Korean Air counters Tiger threat with its own LCC unit

Korean Air (KAL) has moved quickly to address the threat of Tiger Airways’ planned JV in the South Korean market by announcing plans to launch its own LCC unit for international routes in May-08, subject to regulatory approvals. Investors welcomed KAL’s foray into the budget airline segment, sending the airline’s shares up 7% following the announcement. In Jun-07, KAL stated it would launch an LCC unit within three years as a display that it “shall no longer remain indifferent to invasion of LCCs from China and Southeast Asia into the Korean market”. KAL has brought forward these plans following Tiger Airways’ announcement earlier this month that it plans to establish a JV LCC airline with the Incheon City Government. Incheon Tiger Airways hopes to be operational by Aug-08, initially operating up to five A320s domestically. It later plans to expand its fleet to ten A320s as it targets international opportunities, subject to Government approval, in Japan, China, east Russia and Mongolia. KAL’s LCC unit, tentatively named Air Korea, will offer international services from a base at Incheon Airport to China (Shandong and Hainan provinces), Japan (except Tokyo), Thailand and Malaysia with three A300s and two B737s (with maintenance to be outsourced to KAL). A300s are not the typical choice for LCCs, with seating for around 266 passengers in a two-class configuration. Air Korea will have start-up capital of USD21.5 million (similar to Incheon Tiger Airways’ initial capital) and "gradually plans to add other short-or-mid-distance destinations”, according to a KAL statement. The carrier targets revenues of USD270 million in 2012. The Ministry of Construction and Transportation previously indicated it would award an international license for a budget airline unit of Korean Air if the carrier operates domestic routes first. Incheon Tiger Airways is expected to face the same restriction and operate domestic services prior to launching international operations. The Korean domestic air market has been in decline, following the launch of high-speed rail services connecting Seoul and Busan. Capacity has dropped by a quarter since 2003, as airlines refocus on more profitable international routes. The introduction of new entrants could exacerbate losses in the domestic market and participants will likely seek the rapid allocation of international rights, as domestic service opportunities are limited. KAL is aiming to segment its market with two separate flying brands. According to the carrier, “Korean Air shall retain its global image and concentrate on upper class business travel demands and Air Korea shall focus on travellers seeking shorter distance leisure travel routes”. But by retaining a national identity brand, KAL is anchoring the carrier in Korea, unlike Qantas’ Jetstar or Singapore Airlines' Tiger, which are developing offshore bases to develop a pan-regional presence. Meanwhile, Jeju Air, South Korea’s biggest LCC, is not standing still, announcing plans to add 15 B737-800s to its fleet over the next six years to expand capacity and tap the promising international market. Korea’s international capacity has almost doubled over the past seven years and it has one of the highest per capita propensities for international travel in Asia. According to the Centre for Asia Pacific Aviation’s estimates, up to 300 million people in Northeast Asia can now afford to fly on an LCC – and would do so, if regulatory barriers were removed - and thousands more are being added each day as regional economies surge. It is a massive market waiting to be tapped, particularly as China and Japan remove access restrictions for foreign carriers. All eyes turn now to Japan’s All Nippon Airways, which also noted in Jun-07 that it is considering establishing an LCC to serve Asia. Note to editors: About Centre for Asia Pacific Aviation The Centre for Asia Pacific Aviation (CAPA) was founded in 1990 and has since built an international reputation as the leading specialist aviation consultancy in the Asia Pacific, the Indian Subcontinent and Middle East regions. CAPA Consulting’s strategic advisory services are supported by the extensive information and data services provided by the Centre’s Market Research Unit to aviation industry leaders every day. The Centre also holds regular Aviation Leadership Summits, which provide unique opportunities for the exchange of ideas and experiences. Head Office, Sydney: Derek Sadubin, Chief Operating Officer Aurora Place, Level 4, 88 Phillip St Sydney PO Box N777, Grosvenor Place Sydney, NSW Australia 2000 Email: [email protected] Southeast Asia Regional Office: Richard Pinkham, Regional Director, Southeast Asia Email: [email protected] Indian Subcontinent and Middle East Office: Kapil Kaul, CEO Indian Subcontinent & Middle East Email: [email protected] UK/Europe Office: David Bentley, UK Associate Email: [email protected] North America Regional Office: Martti Raito, Regional Director, North America Email: [email protected] North Asia Representatives: Korea: Kyung-sup Lee. Email: [email protected] Japan: Reiko Sonoyama. Email: [email protected] More information is available on the Centre’s website: www.centreforaviation.com

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