Jetstar and Tiger battle for Southeast Asian skies

Can Jetstar and Tiger Airways rely on growth in air travel alone to succeed?

Southeast Asia's skies have become a battleground for low-cost carriers duking it out to capture the region's increasing appetite for air travel.

As Freddie Laker (a British airline entrepreneur who founded Laker Airways in 1966) and Richard Branson both learned, the airline business is one of the toughest industries to make money in, but, to some at least, the Asia market is worth fighting over. Specialists forecast that air travel will grow by about 8% a year during the next 20 years thanks to rising incomes and lower prices. But the more airlines slash prices, the harder it is for them to operate profitably.

To prepare for future battles, carriers are trying to arm themselves with more routes. Consider that just this year AirAsia announced a new Vietnam joint venture, Jetstar Airways signed an agreement with Singapore's Changi Airport to build a new hub for long-haul passengers and expand its existing short-haul hub at the facility, and Tiger Airways raised $178 million in a four-times covered initial public offering to fund future aircraft deliveries and network expansion.

So far, AirAsia, which is the market leader in passenger traffic and revenue, seems to have the lead. The real scrap at the moment is between Melbourne-based Jetstar and Singapore-based Tiger. Bruce Buchanan, chief executive at Jetstar, and Tony Davis, chief executive at Tiger, are both confident -- almost too confident -- that they will succeed.

"[Because of] our continued cost-reduction exercises, we're able to deliver increasing margins with that growth at the same time," said Buchanan in an exclusive interview with FinanceAsia. "It's a philosophy and culture that's ingrained in the way we operate. We're always looking for ways to do things better in order to drive a stronger competitive platform that allows us to deliver even lower fares to the marketplace."

Davis's business plan is similar. "The model we've adopted is a fairly straightforward one -- if you keep reducing your costs you can then afford to reduce your fares, as you reduce your fares you create more demand, as you create more demand you put in more capacity and so on and so forth," Davis told FinanceAsia.

They have reason to crow. In the six months to December, Jetstar's revenue rose 18% year-on-year to A$1.13 billion ($1.03 billion). Revenue at Tiger, whose fiscal year begins in April, rose 18.7% year-on-year to S$345.6 million ($247.3 million) during the April to December period. Whether the airlines can continue to grow successfully remains to be seen.

Eyes on the prize

"We look at our market share and see huge opportunities for us to grow in Asia," said Buchanan. "We understand the market is quite fragmented and the [airline] landscape in Asia is going to change dramatically as it has in Europe and North America. We think we'll see a strong one or two carriers emerge."

"The market is still very much in its infancy," said Davis on Tiger's growth prospects. "The size of the market here in Asia is significantly larger than Europe or North America, and therefore the fact there are only one or two [other] competitors you can mention is actually a lot better than it would be competing in Europe. The concentration of competition is still very much in its infancy."

Experts are understandably sceptical of this strategy. Can Tiger and Jetstar succeed on growth alone?

"In the medium- to long-term the answer is definitely yes," said Peter Harbison, executive chairman of the Centre for Asia-Pacific Aviation. He defined the medium term as beyond 2015, when Asean open skies are fully implemented. "[But] where the challenges lie is in the short term. Right now, out of Singapore, they compete head-to-head and the scope of markets is limited. There just aren't enough liberalised markets.

"The bottom line is getting from here to the medium term. That's going to be difficult," said Harbison.

Differentiate thyself

Asked how their respective airlines are different, Buchanan and Davis leaned heavily on the crutch of their low-cost models. Each described a cycle where cost savings allow them to offer lower fares, attracting more customers that in turn increases demand and drives growth. With more growth comes greater economies of scale, further cost savings and the cycle repeats.

"The model works on a sort of virtuous circle," said Buchanan, adding that he works to set Jetstar apart through an emphasis on safety, the lowest fares, a great customer experience, great people and delivering operational commitments.

"The key differentiator is that our cost base is lower," said Davis. "We think that we have the lowest cost of any airline in the world, which will give us a very strong competitive advantage. We're not operating wide-bodied aircraft, we're not creating network operations and we don't have lounges or frequent-flyer programmes."

The chief executives of Jetstar and Tiger are betting heavily on Asia's continued passenger traffic growth to sustain their businesses - but along the way they would be well advised to also build brand distinction.

One suggestion for both airlines is to try to distinguish themselves on more than just price. Most aviation specialists agree that successful airlines differentiate themselves. You can do it by dominating a particular market -- think Cathay Pacific Airways in Hong Kong -- or by standing out as an industry leader -- think Singapore Airlines or Qatar Airways -- for passenger comfort. But the key is, distinguishing oneself.

"Differentiation in Asian markets is key, because prices are almost always the same [for the low-cost carriers] on most routes, unless they have a monopoly," said Shashank Nigam, an airline marketing and branding strategist and chief executive of airline blog Simpliflying. "Ultimately, brand differentiation matters. And, if the ticket prices only differ by $10, then I'd have a preference for the brand I have fond memories of."

And, as Nigam put it, when it comes to branding, Jetstar and Tiger still have a lot to learn from their competition. "AirAsia, for example, is known just as much for its food and fun-loving crew, as it is for cheap fares," he said. "Jetstar and Tiger can learn from AirAsia in how to build a lovable brand in Asia."

Of course, the unspoken truth is that Jetstar and Tiger's futures may be secured by their deep-pocketed corporate parents. Jetstar is the wholly-owned subsidiary of Australia's Qantas Group and Tiger is 34% owned by Singapore Airlines (itself partially owned by Singapore-based investment firm Temasek) and 11% owned by the Ryan family, owner of European low-cost leader Ryanair. Business-wise this is sound strategy, but it lacks the buzz low-cost carriers have generated elsewhere.

Without that buzz, it's hard to imagine both airlines will continue to thrive in a region that may be growing, but that will also become more cut-throat as the years go by. 

This story was first published in the April 2010 issue of FinanceAsia magazine.

 

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