Jetstar Asia’s exit spotlights Asia’s budget airline squeeze

Analysts warn a perfect storm of rising costs, competition and economic volatility is forcing low-cost carriers to rethink their strategies

Jetstar Asia’s recent closure highlights the need for budget carriers in Asia to rethink their fare strategies, with analysts warning that the industry is expected to continue facing pressure on its profit margins due to economic volatility, rising costs and intense competition.

The Singapore-based subsidiary of Qantas was the latest casualty in a sector already squeezed by high fuel prices and supply chain bottlenecks. Its exit leaves the Singapore Airlines Group as the only airline group based in the city-state operating carriers out of Singapore.

“I expect all airlines to reconfigure their fare offerings in the coming months and years. The more unstable the world economy becomes, the worse it will be for airlines,” said Shukor Yusof, founder of Singapore-based Endau Analytics, an aviation industry consultancy and research firm.

Budget airlines operate on relatively low profit margins, often in the range of one per cent to two per cent, compared with the broader airline industry, which may average around three per cent to four per cent. While they aim for high passenger volume and cost efficiencies to offset this, they remain vulnerable to economic fluctuations and intense competition, according to aviation analysts.

“Budget airlines find it harder to keep costs down today because the price of money has gone up. Expenses are typically denominated in US dollars but many regional low-cost carriers earn in local currencies, which have weakened versus the greenback,” Yusof said.

“In places such as Hong Kong and Singapore, the high cost of doing business is another factor,” he added.

One bright note for budget carriers is that air traffic volumes have increased significantly from the low levels seen during the Covid-19 pandemic, according to analysts.

“The industry has almost recovered with only a few regions at one per cent to two per cent below [passenger levels in] 2019. Though the demand has come back up, the competition is still high so airlines can’t increase the price too much without impacting demand,” said Shantanu Gangakhedkar, a senior consultant for aerospace and defence at Frost & Sullivan.

Airlines had to maintain a very tight balance between available seat kilometres and revenue passenger kilometres, said Gangakhedkar, who was referring to a measure of an airline’s passenger seat capacity and a key indicator of financial performance, respectively.

The ongoing global conflicts had increased the cost of aviation fuel, which typically accounted for around 40 per cent of an airline’s overall expenses, he added.

Julian Fantauzzo, founder of European Aviation Consulting, said cost pressures faced by budget carriers were not unique to the Asia-Pacific region, with a planned closure of the Abu Dhabi base of Hungarian budget carrier Wizz Air in September illustrating the challenges faced by the broader airline industry.

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“While the low-cost model remains viable in principle, the margin for controlling operating costs has tightened significantly in recent years,” Fantauzzo said.

Political volatilities were also affecting the operations of low-cost carriers as airspace closures and longer flight times to avoid conflict zones had translated into longer flight times and higher operational costs, Fantauzzo explained.

“On top of that, competition is particularly fierce in Southeast Asia, where multiple carriers often serve the same high-density routes with narrow margins. Price wars and aggressive market strategies further reduce the flexibility low-cost carriers have to absorb rising costs,” he said.

Such issues were particularly challenging for these carriers with a business model based on high volume, efficiency, and tight margins while jet fuel prices had risen to above pre-Covid levels, Fantauzzo said.

At the same time, the aviation industry was reeling from a shortage of qualified manpower, especially pilots, technicians and engineers, as a rebound in air travel across Asia drove up salaries and training expenses, he added.

Budget airlines were also facing problems in getting new-generation aircraft to stay competitive due to supply chain disruptions and delivery delays, Fantauzzo said.

Higher airfares?

With higher costs putting pressure on their profitability, budget airlines may have to raise airfares, according to analysts.

“These have to be in tandem with the broader market and taking into consideration the demand and supply as well as seasonality,” Gangakhedkar said.

Fantauzzo concurred, saying these carriers would have to implement fare increases gradually and selectively, rather than to raise them across the board.

“Most budget airlines are already relying more heavily on dynamic pricing and unbundling strategies to generate additional revenue while keeping base fares attractive,” he said.

Among these options are higher prices for window and aisle seats, weight-based baggage fees, and cabin baggage fees, according to Fantauzzo.

Passengers flying with budget airlines would have to factor fees for such optional services when calculating their travel cost, he said.