Budget airlines

More fundraising in store as Asia warms to budget airlines

Asia's low-cost carriers will tap debt and equity markets to fund growing market share, says J.P. Morgan transport analyst.
<div style="text-align: left;">
Budget airlines are taking off in Asia (AFP)
</div>
<div style="text-align: left;"> Budget airlines are taking off in Asia (AFP) </div>

As more price-sensitive customers and governments embrace the idea of low-cost carriers (LCCs), which have boosted the affordability of flying, this particular market has grown significantly in Asia in recent years.

The market share of intra-Asia routes operated by low-cost carriers has grown to 25% today, from less than 3% 10 years ago, Corrine Png, head of regional transportation research at J.P. Morgan, said in a telephone interview yesterday. The bank expects their market share to rise further to 30% during the next two years and for the low-cost carrier market size to increase to $23 billion in 2014, from the current $18 billion.

In Southeast Asia in particular, where low-cost carriers are very active, their market share is already 51% because governments have been making it more conducive for the low-cost carriers to expand, Png said.

In the next two to three years, she also expects that the market share of low-cost carriers in the North Asian market will grow significantly from the current 9%, as North Asian governments are becoming more encouraging in terms of policy, as demonstrated by the construction of two low-cost carrier terminals in Japan.

Major low-cost carriers in Asia include Malaysia-based AirAsia, Philippines-based Cebu Air, Singapore-based Tiger Airways, Australia-based Jetstar and SpiceJet of India.

“We are bullish on the budget airline industry in Asia,” said Png, who is based in Singapore and covers regional airlines, aerospace, shipping and logistics in Asia.

And with growth comes expansion, which inevitably leads to a need for fundraising.

The LCC development trends in Asia will likely be similar to the trends in the US and Europe during the high-growth phase of low-cost carriers there — companies raised debt and equity to fund their aggressive expansion, the analyst said.

“Because the [Asian] market offers a significant growth opportunity, we expect low-cost carriers to order more aircraft and some of them have already done so,” she said, adding that there are a few options for how to fund this. One option is debt financing through bank loans and another option is to raise equity.

Just this week, Asia Aviation, which currently owns 51% of budget airline Thai AirAsia, launched an initial public offering, seeking to raise up to $145 million. The deal is expected to price later today.

Malaysia’s AirAsia, which is Asia’s biggest low-cost carrier and owns the remaining stake in Thai AirAsia, has repeatedly stated its intention to seek separate listings for its associate businesses in both Thailand and Indonesia.

The Asia Aviation offering follows the IPO of Singapore-based Tiger Airways in 2010, which attracted a lot of interest, helping it to raise $178 million. In a release announcing the outcome of the IPO, Tiger Airways’ president and CEO at the time, Tony Davis, said he was “absolutely delighted” with the response from both retail investors in Singapore and major global investors, and he took it as a “strong vote of confidence in [the company’s] low-cost business model and the growth potential of the airline”.

As low-cost airlines boost their presence in Asia, China Eastern Airlines and the Qantas Group also announced in March the establishment of Jetstar Hong Kong, the first low-fare airline based in Hong Kong. The new airline is expected to start operation in 2013.

“It’s not just a zero-sum game. Low-cost carriers stimulate new travel demand by making flying more affordable and by flying to new destinations, rather than just taking passengers away from full-service airlines,” Png said. “The reason why airports are trying to promote themselves and attract low-cost carriers is that they realise that low-cost carriers actually, by offering cheaper fares, stimulate travel demand. This is a new growth driver for tourism.”

¬ Haymarket Media Limited. All rights reserved.