Budget airlines in Asia risk losing their price advantage as fuel prices rise and Middle East tensions disrupt key routes, forcing carriers to raise fares and cut expenses.
Low-cost carriers rely on high passenger volumes and low fares, leaving them with thinner margins and less room to absorb fuel price swings and route disruptions than full-service airlines.
Airline executives, speaking at the Aviation Festival Asia conference in Singapore, said they are now trying to cut costs, adjust fares and shift routes to avoid passing too much of the increase on to passengers.
“[We have to] adjust the fares, and at the same time, stimulate the demand,” Vissoth Nam, CEO at AirAsia Cambodia, told CNBC’s Monica Pitrelli during a panel on Thursday. “Otherwise, we don’t have travelers.”
India’s SpiceJet said the Middle East conflict has significantly affected its operations due to heavy traffic between India and the region.
“Dubai alone has 77 flights a week from India, and that’s absolutely a huge impact for us from a route and loss of revenue perspective,” said Kamal Hingorani, the chief customer officer at SpiceJet.
While higher fuel costs have not yet fully hit the airline, Hingorani said prices are set monthly and could rise further in April.
The Investment Information and Credit Rating Agency of India on March 26 changed its outlook on India’s aviation sector to negative from stable, citing the weaker Indian Rupee against the U.S. dollar and higher fuel prices. Fuel prices were 5.4% higher in March from a year earlier and are expected to rise further in April.
Hingorani said if fuel prices rise to an unmanageable level, the airline “may have to absorb some [costs]” because passing on high fuel surcharges would hurt demand.
Long-haul strength
Not all airlines have been affected equally, however.
Zipair Tokyo says it has performed relatively well compared with other budget airlines, partly because its routes avoid the Middle East and have not been disrupted by the conflict.
The airline, which operates a fleet of eight planes on mid- to long-haul international flights, has also seen strong demand during Japan’s cherry blossom season, particularly in April.
“With this crisis, there are some routes that have become strong while others have weakened,” said Brendan Sobie, an aviation analyst at Sobie Aviation. Long-haul routes have generally remained resilient.
However, fuel prices still directly affect costs, Yasuhiro Fukada, incoming chief executive and co-founder of Zipair, said, especially because the airline carrier does not impose fuel surcharges.
While Japan has domestic oil reserves and is procuring crude from the United States, Zipair told CNBC in an email that supply conditions could still become more challenging depending on how the conflict develops.
Its parent company, Japan Airlines, implemented a fuel surcharge policy on international flights on Feb. 27 due to the “unprecedented rises” in fuel prices.
Zipair intends to double its fleet to over 20 aircraft by 2032, Fukada said.
Airlines turn to tech
Low-cost carriers are also turning to technology to reduce costs.
Zipair said on 26 Feb that its flights would be equipped with Starlink satellite internet at no charge to passengers.
The service allows airlines to stream entertainment to passengers’ devices instead of installing heavier in-flight entertainment systems, reducing maintenance and fuel costs.
SpiceJet said its subsidiary SpiceTech develops in-house software for customers and operational systems, allowing the airline to cut nearly 80% of its technology vendors and reduce expenses.
This, Hingorani said, was “fundamental for our survival … because [SpiceTech is] a subsidiary and not our own company directly, it also is doing a lot of work for global airlines on those things.”
