Asia has a problem. The skies above their respective cosmopolitan nations are full.
There are too many planes, too many passengers and too many airlines. They all compete with each other driving down the cost of flying to unsustainable proportions. We only need to look towards India to see the consequences, where a 2 Cent flight price war has lead to Jet Airways falling to their knees.
“Competition has become more and more intense and you have a lot of aggressive competitors these days,” – Brendan Sobie, chief analyst at Sydney-based aviation think tank CAPA.
But there is a solution. Consolidation.
A rapid merger of several airlines into more powerful blocks will lead to industry stabilization, wage growth and more consistent service for passengers.
Is there really a problem in Asia?
One might assume that this is all good news for passengers and that the industry in Asia is doing just fine. But there are some problems that are occurring.
- 40% of India’s market is controlled by budget airline Indigo, who is rapidly decreasing the price of flights in a price war leading to many airlines suffering consistent monthly losses. Many passengers in India have never flown before and this is creating a market expectation of cheap air travel (For less than a dollar).
- Low-cost carriers across southeast Asia have been chipping away business from full-fledged carriers (Such as Thai Airways who posted double losses recently). Even Vietnam itself has five different airlines, four of which are low-cost carriers.
- Future overcapacity. There are too many jets on order for the region compared to how many passengers there can and will be. Air Asia has 349 jets on order, Vietjet ordered 50 Airbus A321neos to their 324 order and Lion Air (The same as the recent 737 crash) has over 400 jets on order. Who is going to fly on all these planes?
All of these are systematic of too many big fish in a small pool. What are the solutions?
Setting a price floor
The first solution to this problem is setting a price floor. This is where a government entity or a cabal of airlines get together and decide what the minimum price for a ticket would be. This would guarantee that airlines operate profitable routes and that their staff make a livable wage.
In the wake of the crash in Indonesia, South East Asia representatives believe that increased fares will lead to increased safety and regulations.
In South Korea, the government has started to restrict aircraft certificates on the basis that they have ‘too much existing capacity’.
However, this might be a bit doubtful to work and passengers should be worried that airlines will simply form monopolies and restrict newcomers from entering the space.
The alternative is to consolidate the industry, through government intervention or allowing market forces to take their path.
We are already starting to see this route take place in India with Jet Airways. Through its struggles, other airlines have moved in to take a piece of the pie.
“The cash-strapped airline could merge with Tata SIA Airlines Ltd – the joint venture between Tatas and Singapore Airlines that’s known by the brand name Vistara – through a share swap in the first phase. Jet promoter Naresh Goyal, his partner Etihad, Tata Sons and Singapore Airlines will then all become partners in the new company” – The Economic Times
It has also been rumored that Singapore and Tatas would then offer to buy out Naresh Goyal’s 51% to become the majority owner.
This would rank them as the 2nd major airline of India.
In Indonesia, we are seeing Garuda make a bid for rival Sriwijaya Air.
This will mean fewer rivals and a more mature industry.