domestic routes already served by national airline Thai Airways, so its owner, Prasert Prasarttong-Osoth, bought land on Koh Samui and opened his own airport in 1989. The company now offers up to 18 flights a day to the island paradise, carrying 320,000 tourists a year. In April 1996 Prasert opened a second airport in Sukhothai province in northern Thailand. While Bangkok Air's market share remains tiny, its profit margins are fat - 40% of last year's US$40 million revenue.
In Taiwan, U-Land, a start-up airline owned by Rui Lian Construction Company, is fighting its own David versus Goliath battle. In an effort to beat the competition, U-Land has been known to practically give away seats at NT$1 (about US$0.03) each on the popular Taipei-Kaohsiung route. Although most of the island's airlines don't resort to such extreme measures, they admit the fight to win customers is a bit out of control. 'A taxi to Chiang Kai-Shek International Airport from downtown Taipei costs NT$1,000, but you can fly from Taipei to Kaohsiung for less. It makes no sense,' says JC Jong, sales and marketing manager of TransAsia Airways in Taiwan.
Governments across Asia are pushing to liberalise their airline industries, throwing up a host of investment and business opportunities - but that hasn't necessarily meant a smooth take-off for fledgling second-tier carriers. Behind bright prospects lie treacherous pitfalls of cut-throat competition and political turf wars that can ruin large investments. For new entrants the booming markets are hard to ignore.
Rapid economic growth has greatly pushed up demand for air travel in many Asian economies. The International Air Transport Association (IATA) forecasts demand will grow at an average of 8.6% a year until 2000. By then, the region's share of worldwide scheduled passenger traffic will have reached 41.2%.
The most pressing demand is often for domestic flights. To meet the demand, governments, notably those in Taiwan, Thailand and India, have moved to liberalise their skies by allowing competition on many domestic routes.
The stakes are high. In India, for instance, 11.75 million passengers took domestic flights in 1996, up 12% from the previous year. Analysts believe the pace of growth will continue for several years.
'South and East Asia are areas where the growth is higher than anywhere else in the world, and South Asia [mainly India] is the fastest growing market within these areas,' says Neeraj Ghei, managing director of travel agency Sita World Travel and vice-president of the Travel Agents Association of India.
In Taiwan, rising household income and the deregulation of the airline market have combined to fuel an air traffic boom over the past 10 years. In the first half of this year, domestic travel grew 9.4% year-on-year to 18.8 million trips. With a population of 21 million, 'Taiwan has more domestic air travellers than Indonesia', says Martin Craigs, president of Saab Aircraft International Asia-Pacific. 'It's incredible.' Indonesia's population is more than 200 million.
Although many Asian governments recognise deregulation is the only way to cope with the surge in demand, bureaucratic inertia and old political ties are not about to disappear. In Thailand, critics complain that Thai Airways is using its political influence to maintain a stranglehold on many domestic routes. The government owns 93% of the carrier and key civil aviation authorities sit on its board.
New Thai airline formed
For now, Bangkok Air is the only semblance of a domestic rival to Thai Airways. But private-sector interests, including Thailand's huge tourism industry, have urged the creation of a second national carrier, and in 1995 the Ministry of Transport and Communications decided to consider various proposals. In July it was announced that investors led by United Communications Industry (Ucom) had paid up to 3 billion Thai baht (about US$95 million) to form Angel Airlines. The new carrier is scheduled to begin service next year with six aircraft.
But some observers say further financing may be hindered by Thailand's economic crisis and that Angel Airlines' approval does not signal full-scale deregulation. They say officials will probably not allow the airline to compete head-on with Thai Airways, leaving it to fly less lucrative, secondary routes much the way Bangkok Air does.
'Past experience shows Thailand won't be able to support two strong competing national carriers,' says Sanyalak Manibhadu, a securities analyst at ING Barings International. 'An all-out war between Thai and another airline is a long way off.'
Bangkok Air is sticking to its niche-player strategy. Joining the fray to become a second national carrier would mean large capital outlays that could be better spent elsewhere. In 1996, it carried 500,000 passengers compared with Thai Airways' 14 million. But rising tourist flows and airport concessions have helped build profit. Prasert expects the Sukhothai facility to break even after five years.
