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Contents lists available at ScienceDirect

Research in Transportation Economics

journal homepage: www.elsevier.com/locate/retrec

Low-cost carriers in Asia: Deregulation, regional liberalization and

secondary airports
Anming Zhang a, *, Shinya Hanaoka b,1, Hajime Inamura c, 2, Tomoki Ishikura d, 3
a
Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2
b
Graduate School of Science and Engineering, Tokyo Institute of Technology, 2-12-1-I4-12, O-okayama, Meguro-ku, Tokyo 152-8550, Japan
c
Graduate School of Information Sciences, Tohoku University, Aoba 6-6-6, Aoba-ku, Sendai, Miyagi 980-8579, Japan
d
Center for Sustainable Urban Regeneration (cSUR), School of Engineering, University of Tokyo, Faculty of Engineering Bldg.1, Hongo 7-3-1, Bunkyo-ku, Tokyo 113-8656, Japan

a r t i c l e i n f o a b s t r a c t

Article history: While the demand for low-cost air transportation is potentially huge in Asia, development of low-cost
Available online 14 April 2009 carriers (LCCs) lags behind the regions overall aviation development, and certainly lags behind the LCC
development in North America and Europe. It has been noted that market conditions and the regulatory
Keywords: environment of Asia are different from those of North America and Europe. What are the main differ-
Low-cost carriers ences here; and how do these differences impact market entry and success of Asian LCCs? This paper
Deregulation
describes salient features of Asian LCCs and their developments. It examines the impact of Asias
Regional liberalization
domestic and international airline regulations and airport infrastructure on the performance of its LCCs.
Secondary airports
Low-cost terminals We nd that the Southwest effect may also exist in Asia and that the development of low-cost
terminals may compensate, at least partly, the scarcity of secondary airports in the region. The experi-
ences of Thailand and China are investigated as case studies.
2009 Elsevier Ltd. All rights reserved.

1. Introduction a growing segment of middle-income people started to switch

Air transportation is important for Asia: it serves not only to
spur trade and growth in the tourism industry, but also to improve
peoples mobility and more generally weave together a modern
society.4 Several Asian countries, such as the Philippines and
Indonesia, have numerous islands and islets, and many Asian
countries do not connect with each other by land. Countries of
Indochina Peninsula or the Greater Mekong Region, such as
Cambodia, China, Laos, Myanmar, Thailand and Vietnam, are con-
nected by land. Nevertheless, their road and railway infrastructures
are lacking or in poor operational conditions.
Over the past two and half decades, Asia has been among the
highest growth regions in aviation. As part of this overall growth,
* Corresponding author. Tel.: 1 604 822 8420.
E-mail addresses: anming.zhang@sauder.ubc.ca (A. Zhang), hanaoka@ide.ti-
tech.ac.jp (S. Hanaoka), h-inamura@plan.civil.tohoku.ac.jp (H. Inamura), ishikura@
csur.t.u-tokyo.ac.jp (T. Ishikura).
1
Tel.: 81 3 5734 3468.
2
Tel.: 81 22 795 7492.
3
Tel.: 81 3 5841 0566.
4
Aviation is also critical for Asian countries to gain from their accelerated
competitive insertions into the global economy as it serves to increase trade,
especially in high-value added supply chains, and attract foreign direct investment.
Since we focus on the passenger side of air transportation however, air cargo will
not be discussed in any detailed fashion in the present paper.
from bus, rail and ferry to air transport for their domestic and
international trips, as air transport became more affordable. This
phenomenon has occurred mainly in Malaysia, Thailand,
Indonesia and the Philippines, and is facilitated largely by low-
cost carriers (LCCs). Air transport is not a common traveling mode
for developing Asian countries prior to the recent emergence of
LCCs.
While the demand for low-cost air transportation is potentially
huge and promising in Asia, development of LCCs lags behind the
regions overall aviation development, and certainly lags behind
the LCC development in North America and Europe. In North
America and Europe, LCCs have imposed signicant competitive
pressures on large full-service airlines (FSAs), especially on the
lower-end of the fare spectrum. In addition to lowering fares, FSAs
have often resorted to the launch of their own low-cost offshoots in
response to low-cost competition. The Southwest effect i.e.,
a rapid increase in trafc and a simultaneous fall in fares on routes
where, or close to where, Southwest operates has become widely
known (Richards, 1996; US DOT, 1993). The price effects of South-
west were empirically estimated by, among others, Dresner, Lin,
and Windle (1996), Morrison (2001), and Windle and Dresner
(1995); see Tretheway and Kincaid (2005) for a literature review on
the effect of LCCs on air fares in the US. Franke (2004) suggests that
Europe has a similar Ryanair effect. Vowles (2001) further shows,
in the context of a multi-airport region, that entry of Southwest

