The proliferation of low-cost carriers (LCCs) is transforming the aviation business – in Taiwan as well as elsewhere around the globe. Although the first budget airline to serve Taipei, Jetstar Airways of Singapore, entered the market a decade ago, the local LCC business has been expanding rapidly in just the past few years.
There are now 17 LCCs flying the Taiwan route, including two new domestically based carriers in addition to foreign airlines from Singapore, the Philippines, Japan, South Korea, Hong Kong, and China. Last year the 3.2 million LCC passenger-trips – an increase of 12 times in six years – accounted for 7.3% of Taiwan’s international travel.
2013 was a milestone year, with a number of major players, including Peach Aviation and Vanilla Air, both of Japan, and Scoot Airlines of Singapore, setting up in the local market. All three are offering flights between Taipei and Japan, sparking a travel craze bringing Japanese backpackers to Taiwan, and – helped by the sharp depreciation of the Japanese yen–Taiwanese backpackers to Japan. Spring Airlines, China’s leading LCC, also kicked off cross-Strait service in 2013.
Last year saw the entry of more players, including the first two indigenous LCCs. One of them is Tigerair Taiwan, a 90/10 joint venture between Taiwan’s China Airlines and Tiger Airways, a subsidiary of Singapore Airlines that was established in December 2003. “In principle, Tiger Airways will focus on Southeast Asia, including India, leaving North Asia, including Japan, Korea, and China to Tiger Taiwan,” explains Tigerair Taiwan CEO Kwan Yue. The second indigenous LCC is V Air, a 100%-owned subsidiary of TransAsia Airways. Another recent entrant to the market is VietJet of Vietnam, which inaugurated its service on December 12 last year, mainly serving Taiwanese businessmen with investments in Vietnam and Vietnamese women married to local husbands, returning on family visits.
The LCCs serving Taiwan are enjoying a booming business, with the average load factor reaching nearly 90% on flights to Singapore and 80% to Tokyo and Osaka, according to Civil Aeronautics Administration (CAA) data. Spring Airlines’ flights from Shanghai to Taoyuan and Kaohsiung average load factors of more than 97%; of the passengers, 70% are from China and the rest from Taiwan. Many of the Chinese travelers are members of group tours organized by Shanghai Spring International Travel Services, the parent firm of Spring Airlines.
For many of the first-time Taiwanese travelers on an LCC flight, the no-frills nature of the service has required some getting used to. When the inaugural Tigerair Taiwan flight took off on September 26 last year from Taoyuan International Airport bound for Singapore, representatives of the Taiwan media were waiting at Changi Airport to interview the passengers about their reaction to budget travel. Taller passengers reported feeling cramped during the more than four-hour flight, especially when those directly in front of them reclined their seats, and in the absence of an in-flight entertainment system, some passengers said that they had passed the time watching videos on their own tablet PCs or listening to music on an MP3.
About half the passengers had ordered meals from a menu featuring traditional Taiwanese dishes, including braised tender pork chop with rice (NT$200 or US$6.70) and pumpkin rice noodles (also NT$200). Some ate their own lunchboxes or snacks, expressing some embarrassment when reminded by flight attendants of the airline’s policy prohibiting customers from bringing their own food and drink aboard.
But the flight was certainly a success in terms of load factor – the 180-seat cabin was just three passengers short of being fully occupied. When the plane returned to Taipei after refueling, there were 176 passengers on board.
That both flights were nearly full was undoubtedly the result of the airline’s vigorous price promotion. Within three and a half hours of the online rollout on September 2, 10,000 tickets for flights departing Taipei up to March 28, 2015 had been snapped up at the incredibly low price of NT$888 (US$30), including tax, one way. The NT$1,445 (US$48) charged for the return leg was higher due to the more expensive airport tax in Singapore, and the round-trip cost came to only NT$2,350, less than half the fares of other LCCs for the route and lower than a round-trip ticket on the High Speed Rail between Taipei and Kaohsiung.
Since starting business, Tigerair Taiwan has been expanding its reach quickly, taking advantage of Thailand’s open-sky policy to inaugurate flights to Bangkok and Chiang Mai in November, and launching service to Macau in December from both Taoyuan and Kaohsiung, thanks to a new aviation agreement between Taiwan and Macau that removes restrictions on the number of airlines and flights on the route. The airline plans to open service to Tokyo in April, and to South Korea and Vietnam within this year. It also plans to expand its fleet from the current three aircraft to six before the end of this year and to 12 within three years.
“We blend localized service with an international brand,” says Kwan Yue. He notes that Taiwanese passengers, who account for half the customer, appreciate such localized service as “Taiwanese foods, communication in local language, and hospitality, the hallmark of Taiwanese people.” After arrival in Singapore, passengers can transfer to Tiger Airways flights headed for 37 other destinations, including Indonesia and Australia.
Kwan points out that Tigerair Taiwan is mainly targeting cost-conscious customers, including young people, junior businesspeople, and retirees. “In view of their educational level, there should be no difficulty for many Taiwanese people to understand the merits of LCC service,” says Kwan.
