SINGAPORE/HONG KONG/MANILA -- The rapid ascent of budget carriers has created turbulence for major Asian airlines, whose market dominance is fading.
Singapore Airlines, a leading Southeast Asian carrier, logged a net profit of 360 million Singapore dollars ($288 million) last fiscal year -- roughly one-sixth of the record set in fiscal 2006.
The main reason for the decline is competition with low-cost carriers. Their share of passengers on routes within Southeast Asia soared to nearly 60% last year from slightly more than 20% in 2007. Their low prices have forced Singapore Airlines to effectively cut its fares.
The Singaporean flagship carrier's lounge at Sydney Airport underwent a makeover last December, offering rooms for passengers to unwind and a selection of high-quality wines. The company plans to renovate each of its 15 lounges around the world, and has lifted its budget to S$100 million from S$20 million in 2012.
Business-class passengers are the core of Singapore Airlines' strategy for a comeback. First-class and business-class tickets account for around 40% of fare revenue, and it is relatively easy to keep these prices high.
The airline spent S$150 million to modify eight planes added last fall, giving them among the world's widest first-class and business-class seats. Passengers are also offered a choice of more than 280 movies and TV shows.
Joining hands with hotels
Cathay Pacific reported lower-than expected earnings due to a decline in yield, or revenue per passenger mile, amid fierce competition.
The Hong Kong carrier is also taking steps to lure business-class passengers. It will partner with Mandarin Oriental Hotel Group, which boasts famous chefs, to offer a special menu in first class on Hong Kong-London flights starting next month.
Both Singapore and Hong Kong have populations of less than 10 million, but their airports are hubs for Southeast Asia and China, which have 600 million and more than 1.3 billion residents, respectively. This offers a lifeline to established airlines, which can take advantage of business-class traffic to and from the U.S. and Europe.
But carriers in countries with less-prominent airports that chiefly offer short-range flights have few options.
Founded in 1941, Philippine Airlines is Asia's oldest carrier, and is jointly operated by businessman Lucio Tan and the San Miguel conglomerate. Competition from budget carrier Cebu Pacific Air has weighed down its earnings, and rumors have circulated about a buy-in by a Middle Eastern carrier.
State-owned Vietnam Airlines is planning an initial public offering to raise funds for fuel-efficient cutting-edge aircraft. It aims to sell within the year shares equivalent to 25% of the capital base held by the government as part of a blueprint to raise $400 million or so. But some in the market see it as an unattractive investment.
Trouble from the Middle East
Low-cost carriers are not the only competition established Asian carriers must face.
Emirates and Etihad Airways, both of the United Arab Emirates, and Qatar Airways have built up infrastructure such as malls and hotels at hub airports to accommodate passengers with layovers.
The Middle East is a key junction between Europe and Asia, and these carriers are working to establish their airports as hubs with networks of routes throughout both regions. They use modern fleets and luxurious facilities and services as selling points. All three made it into the top 10 in a ranking by the U.K.'s Skytrax.
Since they are unlisted businesses with close ties to their respective governments, their financial details are unknown. But an executive at one Asian carrier laments that it is impossible to compete with companies getting government assistance for such expenses as fuel costs and airport fees.
Flagship carriers in the U.S. and Europe have been undergoing bankruptcies and reshuffles since the 2000s. The flood of competition that has swept the Asian market could leave many airlines high and dry.