0739-8859/$ see front matter 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.retrec.2009.01.001
 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650
would increase competition between the airport it has entered and
the nearby airports.
It has been noted that market conditions and the regulatory
environment of Asia are different from those of North America and
Europe. What are the main differences here; and how do these
differences impact market entry and success of Asian LCCs? This
paper describes salient features of Asian LCCs and their develop-
ments. In particular, it investigates the impact of Asias domestic
and international airline regulations and airport infrastructure on
the performance of its LCCs. There are three reasons for this
emphasis. First, while signicant effort has been extended to
empirical analysis of the LCC impact on fares and airline competi-
tion, few studies have carefully looked at the effects of the regula-
tory environment on LCCs performance. Such analysis is, we
believe, called for, especially in the context of Asia and other
developing economies. Asia in general has a much more restrictive
regulatory environment than matured markets like the United
States, Canada and European Union, and the pace of deregulation
and liberalization in the region is much slower and more gradual
than that of its North American and European counterparts. For the
Asian region, airline markets in most countries are still dominated
by state-owned airlines and airports are largely run by govern-
ments, and market access is still largely exchanged through the use
of a series of bilateral air-service agreements. Whilst Southwest
Airlines and Ryanair grew under a deregulatory domestic environ-
ment after the EU integration in the mid-1990s, the EU internal
market has become a domestic market China and many other
Asian countries are, overall, still very cautious about exposing their
domestic legacy carriers to competition from low-cost carriers,
domestic or foreign. Thus, the analysis of this paper may shed some
light on further directions for policy reforms. The asymmetry in
regulatory environments between Asia and North America/Europe
provides a natural setting for conducting such an analysis.
Second, for yielding useful policy implications it is then
important to assess the prospect for regulatory reforms in Asia,
both domestically and regionally. In effect, there have been signif-
icant recent developments towards a more liberal set of arrange-
ments in the region including the adoption of open-skies policies
by a number of economies. In these policies, multiple airlines
including low-cost carriers designation is sought, capacity
restrictions are removed and a more liberal position may be taken
towards foreign ownership and airline strategic alliances. Third, as
availability of secondary airports seems to be a key requirement for
the implementation of the LCC business model, how to deal with
the scarcity of secondary airports in Asia appears to a major
problem for airports, airlines, and governments.
Although the LCCs in North America and Europe have been
studied extensively, studies on the Asian LCCs are few.5 To our
knowledge, no papers have systematically investigated the impact
of airline regulatory environments, both domestic and interna-
tional, and secondary airports on the performance of Asian LCCs,
nor have they covered LCCs for the entire Asian region. We start
with a detailed discussion, in Section 2, about the traditional LCC
model and LCCs in Asia and their performance. Given most recent
developments occur in East Asia, the paper will focus on LCC
developments in Northeast Asia and Southeast Asia. The only major
omission by doing so is LCCs in India.
Section 3 examines the impact of domestic regulatory condi-
tions on LCCs. Two case studies, one on Thailand and the other on
5
Exceptions include Gillen and Taweelertkunthon (2007), Murakami (2008), and
OConnell and Williams (2005), each of which focuses on a specic sub-region/
country or a specic aspect of Asian LCC development. Forsyth (2003) discusses LCC
developments in Australia.
37
China, are conducted: Whilst the growth of LCCs in Thailand has
been facilitated by domestic deregulation, LCCs growth has been
faced with obstacles from domestic regulation in China. The impact
of the restrictive international aviation in Asia on the regions LCCs
will be examined in Section 4, whereas the issue of scarcity of
secondary airports in Asia and the impact of recent developments
in Asias low-cost terminals will be investigated in Section 5.
Section 6 contains concluding remarks.
2. Background
2.1. The low-cost model in North America and Europe
The low fare, no-frills air travel service was pioneered by
Southwest Airlines in the early 1970s in the United States. Doganis
(2001) summarizes the key features of the original Southwest
Airlines model as follows6:
- Fares: low, simple, unrestricted, point-to-point, no interlining;
- Distribution: direct sales (supplemented by travel agents),
ticket-less;
- In-ight: single-class, high-density, no seat assignment, no
meals, snack and light beverages only;
- Frequency: high;
- Punctuality: very good;
- Aircraft: single type (Boeing 737), high utilization (over 11 h
a day);
- Sectors: city pairs with distance below 800 km (500 miles);
- Airports: secondary or uncongested, 1520 min turnarounds;
- Growth: 10% per annum targeted, maximum 15%;
- Staff: competitive wages, prot-sharing since 1973, high
productivity.
The Southwest Airlines model therefore focuses on a distinct
low-cost service strategy; various frills, such as free meals and in-
ight entertainment that are offered by a full-service airline, are
eliminated.
The low-cost model, represented by Southwest Airlines, has
been evolving in the US since airline deregulation in 1978.
Following the US deregulation, Canada deregulated its airline
industry in 1988, and a period of intense competition and industry
consolidation had begun. The low-cost carrier WestJet began ying
in Canada in 1996. In the early 2000s, it grew at 50% per year while
one of the two legacy FSAs went bankrupt (Canadian Airlines
International), merged with the other FSA, Air Canada, which also
went bankrupt (Tretheway, 2004). The low-cost model has also
been repeated in Europe since the 1990s when the European Union
liberalized and integrated its internal market.
In both Europe and North America (the US and Canada), low-
cost carriers have not only displaced signicant market share from
full-service airlines, but also stimulated demand from new market
segments. They account for 25% of the passenger market in North
America in terms of air passengers carried, and over 20% in Europe.
In particular, Southwest Airlines, the original LCC, has been by far
the largest domestic carrier in the US since 2004. In 2006, for
example, it had 96.3 million emplanements, followed by American
Airlines, at 76.3 million, and Delta Air Lines, at 63.4 million (de
Neufville, 2008). Similarly, Ryanair has overtaken Lufthansa to
become the largest intra-European carrier (Gillen & Tawee-
lertkunthon, 2007).
6
It is noted (e.g., Alamdari & Fagan, 2005) that Southwest Airlines may not fully
follow its own model at present.
38 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650

