Dropping like flights
Following Oasis Hong Kong’s liquidation announcement early last month, murmurs are mounting that the end of the budget airline phenomenon is nigh. But is there any truth behind the terror and is it even cause for travel-retail concern? Nushi Wijewardena gets the lowdown on low-cost flights
At three separate airports, in three different corners of the world, the same scenario is unfolding at the exact same time. Chaos is building, as hundreds of passengers are stranded at foreign airports, wondering when and how they will get to their destination and what happened to their flight.
On April 9 this year, husband-and-wife team Raymond and Priscilla Lee announced that in the face of rising costs, their low-cost long-haul airline Oasis Hong Kong was being liquidated just 18 months after its launch. No buyer had stepped up to the plate when Frontier went to print, and many passengers had still not been compensated or given alternate travel arrangements.
The industry has been quick to contemplate what this means for the travel sector. The fall of Oasis is seen by many as symbolic of more ills to come, as the budget airline that famously set up low-cost long-haul routes, flying between Hong Kong, London and Vancouver for as little as US$130 a return journey, ground to a halt. The skyward soar of oil prices since the airline’s launch in 2006 and the more recent rise in the cost of debt have meant that the model of budget flights was no longer sustainable for Oasis Hong Kong and, creating more worry lines on industry brows, many other budget airlines.
Low-cost troubles
In the same week as the Oasis debacle, four US domestic airlines (Skybus, Aloha, Champion Air and ATA Airlines) declared bankruptcy; in February Ryanair announced that it was expecting its profits to halve if oil prices stayed constant, and in March, easyjet had its share price tumble 17% in a single trading day.
The Centre for Asia Pacific Aviation (CAPA) has predicted that 2007-08 will bring the Indian airline industry a combined loss of US$700 million. “This year is going to be tough and we cannot rule out this closing down of operations possibility in India. Weak carriers are more prone,” Kapil Kaul, CAPA chief executive officer India, said in statement.
But the impact is not limited to budget airlines alone. Even mainstream airlines are not immune to rising fuel prices and the difficulty of debt; and this is starting to show on their bottom line. British Airways has announced that in light of trying times ahead, it has cut profit margin forecasts. Prices would have to go up just to cope with the costs, but more significantly, with fewer budget airlines around to drive competition, these mainstream airlines no longer need to price themselves as aggressively to get their share of passengers and offset increased costs with revenue. Just as the rise of low-cost flights revolutionised the entire travel industry and influenced prices across the board, their decline is also having an industry-wide effect.
And then there are the waves that will be made in the Asia Pacific region, where the fallen airline originated. Oasis’ liquidation comes just as the region began cranking the wheels to get the budget airline phenomenon in the region off the ground. Many industry players vocally entertained high hopes that it would revolutionise travel in the region, expanding the travel industry exponentially; but after the Oasis news came, there ensued an uncomfortable silence from Asia Pacific. Statements from regional airlines and aviation authorities were hard to come by.
Perhaps this is because the industry was working in overdrive to clean up the mess left by Oasis. Cathay Pacific and Virgin set up extra flights to pick up stranded passengers (at an extra cost) and airports tried to accommodate those left behind.
But more likely, the region saw the liquidation as a sign of trouble ahead. Asia Pacific has invested heavily in anticipation of a budget airline boom: in March, Malaysian budget long-haul carrier AirAsia X announced that it had ordered 10 Airbus A330-300 aircrafts with a value of US$2 billion, and was contemplating the purchase of around 50 Airbus A320s and A321, each with a catalogue price of US$70-80m, as part of its plans to expand. AirAsia X is even planning the launch of a daily low-cost flight between Kuala Lumpur and London, for which it would purchase or lease two Airbus A340s. Chief executive officer Azran Osman-Rani evidently did not predict that times would be tough for aviation.
He is not alone, however: investment in the low-cost carrier industry has been growing in other parts of the region too. In March 2006 the Civil Aviation Authority of Singapore (CAAS) opened the doors to a S$45m (US$33.2m) budget terminal that could accommodate 2.7m passengers per annum. In March this year, CAAS announced a S$9.8m (US$7.2m) expansion project for the terminal, with chief executive officer Lim Kim Choon saying in a statement: “Increased air transport liberalisation in this region, means airlines – including low-cost carriers – now have greater opportunities to rapidly expand their air network and increase their flight operations.” The whole region has its fingers crossed that Mr. Choon is correct.
The amount of investment that is still being poured into low-cost carriers is heartening for those who dread the end of a budget travel era. If the fall of some budget airlines signifies nothing more than the bursting of an unrealistic bubble of budget air travel, then the panic can simmer down slightly.
Low-cost, low value?
