High hopes for Asia's overcrowded budget airlines

HONG KONG/SINGAPORE: Asian budget airlines placed a record $42 billion in plane orders over the past week, signalling their high expectations for travel in the world's fastest growing market and also triggering worries some may not survive.

Many of the no-frills carries such as AirAsia

. "It will be over-crowded and the weak will suffer or even fade away, but generally there's still enough intra-Asian travel to generate revenue for the incumbents," said Shukor Yusof, an equity analyst of Standard & Poor's.

Budget airlines including AirAsia and IndiGo placed orders for 454 Airbus aircraft, mostly the fuel-efficient model A320neo.

Global leaders such as Southwest Airlines Co in the United States and Ryanair Holdings Plc in Europe are however facing sluggish markets.

Worldwide passenger demand is expected to rise 4.4 per cent over the next year with the Asia-Pacific region growing faster at 6.4 per cent, according to the International Air Transport Association (IATA), which represents the majority of airlines operating in the $598 billion industry.

The Centre for Asia Pacific Aviation, an independent aviation market intelligence provider, said low-cost carriers accounted for 16 per cent of the market in terms of seats within Asia Pacific last year ,up from 6 per cent in 2005. Their market share is set to rise 2 per centage points annually to about 26 per cent in 2015, it said.

OVERCAPACITY CONCERN

There are worries that overcapacity could plague Asian carriers because of the rapid pace of their expansion combined with the resumption of orders in the past year by full-service airlines and aggressive Chinese carriers.

Boeing Co predicts the global air fleet will more than double to 39,530 in 2030 from 19,410 aircraft at the end of 2010.

Bankers and analysts said the recent plane orders, due to their size, are likely to be financed by internal funding, debt and equity, as well as sale-leaseback agreements. "Airlines should have no problem getting financing and rates are very cheap right now," said Andrew Orchard, an aviation analysts for RBS.

While premium airlines such as Cathay Pacific and Singapore Airlines don't compete head-to-head with budget carriers, there remains an overlap in economy class where they do, said Kelvin Lau, an analyst at Daiwa Securities.

"It will have an impact on marginal carriers such as Malaysian Airline System Bhd , Thai Airways International Pcl and China Airlines Ltd ," said Lau.

AirAsia group commands a 6 per cent market share in intra-Asia routes (ex-domestic), higher than Malaysian Airlines' 4 per cent, but lower than Singapore Airlines' 9 per cent, Goldman Sachs said in a recent research report.

The rise of budget carriers in Asia has pushed some legacy airlines in the region to copy their successful models.

Budget airlines are inclined to use one kind of aircraft to minimise maintenance costs, order in large numbers for big discounts from manufacturers and do away with frills to offer lower fares that are estimated by analysts to be at least 30 per cent lower than those at full-service or legacy carriers.