Asia's budget airlines eye growth, high fuel costs

Posted 01 30 2010 9:33AM

SINGAPORE – Asia's budget airlines will prosper as the region's economic recovery takes hold and its middle class grows, but rising fuel costs could hurt profits, the industry's top executives said Thursday.

Low-cost airlines fared better during last year's global recession than their full-service competitors as individuals and companies looked to cut costs by scaling back expensive business-class travel.

Just last week, full-service carrier Japan Airlines Corp. filed for bankruptcy protection after years of heavy losses while Singapore-based low-cost airline Tiger Airways raised $178 million at an initial public offering.

Budget carriers are now hoping broad regional economic growth can boost leisure travel in 2010.

"The size of the travel market in this region is going to explode as economies come back," said Garry Kingshott, chief executive adviser for Manila-based Cebu Pacific Air.

The region's growing population, especially in China and Southeast Asia, and high economic growth rates bode well for low-cost airlines as millions of Asians are lifted out of poverty and travel abroad for the first time, experts said.

"The creation of first-time middle class households in emerging markets is continuing," said Yuwa Hedrick-Wong, an economist for MasterCard Worldwide in Singapore. "If you look at the budget airlines, budget travel and so on, these are typical services that the newly-minted middle class use."

Industry executives said higher fuel costs could cut into profits and undermine the cost advantages they have over full-service peers.

"I'm sure all of us have sleepless nights worrying about jet fuel prices, the one thing you don't control," said Sam Sridharan, chief commercial officer of India's SpiceJet.

Crude oil prices have traded $10 either side of $75 a barrel in recent months after hitting $147 and crashing to $32 in 2008. Most economists say prices could rise this year and breach $100 again during the next two years, straining budget carriers where fuel accounts for up to 40 percent of operating costs.

"We all know it's going to keep heading up and that's one of the big risks of this industry," said Brett Godfrey, chief executive of Australia's Virgin Blue.

To stay competitive, executives said low-cost carriers must use the latest technology to cut costs, become more efficient and satisfy customers.

Jetstar Airways, based in Melbourne, Australia, plans next month to start sending boarding passes by text message to reduce check-in times.

"We have to constantly innovate to stay ahead," said Jetstar CEO Bruce Buchanan.