It is difficult to predict whether low-cost carriers in the Asia Pacific region will manage to kick their way afloat, or whether the region’s budget travel boom is not to be – not yet, at any rate. But the significance of either scenario for the travel-retail industry is just as hazy. Many suppliers and retailers slip into a sort of giddy euphoria when the words, “Asian budget airlines” are uttered, as visions of discerning passengers with plenty of disposable cash pouring into duty-free shops come flooding into their minds. But according to Euromonitor International, the increased number of passengers that budget airlines bring does not automatically spell more success for travel-retailers across the board.
In a 2006 report on the European travel-retail market and its evolution since the arrival of budget airlines, the research company suggested that despite the growth of the industry as a whole, budget airlines brought with them a series of challenges that the travel-retail sector had to address in order to remain successful. “The trend towards low-cost airlines has resulted in consumers travelling more and the airline industry rebounding. This has had a positive influence on the performance of the duty-free market, which grew by 3% between 2004 and 2005. Despite this growth, the challenge for duty-free retailers is to understand how their consumer base is evolving and how to effectively tap into this market,” Euromonitor International claimed.
The report also suggested that the items that would be commonly purchased by travel-retail shoppers had changed in type and in value. Allegedly, in European travel-retail, budget airlines had taken the emphasis from high value and gifting items such as fragrances, to lower value, practical daily-use items such as cosmetics and confectionery. “Confectionery has gained a growing profile in duty-free outlets, showing growth of 8% between 2000 and 2005. Confectionery is ideal for attracting low-cost travellers into stores as it not only serves gift giving needs but it can also be used for immediate consumption,” Euromonitor’s analysts claimed.
Indeed the face of travel-retail has changed since the 1990s. In most large European airports, travel-retail has unarguably lost an element of its high luxe environment, making room for familiar high street outlets. While the luxury spirit, fragrance and high-end tobacco sectors still see their share of activity, it is nothing compared to the flurry of business taking place around outlets stocking high-volume items.
Euromonitor International explains this by claiming: “Duty-free shoppers can no longer be characterised as business travellers or families with above average wealth. Rather, they are coming from all social backgrounds and increasingly from a wider range of geographical destinations. One strategy for retailers is to attract travellers who are not necessarily committed duty-free shoppers, but can be attracted by convenience or impulse products.”
But perhaps this is to slightly overblow – or at least misunderstand – the impact of the budget airline on travel-retail. Euromonitor’s claim that with the rise of budget travel, purchasing went from high value, luxury product to high volume, low-cost products, may be accurate, but the report may run the risk of confusing correlation with cause. While the two phenomena may have a coincidental relationship with a strong correlation existing between them, this does not imply a causal relationship. The late 1990s saw many significant changes occurring to the travel-retail industry, the most notable being the switch from duty-free to duty-paid within the EU. With no significant saving to be made on high-end luxury goods in travel-retail, it is just as likely that it was this piece of legislation – not the low-cost carrier – that caused the shift from high-value to high-volume sales in travel-retail.
Many industry voices also disagree that the consumer demographic has changed since the rise of the budget airline. According to the European Travel Retail Commission (ETRC), the passenger type has not changed since budget airlines became widespread. “The same guy who flies up front on business may fly budget on a weekend break,” says Frank O’Connell, president of the ETRC.
Suppliers agree that budget airlines are not as disruptive to luxury goods sales as Euromonitor suggests. Drinks giant Pernod Ricard believes that with a considerable saving made on the flight, consumers will now be willing and able to spend elsewhere on their vacation – which begins at duty-free shops.
The Asian phenomenon
The Asian travel-retail industry may see none of these changes occur. In the Asia Pacific region, the low-cost carrier phenomenon is coinciding with a much larger, more impactful occurrence: the rise of the average income. With the region’s colossal growth over the last decade, people are experiencing purchasing power for the first time in their lives and they are exercising it in the travel-retail area when they travel. “There are a lot of people now catching planes in Asia, who have never travelled before in their lives. They’ve got money for the first time and they want what other people have,” says André Levy, director of drinks and tobacco supplier Protégé International. “I don’t think Asian travel-retail will switch to low-cost, high street items like confectionery just because of budget travellers appearing on the scene. I think Asian travelers want the same things we have been consuming in the West for a long time.”
This invariably means high value, big brands, like the ones that exist in the fragrance and spirits categories. It will be a long time before travel-retail in Asia Pacific starts resembling everyday shops that exist in domestic markets simply because the region is a far less mature market.
But culture also comes into the argument. As Levy says, “The Asian market is all about gifting. If you’re Chinese and go on a trip, you have to bring back gifts. This will not be high volume, everyday use gifts: they will be something special, that show off the gifter’s status and is special.”
