Budget airlines’ capacity expansion plans may lead to overcapacity

Tigerair has completed the sale of its 40 per cent stake in Tigerair Philippines to Cebu Pacific.

The deal is part of a strategic alliance announced by the two partners, hoping to tap each other's network to boost growth.

There has been rapid growth in the budget segment in Southeast Asia in recent years and competition is intense.

However, as low-cost carriers adopt aggressive capacity expansion plans, there are concerns that this may lead to overcapacity.

Low-cost carriers in the region have taken off in the past decade.

Ten years ago, budget air travel accounted for 9.8 per cent of total capacity of seats, but this has jumped to more than 60 per cent now.

To meet the growing demand and to position themselves for growth, low-cost carriers have placed strong orders for planes, with more than 1,000 aircraft now on order.

But industry-watchers warned that filling all the seats may be a challenge.

Greg Waldron, Asia managing editor at Flightglobal, said: "There is some analysis that shows there might be too many aircraft coming into the market and this could lead to a case of overcapacity, especially with the big carriers in the region such as LionAir, AirAsia and Indigo."

Paul Yong, vice president of equity research at DBS Vickers, said: "A lot of them have been aggressively expanding and ordering planes in order to get more market share.

"But we've seen in recent quarters that yields and load factors have not been as strong as they would've liked. Amidst this keen competition, I think earnings might have slipped quite far behind revenue growth."

To temper the risks, some budget carriers are now looking to slow down their plane orders.

Mr Waldron said: "One of the advantages that these big carriers have is that they have a lot of leeway with the manufacturers -- Boeing and Airbus -- to defer aircraft as need be, so they can actually manage their capacity growth quite well.

“We saw AirAsia defer the delivery of 19 aircraft, that shows they're trying to manage their capacity growth a bit more carefully as opposed to the rapid growth you saw last year, and of course you see Jetstar reducing its growth. The market out here is extremely competitive right now."

Plane orders aside, some budget carriers have been reviewing their business strategy.

Tigerair, for example, is focusing its efforts on exploring new routes to strengthen its foothold in Singapore.

It has chosen to divest its Philippine arm to Cebu Pacific, and strike up a greater network of partnerships to maintain its presence abroad.

Koay Peng Yen, group chief executive officer at Tigerair, said: "One of our strategies going forward is to work with alliance partners like Cebu Pacific, Scoot, Spicejet, China Air.

"These are some of the recent alliances we've announced in the past three to four months. So we will be able to compete also in the domestic sectors and international sectors in some of these countries in Asia."

Through the partnership, Tigerair can tap Cebu Pacific's network in the Philippines and North Asia, while Cebu Pacific can extend its network to include Australia and India. Both parties will be able to increase flight frequencies and jointly sell and market their routes.

Industry observers said one silver lining ahead is the ASEAN Open Skies agreement which is set to kick in by 2015.

They said with greater liberalisation, short haul travel with ASEAN cities is expected to double by 2020 and open up more opportunities for low-cost carriers.

SOURCE