Table 1
Low-cost carriers in Northeast Asia.

Country Associated Commencement In-ight Aircraft Fleet Base Destinations FFP

carriers service size airport
Spring Mainland China None 2005 No frills A320 8 Hongqiao, Over 20
Airlines Xinzheng,
Meilan
Viva Macau Macau None 2006 Yes B767 2 Macau 4 (Jakarta, Ho
Chi Minh City,
Sydney, Tokyo)
Oasis Hong Hong Kong None 2006 Yes B747 5 Hong Kong 2 (London,
Kong Vancouver)
Air Do Japan Code-share/ 1998 No frills for B737; B767 & B737 Sapporo Yes
Partnership radio & music
with ANA & for B767
Skynet Asia
Skymark Japan None 1998 No frills B767 & B737 Tokyo Limiteda
Airlines
Skynet Asia Japan Code-share/ 2002 Beverages B737 Miyazaki Limitedb
Partnership
with ANA &
Air Do
Star Flyer Japan ANA 2006 Sweets, A320 Kita- Yes
beverages Kyushu
Jeju Air South Korea None June 2006 Bombardier 5 Jeju Jeju-Gimpo,
Q400 & B737 Jeju-Kimhae,
Gimpo-Kimhae
Hansung South Korea None August 2005 ATR 72-200 4 Cheongju Cheongju-Jeju,
Airlines Gimpo-Jeju
Yeongnam South Korea July 2008 Fokker 100 Kimhae Kimhae-Jeju,
Air Kimhae-
Gimpo,
Kimhae-Daegu
Jin Air South Korea Subsidiary of July 2008 B737 Gimpo Gimpo-Jeju
Korean Air
a
Available for buyers who pay with Skymark Visa/Master Card.
b
Discount tickets available for pre-purchasing, round trip, students, and the handicapped.