The budget traveler in the Asia Pacific region, therefore, is a completely different animal to that in the West. Often, they will be new to international travel and be experiencing all that travel-retail has to offer for the first time. It is not the same as international travel in Europe a decade ago, when budget airlines first served the continent, because they were picking up a population that already lived in mature markets. It is even incomparable to European travel two or three decades ago, when international travel became commonplace, because at the time, flights were so expensive that it was largely limited to businessmen and wealthier families.
Asia Pacific budget travellers, just like the region from which they originate, are a force of their own, and will indeed revolutionise the travel-retail industry, but only in that they will make it grow. High-value luxury items will most likely remain the focus, but with more travellers, the sector is set to balloon.
Small wonder that so many large multinationals are pouring into the region’s travel-retail channel, bringing with them their super-premium, luxury liquors, jewellery, tobacco, fragrances, electronics, cosmetics, and clothing and luggage lines. Small wonder also that the whole industry is watching the low-cost carrier and its performance like hawks: they will have a definitive influence on making or breaking the region’s travel-retail.
It is difficult to predict whether low-cost carriers in the Asia Pacific region will manage to kick their way afloat, or whether the region’s budget travel boom is not to be – not yet, at any rate. But the significance of either scenario for the travel-retail industry is just as hazy. Many suppliers and retailers slip into a sort of giddy euphoria when the words, “Asian budget airlines” are uttered, as visions of discerning passengers with plenty of disposable cash pouring into duty-free shops come flooding into their minds. But according to Euromonitor International, the increased number of passengers that budget airlines bring does not automatically spell more success for travel-retailers across the board.
In a 2006 report on the European travel-retail market and its evolution since the arrival of budget airlines, the research company suggested that despite the growth of the industry as a whole, budget airlines brought with them a series of challenges that the travel-retail sector had to address in order to remain successful. “The trend towards low-cost airlines has resulted in consumers travelling more and the airline industry rebounding. This has had a positive influence on the performance of the duty-free market, which grew by 3% between 2004 and 2005. Despite this growth, the challenge for duty-free retailers is to understand how their consumer base is evolving and how to effectively tap into this market,” Euromonitor International claimed.
The report also suggested that the items that would be commonly purchased by travel-retail shoppers had changed in type and in value. Allegedly, in European travel-retail, budget airlines had taken the emphasis from high value and gifting items such as fragrances, to lower value, practical daily-use items such as cosmetics and confectionery. “Confectionery has gained a growing profile in duty-free outlets, showing growth of 8% between 2000 and 2005. Confectionery is ideal for attracting low-cost travellers into stores as it not only serves gift giving needs but it can also be used for immediate consumption,” Euromonitor’s analysts claimed.
Indeed the face of travel-retail has changed since the 1990s. In most large European airports, travel-retail has unarguably lost an element of its high luxe environment, making room for familiar high street outlets. While the luxury spirit, fragrance and high-end tobacco sectors still see their share of activity, it is nothing compared to the flurry of business taking place around outlets stocking high-volume items.
Euromonitor International explains this by claiming: “Duty-free shoppers can no longer be characterised as business travellers or families with above average wealth. Rather, they are coming from all social backgrounds and increasingly from a wider range of geographical destinations. One strategy for retailers is to attract travellers who are not necessarily committed duty-free shoppers, but can be attracted by convenience or impulse products.”
But perhaps this is to slightly overblow – or at least misunderstand – the impact of the budget airline on travel-retail. Euromonitor’s claim that with the rise of budget travel, purchasing went from high value, luxury product to high volume, low-cost products, may be accurate, but the report may run the risk of confusing correlation with cause. While the two phenomena may have a coincidental relationship with a strong correlation existing between them, this does not imply a causal relationship. The late 1990s saw many significant changes occurring to the travel-retail industry, the most notable being the switch from duty-free to duty-paid within the EU. With no significant saving to be made on high-end luxury goods in travel-retail, it is just as likely that it was this piece of legislation – not the low-cost carrier – that caused the shift from high-value to high-volume sales in travel-retail.
Many industry voices also disagree that the consumer demographic has changed since the rise of the budget airline. According to the European Travel Retail Commission (ETRC), the passenger type has not changed since budget airlines became widespread. “The same guy who flies up front on business may fly budget on a weekend break,” says Frank O’Connell, president of the ETRC.
Suppliers agree that budget airlines are not as disruptive to luxury goods sales as Euromonitor suggests. Drinks giant Pernod Ricard believes that with a considerable saving made on the flight, consumers will now be willing and able to spend elsewhere on their vacation – which begins at duty-free shops.
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