'The next step is going long-haul,' says Prasert. His company's Samui facility has already been upgraded to a customs airport, and direct flights to Singapore began in the spring. Future routes may reach Medan in Indonesia and Kuala Lumpur and Langawi in Malaysia, he says. The company also plans to upgrade the Sukhothai airport for flights to tourist destinations in Laos, Burma and southern China.
This sort of entrepreneurship is also seen in Taiwan's burgeoning airline industry. 'When the government announced deregulation [in 1987], many people wanted to start up airlines,' says Sun Hung-hsiang, president of Formosa Airlines, which has operated for 32 years.
The rush to the skies has triggered an air traffic boom that is attracting other start-ups. National flag carrier China Airlines and international carrier EVA Airways now share domestic routes with six smaller companies.
Stiff competition among airlines has driven down domestic air fares which, in turn, has encouraged more people to fly. Air traffic in Taiwan grew 600% from 1988 to 1994. 'Air fares are getting close to the cost of bus fares, so of course people will prefer to fly,' says Charles Wu, vice-president of Great China Airlines, a separate entity from China Airlines.
Meanwhile, second-tier airlines are boosting capacity to cash in on the growing demand. UNI Air, for instance, has just received five of six MD-90s aircraft ordered from McDonnell Douglas, with another arriving next year. Great China has ordered six 78-passenger de Havilland Dash 8-400s.
But analysts in Taiwan say carriers are adding extra seats faster than they can fill them despite the steady growth in passenger traffic of between 15% and 20% a year. 'The market is already saturated,' says Charles Hsu, a spokesman for China Airlines.
Fighting for profit
Some airlines are already feeling the pinch as the rising cost of buying or leasing new aircraft and market saturation have begun to cut into the bottom line. Even after a bumper passenger year in 1995, some domestic airlines are operating at a loss, and others are struggling to break even, according to analysts in Taipei. Formosa, for instance, posted a loss for the first-half of 1996. 'We are at the break-even point now,' says Sun.
In contrast to Taiwan, airline deregulation in Japan is mired in government bureaucracy. Over the past year, four new carriers announced they would fly at discount fares, raising consumers' hopes that competition would give them a big price break and shake up Japan's tightly-controlled aviation industry. But the new entrants soon learned that deregulation, announced in 1996, was only an illusion.
The need to reduce artificially high air fares in line with Japan's economic downturn has been widely cited as the main reason for deregulation. In the past, the government required the three airlines that operate domestic routes, Japan Airlines, All Nippon Airlines and Japan Air Systems, to charge the same fares. The fares were kept high partly to protect the travel market's share of the financially-troubled Japan National Railways (Asian Business, July 1996). Airlines were only allowed to compete on such factors as flight scheduling, service and overall image.
In June 1996, the Ministry of Transportation (MoT) took the first step by allowing the three airlines to set fares within a band of 25% above or below government-recommended fares. But in-stead of discounting across the board to compete, the three airlines raised fares on the most popular routes by a few hundred yen. This brought a storm of protests from customers. The MoT then took another step in the deregulation process. The most important new measure was to license new domestic carriers. What's more, the MoT promised to give the new carriers preference when assigning 40 new slots made available for domestic flights following the expansion at Tokyo's Haneda airport. Skymark, established by discount travel agency H.I.S. Co, was among the first new carriers to obtain a licence in October, 1996. The company plans to operate a shuttle service between Tokyo and Osaka at fares that are 20% to 30% below its competitors. This would bring the company's fares close to that of the bullet train.
'Airlines can make more efforts to reduce costs,' says Hideo Sawada, president of H.I.S. 'Someone has to dare to compete.'
He is not alone in believing air fares in Japan need not be so high. Another start-up, Hokkaido International Airlines, established by a consortium of 25 Hok-kaido businessmen, led by poultry merchant Teruo Hamada, said it would offer a 50% discount on a proposed Tokyo to Sapporo flight scheduled to start next year.
But after the licensing process, the rules suddenly changed, and new carriers may find it tough to meet profit margin targets, no matter how narrow.
Last February, the MoT, citing safety reasons, ruled new carriers would initially be limited to operating only one aircraft each. This ruling came as a serious blow to all the new start-ups that planned to lease at least three to four planes each to make their businesses viable.