Furthermore, using a very different business model, the LCCs
such as Southwest and JetBlue in the US, WestJet in Canada, and
Ryanair and easyJet in Europe are driving conversion of some of
their FSA counterparts to LCCs, or modifying the FSA business
model to be more LCC-like. As a consequence, one of the most
important aspects of todays likely, futures as well airline
industry in North America and Europe is that of competition
between FSAs and LCCs, and to a lesser extent (but gaining in
importance), that of competition among LCCs.
2.2. Low-cost carriers in Asia
In Asia, LCCs are a much more recent phenomenon. Table 1
provides an information summary for LCCs in Northeast Asia
(Japan, South Korea, China). In 1998 the two low-cost carriers,
Skymark Airlines and Air Do, entered, respectively, the Tokyo
Fukuoka route and the TokyoSapporo route. Although limited in
their scope, these were the rst independent entries since the
1960s. Skymark offered normal fare at half the price, and Air Do at
36%, below incumbent FSAs fares. The competitive forces resulted
in an annual increase of 16.3% in air passengers on the Tokyo
Fukuoka route and 9.4% on the TokyoSapporo route (Yamaguchi,
2005). Skymark also entered the OsakaSapporo and Osaka
Fukuoka routes. Japans new Civil Aeronautics Law, passed in 1999,
substantially liberalized the operating licensing system, fare
approval system and other regulatory provisions. In 2002, Skynet
Asia entered the TokyoMiyazaki route, followed by the Tokyo
Kumamoto and TokyoNagasaki routes. Star Flyer started operating
in the TokyoKitakyushu route in 2006, and then entered the
TokyoKansai route in 2007. Both Skynet Asia and Star Flyer are
low-fare airlines, offering fares at 32% and 17%, respectively, below
Japanese FSAs fares (Murakami, in press).
In South Korea, the LCCs, Hansung Airlines and Jeju Air, entered
the domestic market in 2005 and 2006 respectively, and two more
LCCs, namely, Yeongnam Air and Jin Air, just entered the market in
July 2008. The rst three airlines offer fares at 30% below incum-
bents fares, whereas Jin Air, a subsidiary of FSA Korean Air, at 20%
below incumbents fares. Five more low-fare carriers are at the
preparatory stage to enter domestic routes, including Incheon Tiger
Airways, a joint venture between Incheon city and Tiger Airways, an
LCC based in Singapore. It is noted that in addition to domestic
routes to begin with, Incheon Tiger plans to apply for ying rights to
destinations in Japan, China, Mongolia and the Russian Far East.
Similar to South Korea, LCCs are a recent phenomenon in
Mainland China. Established in 2005, Spring Airlines is so far the
only LCC. Another carrier, Okay Airways (which is not listed in Table 1),
has shown a strong interest in being a budget carrier, but the company
believes that the current regulatory conditions in China are not
conducive for LCC operation (see detailed discussion in Section 3.2
below). As a consequence, Okay at the moment focuses largely on
international cargo operation.
Following the Southwest model, Spring Airlines uses single
aircraft type and offers single seat-class to reduce maintenance and
management costs. It also develops its own booking system and
sells its tickets online. (Before the commencement of Spring
Airlines, all the Chinese airlines use the computerized reservation
system provided by the monopolist, Travel Sky Technology Ltd.)
These strategies help Spring eliminate the high charge of using the
monopoly system, and avoid paying the commission fee to retailers
(about 9% of the ticket price). Currently, 70% of Spring Airlines
tickets are sold online or via the telephone. Other cost-saving
 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650
strategies are also adopted, such as smaller leg space in its ights,
no free meals in-ight, and lower aircraft rental fees than the fees
paid by its competitors.7
In Hong Kong and Macau, the two Special Administrative
Regions of China, Oasis Hong Kong and Viva Macau are the
respective LCCs, both serving long-haul international routes in
effect, established in 2004 Viva Macau is the rst long-haul LCC in
Asia. Both airlines share some other operational strategies that may
not be typical for LCCs (Table 1). For example, both airlines
provide business/premium class seats and emphasize cargo
services. (Viva Macau also provides some charter operation.) In
terms of passenger services, Viva Macau appears to be more similar
to a traditional short-haul LCC than Oasis. While fuel accounted for
50% of its total cost, Oasis still managed to lower fares by 4050% of
competing FSAs. But high fuel price and relatively high cost service
eventually hit the carrier; Oasis was liquated in April 2008. It is also
interesting to note that statistics from the Tourism Ofce of Macau
Government shows that after Viva Macau ied to Indonesia,
Australia and Japan, visitor arrivals by air from these three countries
have grown by 71%, 290%, and 300%, respectively.
Compared with Northeast Asia, LCCs grow more rapidly in
Southeast Asia; in effect, Southeast Asia is the most developed
region for low-cost aviation in Asia. Information of major Southeast
Asian LCCs is given in Table 2. The leading LCC in Asia is AirAsia,
based in Malaysia. The former loss-making full-service airline was
taken over by new owners in late 2001 and was then re-launched as
a low-cost carrier. Since its re-launch AirAsia has expanded rapidly
and helped grow the domestic market. In January 2004, AirAsia
formed a joint-venture (JV) carrier with the then Prime Minister
Thaksin Shinawatras Shin Corporation, called Thai AirAsia, with
