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No-Frills Carriers Under Threat as Asia's Airlines Battle Rising Fuel Bills

  • Ron Corben

Asia's airlines are under pressure from rising fuel costs. Hardest hit are the new low-cost airlines serving the region

In recent days, oil prices have edged past $70 a barrel - and airlines are feeling the pain.

The high costs have led airline executives to warn of a shakeout among so-called no-frills carriers. About 30 of these low-cost regional airlines have emerged over the past few years in Asia as many countries liberalized aviation regulations.

Tony Fernandes, the chief executive of one of the best-known discount carriers, Air Asia, has warned high fuel costs may force some operators out of business. Others may have to merge with rivals.

Mr. Fernandes says while Air Asia hopes to keep fares low it is getting "tougher and tougher" to do so given current fuel costs.

Jet fuel generally accounts for about 40 percent of the costs for discount carriers - in an industry where competition is fierce among both low-cost and traditional carriers.

Methit Mukdasiri, a transport analyst with Boston Consultants in Bangkok, says the squeeze between costs and earnings is already evident.

"This is a two-way pressure for the low cost airline. This does make it tough for the low-cost airlines to compete if they already squeezed down their [profit] margins and squeezed down on their operating costs," said Methit Mukdasiri.

In the past month, the bigger Asian carriers, such as Thai Airways, Hong Kong's Cathay Pacific, and China Eastern Airlines have reported sharp declines in earnings, due largely to fuel costs.

Anthony Phillips, a spokesman for Airbus Industries in Singapore, says fuel costs are adding pressure on all carriers.

"Without exaggerating, certainly the current cost of fuel is putting pressure on carriers - both the long-term established flag carriers as well as low-cost," he said.

Mr. Phillips agrees with other experts that the low-cost sector in Asia is likely to see some consolidation.

"We've seen here in Singapore within the last year or so effectively three new low-cost, no-frills airlines already under pressure of competition not solely for the cost of fuel, but two of them are talking about some kind of merger," he said.

Competitive pressures and rising costs led Thai carrier Phuket Air to curtail operations after suffering losses. The no-frills airline has additional problems - some European aviation authorities have placed it on a safety warning list.

Not all low-cost carriers are reporting bad news. Singapore budget carrier Tiger Airways - a subsidiary of Singapore Airlines - last month reported it had carried half-a-million passengers - less than a year after starting operations.

Thai low-cost carrier, Nok Air, also has an upbeat outlook. Nok Air has so far succeeded in riding out the competitive storm by focusing on the domestic Thai market.

Nok Air chief operating officer, Patee Sarasin, says he remains optimistic for the outlook for no-frills carriers.

"It's going to continue to grow. Certainly in Asia it's not in the maturity stage at all," he said. "The airline industry in Asia is still at the infant stage. The business is going to grow and more and more people are going to be flying not only in Thailand but also in Indochina."

Industry analysts also say that growth in the China and India, which have expanding middle classes, may act as a vital cushion to the industry as it weathers the clouded outlook from high oil prices.

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