A budget take off (maybe)

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Hong Kong is about to get a new low-cost airline. Or will it? Shirley Zhao explores how Jetstar's arrival may change the way we fly… should it ever get off the ground

For years, Hongkongers have looked on jealously as our Asian neighbours have become budget flight hubs. Kuala Lumpur was one of the first, booming as the Malaysian low-cost phenomenon AirAsia spread its mix of 'crazy' fares and reliable service across the region. Tiger Airways followed, launching in Singapore with a similar raft of affordable tickets to the Southeast Asian market. And ever since, Manila, Seoul, Shanghai, Hanoi, Osaka and many other cities have become home to budget airlines.

Around the world, the concept of the budget carrier has been long established, working off a low-cost model which introduces traditional elements of flying – such as meals, in-flight entertainment, seat allocation and check-in baggage – as optional, charged extras, all in exchange for reduced fares. But over the past decade, the budget market in Asia has boomed. There are now 12 low-cost airlines flying to Hong Kong from around Southeast Asia, Australia and Japan. None of them, however, is based in the fragrant harbour.

However, this may soon change: Jetstar Hong Kong, a budget airline jointly operated by China Eastern Airlines and Australia's Jetstar, is coming, and it may well be a gamechanger for the local travel industry – as well as for Hongkongers looking for bargain flights. According to Jetstar Hong Kong, the airline plans to start operating three planes this year, expanding its fleet to 18 aircraft by 2015, focusing on secondary cities in mainland China, Japan, South Korea and Southeast Asia. It says it's aiming to set tickets – with fuel surcharge included – at half that offered by full-service airlines, hoping to attract young flyers, backpackers, weekend travellers and frequent-flying businesspeople. "Hong Kong has a population of seven million," says Nick Rohrlach, executive vice president of Jetstar Hong Kong, "but unlike other major Asian hubs, it doesn't have its own low-cost carrier. We see a great opportunity to bring the low fares revolution to Hong Kong."

After last year's announcement of Jetstar's plans to enter Hong Kong, there's been plenty of talk within the industry about how the SAR's existing airline players, such as Cathay Pacific, Dragonair and Hong Kong Airlines, would react – or, indeed, whether any of them would launch a budget airline of their own.

Cathay Pacific says it has no plans to launch its own low-cost carrier, adding that the company has 'no objection' to budget airlines being based in the city and that it has been competing with 'dozens of them every day on different routes'. "We also compete in the low-fare sector by offering extremely attractive fares in our economy class cabins," a company spokesman tells Time Out. "In addition, we stimulate travelling through special promotion programmes." Last year, Cathay started a 'fanfares' programme that provides a limited amount of cheap tickets in a short period.

Originally scheduled to start operating in the mid-year, Jetstar Hong Kong's launch has now been delayed due to regulatory restrictions. The company expects to gain authorities' approval within the second half of this year but Michael Fung Ka-yiu, executive director of the Aviation Policy and Research Centre of the Chinese University of Hong Kong, says it's 'very complicated'. "Neither Jetstar nor China Eastern is based in Hong Kong," says Fung. "The major shareholders of Jetstar Hong Kong are not local companies." Fung says if the low-cost carrier wants to register here, it must use the city as its base for operations. "But can all the decision-making really be done here?" he asks. "Or will it happen on the Mainland or Australia? There is room for discussion."

Regulatory issues are only the first step. Beyond that, there's the much bigger issue of making the budget carrier model work in Hong Kong – a city which has never successfully sustained a low-cost carrier. Indeed, the shadow of Oasis Hong Kong, a budget airline based in the SAR, which failed less than two years into its operations, still looms as a cautionary tale. Founded in 2005, Oasis provided long-haul routes to London and Vancouver. In 2008, Oasis announced that it would stop operations after suffering an accumulated loss of $1billion since its launch.

According to Fung, the collapse of Oasis is a reminder of the difficulties of running budget airlines in the city. He says the performances of low-fare airlines are subjected to three major factors: airport charge, oil prices and modes of operation. In the case of Oasis, these three factors all tended against its success.

For starters, Fung believes the charges of Hong Kong International Airport are too high for many budget airlines. "To reduce the cost of operation as much as possible, many low-cost carriers choose to operate in secondary airports," he says. According to an analysis report released last year by the International Air Transport Association, the cost of operating at HKIA is twice the average for the whole Asia-Pacific region. With the fast development of budget airlines in the region, some companies have asked the Airport Authority to grant discounts but so far it hasn't responded to these requests.

Oasis' failure also came at a time when oil prices were skyrocketing to more than US$100 a barrel, a 'fatal blow' according to Fung. And the airline's long-haul mode of operation was rare and hasn't proved successful in the world. "The cost of budget airlines has to remain low," he says. "That's why most of these airlines choose to fly short or regional routes."

Despite Oasis' demise, Jetstar Hong Kong, however, remains optimistic. "The Oasis experience was very different," says Rohrlach. "Jetstar is the largest low-cost carrier by gross revenue in the Asia-Pacific region and has been operating for nine years. It has a fleet of 100 aircraft today. The Jetstar brand now operates airlines in Australia, New Zealand, Vietnam, Japan and Singapore, and therefore has a wealth of experience bringing low-cost services to new markets across Asia. There are challenges when starting any new operation – but we have the experience to meet these challenges."

The company also cites its experience in Jetstar Japan, which launched last year, as proof. According to the firm, the Japan offshoot has already carried more than one million passengers on its domestic network. By 2015, when it hopes to have its full fleet operational, the company expects to generate $8b every year for the Hong Kong economy through local employment, supplier contracts and tourism spending.

However, there remain doubts as to whether Hong Kong's airport has the capacity to handle more airlines. According to the airport, last year it handled almost 57 milllion passengers and more than 350,000 aircraft movements. Authorities say the airport has reached these traffic levels three years ahead of its original forecast, and they believe the capacity of the existing two-runway system of 74 million passengers per year may reach saturation point earlier than expected. Says Fung: "Until the third runway is built, airlines won't be able to start many new flights. The capacity of the airport simply won't allow it."

Indeed, the Airport Authority is planning a third runway, expected to start next year, pending all relevant approvals, and to cost an estimated $136b. The new three-runway system would begin in 2023.

"In the long run," says Fung, "the government will have to consider its policy on the development of the airline industry. Hong Kong sits against the Pearl River Delta, where there are not only rich people, but also many low-income people who want to travel. There is a market for budget airlines. Resources have become less – and thus more precious – nowadays. We should all ask ourselves: which one can bring more added value – low-cost carriers or traditional airlines?"


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