AirAsia holding 49%. Thai AirAsia launched, in February 2004,
domestic operations between Bangkok and other major cities in
Thailand. In November 2004 AA International Limited, a company
that is 99.8% owned by AirAsia, successfully concluded a sales and
purchase agreement with the Indonesian private airline AWAIR to
acquire a 49% stake in the company. In December 2004 AWAIR was
re-launched successfully as an LCC serving Indonesian domestic
routes. Indonesia AirAsia was, in the following December, estab-
lished through AWAIR.
AirAsia charges fares that are on average signicantly lower
than those offered by FSAs. This fare strategy, adopted from the
original Southwest Airline business model, identies the following
key business strengths:
- Single-class and no-frills service: AirAsia operates a single-
class service with no amenities, such as complimentary in-
ight meals and entertainment, frequent yer programs (FFPs)
and airport lounges;
- Short-distance routes with direct service: AirAsia operates
from four hubs in Malaysia Kuala Lumpur International
Airport (KLIA), Senai International Airport in Johor Bahru, Kota
Kinabalu and Kuching whereas Thai AirAsia operates from
Suvarnabhumi International Airport in Bangkok, and Indonesia
AirAsia from Soekarno Hatta International Airport in Jakarta.
Together, these three carriers now operate about 100 non-stop
domestic and international routes. Their route strategy is to
target markets within 4-h ight time from their base and focus
airports. Most routes are within 3-h ight time;
7
The summaries about Chinas low-cost carriers and low-cost terminals (here
and below) are drawn from diverse sources in the Chinese nancial media, only
some of which will be specically citied. Complete citation is available upon
request.
39
- High aircraft utilization and efcient operation: generally,
AirAsia makes more round trips per aircraft per day than FSAs
in the region, because it operates direct services and maintains
25 min turnaround times. It further streamlines administrative
functions by hiring employees who are able to perform
multiple roles;
- Low xed costs: AirAsia has negotiated lower aircraft lease
charges and lower rates for long-term maintenance contracts.
By basing its operation at low-cost carrier terminal (LCCT) in
Kuala Lumpur, AirAsia saves on airport changes (see more
discussion in Section 5);
- Low distribution costs: to encourage more Internet bookings,
AirAsia offers lowest fares through the Internet. It employs
a fully ticket-less system, which saves administrative and
related expenses. In the scal year 2007, air tickets sold by the
Internet, travel agents, airport counters, call centers, and sales
ofces were 64.7%, 13.0%, 9.6%, 7.0% and 5.7%, respectively.
Internet booking has been increasing year by year at the
expense of call-center booking, whereas sales by travel agents
were rising slightly during the last two years;
- Single aircraft type: operating a eet of similar aircraft leads to
cost savings by simplifying maintenance and reducing spare
parts inventory requirements. In line with its growth and
expansion plans, A320s would gradually replace the existing
Boeing 737-300s.
AirAsias latest JV carrier, AirAsia X, is a long-haul LCC with ight
time being greater than 4 h. Virgin Group, one of the shareholders
of AirAsia X, supports the carriers management. The rst ight,
commenced on 2 November 2007, was between Kuala Lumpur and
Australias Gold Coast. The carrier has since added three more
Australian routes and one Chinese route (Hangzhou), and it plans to
add more Chinese routes and expand services to Japan, South
Korea, India, Middle East and Europe. Unlike AirAsias single-class
service, however, AirAsia X has premium XL seats with price
doubling that of economy seats.
Now we describe the rest of the LCCs presented in Table 2:
One-Two-Go: An offshoot of Orient Thai Airlines, One-Two-Go is
the rst LCC that operates in Thai domestic airline market, with
ights, from Bangkok to Chiang Mai, being inaugurated in
December 2003. The carrier adopts the strategy of having a single
price no matter how far in advance a passenger books a seat,
a practice that is different from that of the other two Thai LCCs (i.e.,
Thai AirAsia, Nok Air). On the other hand, it provides free water and
snacks for passengers on all ights. Its eets consist of B747-LR,
B757-200 and MD82, which are larger than the aircraft of other
general LCCs. One-Two-Go suspended its operation in July 2008,
due to high fuel price as well as the order of operation ban by the
government for its lack of safety standard.
Nok Air: Nok Air is a joint-venture LCC set by Thai International
Airways, an FSA, to compete with the other two Thai LCCs, Thai
AirAsia and One-Two-Go. It initially, in July 2004, ew from
Bangkok to three domestic destinations. Its pricing is similar to Thai
AirAsias, in that passengers can get cheaper fares for advance
booking. On the other hand, unlike Thai AirAsia, its regular fares for
a single-trip are divided into ve ranges. Furthermore, Nok Air
considers its position as a premium LCC. Consequently, it provides
business-class seats, so-called Nok-Plus, with extra around 500
Baht (about US$15). A few routes with medium passenger
demand are taken over from Thai International Airways. From July
2008 Nok Air started to reduce the number of ights and routes
owing to high fuel price.
Tiger Airways: Like Nok Air, Tiger Airways is the offshoot of an
FSA in this case, Singapore Airlines (SIA). In 2003, SIA announced
that it would join an increasingly competitive budget-airline
 40
Table 2
Major low-cost carriers in Southeast Asia.

