Coalition seen as precursor to mergers in highly competitive and saturated market
Low-cost carriers in Asia have realized that a sure-fire method to overcome challenges in earning revenue in an intensely competitive market is to join forces. As a result, eight low-cost Asian airlines have joined forces to form the world’s largest alliance called Value Alliance. The Value Alliance stretches from Japan to Australia and includes Singapore Airlines Ltd.’s Scoot and Nok Airlines PCL from Thailand. The Alliance is seen as an attempt by smaller low-cost carriers to stand up to larger airlines with deeper pockets, but also as a means to end as this sector continues to get intensively competitive. Value Alliance’s eight carriers have a combined fleet roughly equal to that of AirAsia. Its aim is to sell tickets, or even baggage allowance and in-flight meals across the group’s eight airlines in a single transaction.
Value alliance includes Vanilla Air, a unit of Japan’s ANA Holdings Inc., Tiger Airways Australia, controlled by Virgin Australia Holdings Ltd., Cebu Pacific Air in the Philippines and South Korea’s Jeju Air. However, the region’s best-known and biggest low-cost carriers, AirAsia Bhd. and Jetstar, owned by Qantas Airways, are not part of the coalition.
According to Value Alliance, its members offer flights to more than 160 destinations with a fleet of 176 aircraft. AirAsia and AirAsia X Bhd have a combined fleet of 199 aircraft, while IndiGo has 108 planes.
Strength lies in numbers
Faced with cut-throat competition and financial losses in recent years, the coalition may be moving away from the budget model, which avoids the cost of international alliances and frequent-flier freebies. The alliance could trigger mergers in Asia, where low-cost carriers have flooded the world’s fastest-growing travel market with plane orders.
About a dozen low-cost airlines, which started operating in Asia Pacific over the past decade, have placed orders for hundreds of aircraft from Airbus Group SE and Boeing Co. (NYSE: BA), thereby indirectly fuelling the growth of these aircraft manufacturers. These carriers are looking for additional gains such as improving distribution and brand awareness, and getting some incremental traffic through the alliance.
Union hurdles could hurt revenues
Experts feel that it will be tough for the new coalition to generate additional revenue for its members because low-cost carriers, which often use the same plane to service two destinations several times in a single day, may find it hard to meet arrival and departure times. Moreover, their service offerings could be hit since members may not be able to coordinate schedules.
On the other hand, the possibility of a consolidation in Asia is expected to face several hurdles as seen in Europe, where the capacity of low-fare airlines, led by market leaders Ryanair Holdings PLC (NASDAQ: RYAAY) and EasyJet PLC, is set to rise four times faster than the continent’s gross domestic product, according to Bloomberg. Moreover, low-cost carriers are facing intense competition from full-service European carriers that have merged into three large groups led by Deutsche Lufthansa AG, Air France-KLM Group and British Airways.
Similarly, in the US, mergers over the past few years have left the industry dominated by American Airlines Group Inc. (NASDAQ: AAL), Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL) and discounter Southwest Airlines Co. (NYSE: LUV). Moreover, ultra-low-cost carriers such as Spirit Airlines Inc. (NASDAQ: SAVE) have expanded into markets dominated by larger rivals, resulting in price wars in the industry.
Lastly, a massive advantage for Value Alliance is that the alliance won’t need any regulatory permits to proceed. The accord could prove to be successful if travellers can get the best connectivity of various members as they fly around Asia. However, this kind of cooperation could increase costs.