The inaugural flight of V Air for Bangkok on December 17 last year also caused quite a stir, as the company had run a vigorous online campaign to boost its public profile. The promotion invited visitors to the website to pile up icons representing the airline’s mascot, the Taiwanese black bear, with the company pledging to cut the ticket price in proportion with the number of participants. Eventually, 200,000 persons took part and the company slashed the fare for the first batch of 15,000 tickets for Bangkok to a mere NT$520 each, excluding airport tax. The volume of would-be buyers was so high that for a time the ticketing system was paralyzed.
The inaugural flight carried 185 passengers in its 194-seat cabin. Passengers had rather large space, as the seats were 32 inches away from the one in front, similar to the economy-class seats of conventional airlines. Many relished the in-flight Taiwanese delicacies available, including rice with pork chop (NT$250), fried salty chicken (NT$150), and meat balls (NT$150). The plane landed at Don Mueang Airport, Bangkok’s older airport used mainly for domestic and LCC flights, after the three-hour flight. The passengers spent less than NT$2,000 for the round trip, compared with the normal rate of over NT$10,000.
Early this year V Air kicked off flights to Chiang Mai and charter flights to Cambodia’s Angkor Wat and it plans to open service to South Korea and Japan in the second quarter after taking delivery of its second plane. The company intends to expand its fleet to four or five planes flying to eight or 10 destinations within this year before adding another two or three planes next year.
The foreign LCCs welcome the participation of the two indigenous newcomers, saying they can help enlarge the pie, as the share of local LCC service is still far from the global average of 30%, with the rate in some mature markets even topping 40%. The LCC share in Europe reportedly now stands at around 35% and in Singapore about 30%.
“The entry of multiple LCCs can expand the pie of the Taiwanese market,” says Liu Pei-chi, Jetstar Airways’ market superintendent for greater China. “Taking short overseas trips on LCCs may become a fashion among Taiwanese people in the future.” For his part, Tigerair Taiwan’s Kwan expresses confidence that LCCs can achieve a 25% market share in Taiwan within the next five years or so.
Han Chen-hua, deputy chief of the CAA’s air transport section, says that the launch of Taiwan-based budget carriers will give a strong boost to the local LCC market, though he stresses that local carriers will have to develop their own special features in order to attract business beyond Taiwan.
Another CAA official is also upbeat about the prospects of LCCs in Taiwan, pointing to Taiwan’s advantageous location with convenient access to major Asian cities, a mere 90 minutes for flights to Macau and four and a half hours to Singapore, the farthest away. Although the recent drop in international oil prices has slashed fuel costs for both LCCs and conventional carriers, observers see it as particularly helping the LCCs by increasing their ability to solicit customers with low fares.
The LCC experience
In order to bring down costs, LCCs minimize service. All tickets are sold online and customers cannot return tickets or change flights, nor can they designate seats without paying an extra fee. Most in-flight services, including drinks and meals, are chargeable options, and passengers must pay for carry-on luggage that exceeds a certain weight, normally 15 kilograms. All checked luggage is chargeable. There is only one class of service, and the space is usually rather narrow so as to accommodate the maximum number of passengers. On the other hand, LCCs generally fly new planes to assure safety and cut maintenance costs, and the fares typically amount to only 40-50% those of conventional flights.
LCC service has become popular mostly in regional markets, for flights of up to four to five hours. Due to the shorter flight time, the inconvenience of bare-bones service and narrow seat space is more bearable. “LCCs provide a vehicle for passengers to arrive safely at destinations on time, while generating savings allowing them to have an extra day of travel,” says Kwan Yue. “LCC s only offer you what you really want and need, while regular airlines provide a comprehensive package, no matter whether you actually need every component.”
In recognition of the growing role of LCCs, some countries have built airports dedicated to LCC service. Kuala Lumpur International Airport 2, opened in May 2014, claims to be the largest LCC airport in the world, and the Kansai International Airport in Osaka constructed a second terminal for the dedicated use of Peach Aviation, Japan’s largest LCC and fourth largest airline. Many LCC airports look more like a bus terminal than an airport, lacking the luxury-goods shops, VIP lounges, and other facilities usually seen at larger airports.
Some 20 LCCs, including the three indigenous carriers of Spring Airlines, West Airlines, and 9 Air, are serving the Chinese market, where they have a 7% market share. Spring Airlines, launched in May 2004, now owns a fleet of 32 A320s with an average age of four years and serves 76 domestic and seven international routes. The company expects to expand its fleet to 60 planes by the end of 2015 and 100 by 2018.
The rapid growth of the LCC business has brought increasing pressure for the full-service carriers (FSCs) in Asia. Singapore Airlines, for example, saw net profits drop to US$288 million in 2013, one-sixth of the peak level in 2006, and spent 150 million Singapore dollars in 2013 to renovate eight planes by increasing the number of first- and business-class seats to retain premium business travelers, who now generate 40% of its ticket sales. In recognition of the LCC trend, the airline in November 2011 had also set up an LCC arm, Scoot, which now has a fleet of six planes flying to 12 cities.