Country Associated Commencement Route Base/hub In-ight Seat FFP Aircraft Others
carriers airports service assign.
AirAsia Malaysia; Thai AirAsia; 2001 (as LCC); 2004 Domestic & KLIA (LCCT); Kota No frill (food & Free (Xpress No Single [B737 SMS reservation;
Thailand; Indonesia in Thailand international Kinabalu; beverages for- boarding option) to A320] web check-in; extra
Indonesia AirAsia; AirAsia X and (within 4 h) Kuching; Johor purchase) baggage weight for
Indonesia Bahru; Bangkok a fee; 25-min
(Suvarnabhumi); turnaround time

A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650

Jakarta
AirAsia X Malaysia AirAsia 2007 International KLIA (LCCT) Frill-or-no frill Yes & XL seat size No Single [A330]
long-haul choice before (no business class)
(more than 4 h) boarding; light
meals for-purchase
onboard
One-Two-Go Thailand Orient Airlines 2003 [stop Domestic Bangkok (Don Free snacks/drinks Yes No Single [MD82] Fixed fare system;
(Charter) operation Muang) prepaid card;
in July 2008] paid in bank
and 711
Nok Air Thailand Thai Airways 2004 Domestic Bangkok (Don No frill (food & Yes & Nok Plus No Mix [B737, ATR72 ATM reservation;
International Muang) beverages for- (frill service) for local routes] 711
purchase) payment
Tiger Airways Singapore Singapore 2004 International Singapore (BT); No frill (food and Yes No Single [A320] International
Airlines, SE AIR with 4 h Clark beverages for- ticketing on a
(in Philippines) purchase, but free few routes; Tiger
for more than 3-h Add-On products
ights) (extra luggage,
sports equipment
check-in and seat
selection)
Jetstar Asia Singapore Qantas 2004 International Singapore, Jakarta No frill (food and Yes World Perks Single [A320] Merged with
within 5 h (with Valuair beverages for- Valuair in 2005
Name) purchase, but free
for more than 3-h
ights)
Lion Air Indonesia 1999 Domestic & a few Jakarta, Surabaya Free snacks/drinks Yes & business Yes (Lion Mix [MD 80, SMS reservation;
international class Passport) MD90, B737] aircraft lease
business
Cebu Pacic Philippines 1996 Domestic & Manila, Cebu, KLIA Fun ight (quiz, etc) Yes No Mix [A320, SMS reservation;
international (LCCT), Singapore A319, ATR72] Cargo service with
(BT) some network
carriers
 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650 41

market in Asia by launching Tiger Airways. Tiger Airways started its Table 3
operation in September 2004, and since then it has targeted routes Spring airlines cost structure and performance indicators (in million RMB).