Industry experts expected as much. Before the ruling, Tawahisa Wada, a professor at Seishu University and architect of Hokkaido International's business plan, warned officials were half-hearted about letting the newcomers spread their wings.
'They [the government] are really not interested in deregulation at all. They want some symbol to show people that they are,' he said.
Analysts now predict that even if the new carriers are allowed to become a significant force, the government will not allow a fare war that drastically drives down ticket prices. 'On the whole, the price system probably won't collapse,' says Naoto Hashimoto, an airline analyst at Nomura Research Institute.
If the Japanese-style airline deregulation seems confusing, the Indian version is decidedly mind-boggling.
The Indian government launched its open skies policy in 1991, allowing deregulation of an industry monopolised by public sector giant Air India. But rising competition has not brought any benefit to passengers. Fares have more than doubled since 1991 and they are rising. Service remains poor, delays common and cancellations usually take place without notice, passengers complain.
Money woes sour partnerships
Analysts say the major problems facing many new airlines are lack of expertise and, more importantly, funding. 'Most of the Indian operators have shallow pockets,' says Kavin Sethi, director for corporate communications at Lufthansa in New Delhi. He should know. Lufthansa has just spent a year fighting a court battle with its former Indian partner, SK Modi, over custody of aircraft owned by the now-grounded domestic carrier, Modiluft. In May last year, Lufthansa unilaterally terminated all its contracts with Modiluft, alleging non-payment of lease rentals for three 737-200s and for technical support and management services. Lufthansa, which claimed outstanding dues running into several million US dollars, was sued by Modiluft last November for US$140 million in damages for breach of contract.
The two finally negotiated a settlement - and an end to the relationship - in August. The agreement requires Modiluft to pay US$5 million and to return the three aircraft. SK Modi said he would re-launch the carrier.
Another start-up, East West Airlines, has also closed after running into problems over lease rental default.
Of the six airlines that entered the Indian market with scheduled operations after 1991, only three remain in business.
A controversial new policy on foreign participation in the airline industry may further thin the ranks. In April, the cabinet ruled that foreign equity participation in a domestic airline should not exceed 40%, and it barred investment by foreign airlines.
Defending the new policy, civil aviation minister Chand Mahal Ibrahim says: 'No-where in the world has a foreign airline been allowed to invest in the domestic sector.'
The government has already asked India's most successful new airline, Jet Airways, to divest itself of foreign equity by October 15. Jet Airways was established in 1993 by UK-based Indian businessman Naresh Goyal, who controls a 60% interest in the carrier. The rest of the shareholdings are equally divided between Gulf Air and Kuwait Airways. Jet Airways says it now has a market share of 15%, making it the second largest domestic carrier after Air India. Analysts attribute the carrier's success to its relatively deep pockets and, more importantly, to support it has enjoyed from its partners.
Although that support may have helped Jet get off the ground, the new policy means it will now have sever those links. Goyal announced in August that he would buy the stakes held by the two other airlines.
A major casualty of the new ruling is a proposed joint venture between Singapore Airlines (SIA) and Indian conglomerate the Tata group. The two groups secured initial approval two years ago from the Foreign Investment Promotion Board, and the Ministry of Industries, to set up a US$708 million domestic airline in which SIA was to hold a 40% stake, the Tata group 40% and the remaining 20% was to be held by Indian institutional investors.
But Ibrahim may not have the final word on airline policy. On June 7, India's Prime Minister IK Gujral said modernisation was not possible without a true open skies policy.
He has since relieved Ibrahim of his second portfolio as Information and Broadcasting Minister, a move seen by many as a reprimand. Gujral also appointed Jayanti Natrajan, who supports liberalisation, as a junior minister in the civil aviation ministry.
In August, Natrajan announced a new civil aviation policy would be released by October. While this move raises new hopes for the Tata-SIA proposal, not everyone is optimistic because Gujral faces opposition from within his own United Front coalition. Insiders say aviation policy has become a victim of the power struggle. 'Given the political scenario, the odds are against any review of the Tata venture,' says one analyst.
Tata executives hope politicians will see the need for foreign investment - and expertise -- in India's airline sector. Says Sujit Gupta, managing director of Tata Industries: 'Would a potato chips company without any knowledge of airlines put money into an Indian airline? If not, how do you expect foreign investment to flow into the Indian airline industry?'