What is the macro and industry environment in the Southeast Asian region for the entrance of new budget airlines? What opportunities and challenges are associated with that environment?
The environment for new entrants into the budget or low cost carriers market in the Southeast Asian region has become very competitive in the last few years despite the fact that the low cost carrier industry is still young. One of the most appealing aspects for operating a low cast carrier in Southeast Asia is the size of the market. Moreover, the untapped potential for growth in many countries within the region is great. As stated in the case study, some government regulations have been adjusted, lifted or cancelled and this has brought about a flood of new entrants. While government deregulation is viewed as good news, there are some limitations to the potential of intra-Asia flights. “A major disadvantage of the LCCs in Asia is the smaller geographic areas of domestic economies. As LCCs turn their attention to international routes for expansion opportunities, they would confront regulatory constraints applying in international markets.” (Zhang, 2008). This is key to the development and continued growth of the low cost carriers in Southeast Asia. There are also many challenges and pitfalls when it comes to running an airline, especially if the profit margins are thin. With any airline, be it full service carrier or a low cost carrier, fuel cost is always going to be at the top of the list. Fuel costs for an airline, as a percentage of operating costs, typically runs from 20% to 40%, depending on the price of oil in any given time period (please refer to Appendix A).
The next biggest cost associated with running an airline would customer service and operations. The case study does indicate that AirAsia has entered into an alliance with another low cost carrier Jetstar from