that are within a 4-h ight time from Singapore, including China Spring Airlines Domestic industry average
and Australia. Like AirAsia, Tiger Airways follows the original Airport charge as % of total cost 1020% 1520%
Southwest model. For instance, it uses the Budget Terminal of Landing/taking off fee 12%
Singapore Changi International Airport (SCIA) as its base so as to Fuel cost as % of total cost 40% 2530%
Security investment (2006) 60
save airport costs. In addition, it has the operational cooperation
Annual savings 50
with South-East Asian Airlines (SEAIR) in Philippines to use Clark Annual fuel savings 30
airport, Manilas secondary airport. Load factor 95% 70%
Tiger Airways has been engaged in expansions across the Asia Airfare vs. FSAs 36% lower
Pacic region through joint ventures, a strategy used by AirAsia No. of ights operated (2007) 14 206
No. of passengers (2007) 2 350 000
(see the discussion above). Its subsidiary, Tiger Airways Australia Revenue (2007) 1230
which began operation on 23 November 2007 has now extended Prot (2007) 70
service coverage to every state and territory in Australia. Tiger also Prot (2005 2006) 67
announced in June 2008 that it would in 2008 establish a Korean- Source: various Chinese nancial media.
based budget airline (Incheon Tiger), a JV with Incheon municipal
government. It is interesting to note that Temasek Holding, a Sin-
gaporean national investment holding company, is one of the
found that AirAsia also has the highest return on xed assets
investors of both Tiger Airways and AirAsia. Temasek also invests in
among these four Southeast Asian airlines.
Jetstar, an LCC and we discuss it next.
Table 3 shows the cost structure and performance indicators
Jetstar (Jetstar Asia): Jetstar Asia was established by Australian
for Spring Airlines. Spring Airlines achieves the highest load
ag carrier, Qantas Airways, and it inaugurated its operation in
factor and highest aircraft utilization rate in China, and its
December 2004. Its brand name was, in February 2006, integrated
operational cost is 18% lower than the domestic industry
with Jetstar in Australia as Jetstar. In July 2005 Jetstar Asia
average. In 2007 it achieved the highest prot per aircraft in the
merged with Valuair a relatively small LCC set up by a former SIA
domestic civil aviation industry (RMB 10 million per aircraft).
executive which represents the rst merger of two LCCs in Asia.
These Springs achievements are due mainly to its travel agency
Jetstar Asia and Valuair have, post merger, continued to operate
background. Spring Airlines was founded by Shanghai Spring
their respective routes under their own brands. Valuair ights are
International Travel Services (called Spring Tour), the largest
operated by Jetstar crews however, and they offer the same services
domestic travel agency in China. Spring Tour has one of the
(in-ight meals and entertainment) as Jetstar. Valuair only serves
most extensive market coverage and mature sales network
routes between Singapore and destinations in Indonesia, whereas
throughout the country. This vertical relationship allows the
Jetstar Asia does not have operations in Indonesia owing to
advantage of a tour agency and an airline to be combined. Both
a protectionism policy of the Indonesian government.
air tickets and tour services are sold at the same website and
Lion Air: Lion Air started its operation in June 2000 prior to
the same agency ofces. This signicantly lowers management
AirAsias low-fare operation. Its load factor is quite high, 89.5% in
and selling costs. Since the tour agency has an extensive market
2004 and 91.1% in 2005 according to the Airline Trafc Results of
coverage, the airline is able to extend the catchment area of the
ATW. The number of routes it serves is more than 40 mostly
base airport by attracting passengers farther away from the base
domestic routes and is No. 2 among Asian LCCs (next to AirAsia).
airport (e.g., attracting passengers in Suzhou to take ights
Lion Air offers low fares; however, its service is almost the same an
departing from airports in Shanghai). Spring Airlines is able to
FSAs: it provides frills, FFP, seat assignment, business class, etc. In
achieve a very high load factor by providing part of the seats to
January 2008, Lion Air announced plans to start operating from
Spring Tours clients and by promoting its service with Spring
Australia. The new airline, to be named Lion Air Australia, is set to
Tours brand name. Meanwhile, since domestic tour trans-
operate as a domestic and international airline.
portation takes up half of the total cost, tour agencies also need
Cebu Pacic: Cebu Pacic started operation in 1996 as a second
to control the transportation cost. With the cooperation of
air carrier in the Philippines; in terms of timing, it is Asias LCC
Spring Airlines, Spring Tour is able to lower its transportation
pioneer. It is shifting to an all-in pricing format so that
cost by obtaining much cheaper air tickets than other tour
passengers immediately know about the total amount they need to
agencies can.
pay and can easily compare Cebus fare with the fares of other
However, with the exception of a few LCCs in Southeast Asia and
modes of transportation including ferries and buses. Cebu uses the
perhaps Spring Airlines in China, Asian LCCs have not been very
low-cost carrier terminal at Kuala Lumpur International Airport
successful so far. For example, in Japan Air Do and Skynet Asia have
(KLIA) and Budget Terminal at SCIA to save airport costs.
been operating at a loss while Skymark made a prot only in 2004
(Murakami, in press). In South Korea, both Hansung Airlines and
2.3. Performance of low-cost carriers and reasons
Jeju Air have been operating at a loss (Lee, 2008). This is in contrast
to LCCs in North America and Europe. Southwest Airlines and
As mentioned earlier, AirAsia is the leading LCC in Asia. By using
a number of other LCCs have been very protable. To illustrate, on
data envelopment analysis both the Charnes-Cooper-Rhodes
30 September 2008, the market capitalization of Southwest is
(CCR) window and non-window models Inamura and Saraswati
US$10.7 billion, which is greater than US$10.6 billion the sum of
(2008) found that AirAsia outperformed the three FSAs, namely,
market capitalizations of the six largest FSAs in the US (American,
Singapore Airlines, Thai Airways and Malaysia Airlines, in cost
Delta, Northwest, Continental, United, US Airways); whereas
efciency. This result may not be very surprising given that AirAsia
WestJests market capitalization (US$1.3 billion) is easily greater
follows the original model of Southwest Airlines and so focuses on
than Air Canadas (US$0.8 billion).8
cost efciency. In effect, the cost per available seat kilometer (ASK)
of AirAsia is the lowest among the worlds LCCs: 2.86, 2.47, 2.19,
2.95 and 3.16 US cents, respectively, for the years from 2003
8
through 2007. Somewhat surprisingly, Inamura and Saraswati The authors search from nance.yahoo.com.
42 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650
In the remainder of this paper, we examine three main reasons
for why Asian LCCs have not been very successful so far9:
- Domestic regulatory constraints: For instance, although Spring
Airlines has achieved a lot since its commencement of opera-
tion, its growth has faced with obstacles from domestic regu-
lation in China. On the other hand, the growth of LCCs in
Thailand has been facilitated by domestic deregulation. These
will be discussed in Section 3;
- Lack of open-skies agreements among Asian countries: The
impact of the restrictive international aviation in Asia on the
regions LCCs will be examined in Section 4;
- Scarcity of secondary airports in metro areas in the region: For
instance, Murakami (in press) attributes the inability for Japa-
nese LCCs to achieve low costs to the scarcity of secondary
airports. This issue and the impact of recent developments in
Asias low-cost terminals will be investigated in Section 5.
3. Domestic regulatory barriers and deregulation
The rapid growth of Southwest Airlines has being facilitated by
domestic deregulation. Until 1978, the US airline industry was
regulated by the Civil Aeronautics Board. It was mainly through the
experience of unregulated Southwest Airlines which offered
lower fares for intra-state (Texas) services than comparable regu-
lated services between states that the deregulation of market
entry commenced in 1978 with the passage of the Airline Dereg-
ulation Act (Levine, 1987; Morrison, 2001). This has in turn stim-
ulated Southwests domestic expansion as the state borders did not
matter any more.
In Asia, entry of LCCs was facilitated by domestic deregulations.
In the Philippines, for example, months after the domestic entry
deregulation in 1995, ve new airlines namely, Cebu Pacic, Asian
Spirit, Air Philippines, SEAIR, and Grand Airways began opera-
tions, and by 1999 the domestic market share of Philippine Airlines,
the nations ag carrier, had fallen to 49%. Two of the newcomers,
Cebu Pacic and Air Philippines, had captured 24% and 22% market
shares, respectively, although another newcomer, Grand Airways,
had already gone out of business (Huenemann & Zhang, 2005). In
Indonesia, Lion Air and Adam Air launched low-fare services soon
after domestic entry deregulation. In both countries, therefore, an
era of monopoly by their national ag carriers was ended as
a result.
Similar deregulations occurred in Malaysia, Singapore and
Thailand. A major motivation for deregulation in these ve South-
east Asian countries is to boost tourism and business travel after the
devastating Asian nancial crisis of the late 1990s. In this section
we discuss deregulatory experiences of Thailand and China as case
studies, focusing on the impact of domestic regulation/deregulation
on LCC development.
3.1. Thailand as a case example
In the past, to protect the state-owned carrier Thai Airways,
Thais Department of Civil Aviation (DCA) prohibited private
airlines from ying on the routes that Thai Airways operates. Fares
were also regulated with the rates being determined by route
9
Another reason, which is not discussed further in this paper, is related to
stafng cost. Labor union in Asia usually has much less power (and hence less
inuence on wages) than labor union in the US, Canada and EU. As a result, Asian
LCCs do not have much advantage over their domestic full-service counterparts.
Moreover, in order to attract experienced pilots away from FSAs, the LCCs might
have to pay a higher wage to the pilots.
Table 4
Single-trip fares of major domestic routes in Thailand, 2004 (in Baht).
Routes Thai Airways Thai AirAsia Nok Air One-Two-Go
BangkokChiang Mai 1399 [2170] 6001800 5981700 1350
BangkokChiang Rai 1599 [2540] n/a 1350
BangkokPhuket 1599 [2625] 8001900 11502350 1350
BangkokHat Yai 1599 [2990] 9002400 8992198 1650
BangkokUbon Ratchathani 1199 [1895] n/a
BangkokUdon Thani 1199 [1785] n/a 4981200
BangkokKhon Kean 1199 [1500] 5001500
BangkokPhitsanulok 1199 [1380] 11501400
Note: [ ] in the Thai Airways column shows normal fare.
Source: Transport Journal (2004).
distances and route types, such as trunk, local or feeder routes.
Thailand gradually deregulated its domestic airline market during
the early 2000s. An interview with a representative of DCA revealed
the following deregulation steps:
- Entry deregulation: effective from December 2001, private
airlines were allowed to enter any domestic routes;
- Fare deregulation: rst, airlines were free to charge prices
subject only to an upper limit and a lower limit (effective from
December 2001 to November 2003). Second, effective from
December 2003, the lower limit policy was abolished;
- Foreign ownership deregulation: effective from October 2003,
the foreign-shareholding ceiling was raised from 30% to 49%.
These policy reforms, especially the freedom of low-fare pricing
and the relaxation of foreign ownership, have facilitated LCC entries
into the Thai domestic aviation market. Soon after these deregu-
lation measures, Thai AirAsia, Nok Air and One-Two-Go started
domestic operation as LCCs. The impact on the incumbent FSAs
fare is almost immediate. Thai Airways charged a roundtrip fare of
4500 Baht for its BangkokChiang Mai ight and 3200 Baht for its
BangkokKhon Kaen ight prior to the entry of LCCs. After the LCC
entry in late 2003, Thai Airways countered low fares of the LCCs by
offering discounted fares from 5 January to 31 March 2004 for
twelve destinations from/to Bangkok. This promotion was divided
into three discounted price groups, namely, 1199, 1399 and 1599
Baht per single-trip, with 30 seats available per ight (see Table 4).
After 31 March, Thai Airways continued offering promotional fares
on domestic routes such as BangkokChiang Mai (2945 Baht for
roundtrip) and BangkokUbon Ratchathani (2485 Baht). These
packages were valid from 19 April to 30 June 2004 (The Nation
Newspaper, 2004).
Table 5 shows the number of domestic airport passengers at all
the Thai airports owned by Airport of Thailand, which includes the
six largest airports in Thailand (the rst ve airports in Table 5), by
Department of Civil Aviation (DCA) and by Bangkok Airways
(Samui, SukhoThai, and Trad). Table 5 also reports total domestic
passengers carried by the three LCCs and their shares in the
overall passengers for 19992007. The table shows that domestic
passenger trafc was stagnant in the 19992003 period. During the
year 2004 when the LCCs operated in the domestic market, overall
trafc rose 39.3% over 2003. This dramatic growth was due partly to
the discount fare promotion by Thai Airways, and partly to the fact
that the LCCs grew the market themselves they accounted for
19.1% of the overall trafc in 2004. In 2005 passengers using the
LCCs continued to rise (over 61 million); nevertheless, the Tsunami
disaster (caused the Indian Ocean earthquake) hit the market hard,
especially, the Phuket tourism market hard.10 As a consequence,
10
For example, about 2.7 million foreign tourists visited Phuket in 2001.
 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650 43

Table 5
Total domestic airport passengers in Thailand, 19992007.

Airports Total domestic airport passengers (arrival, departure and transit)

1999 2000 2001 2002 2003 2004 2005 2006 2007

BKK: Don Muang 6 832 876 7 280 565 7413 111 7 302 838 7 384 924 10 396 944 10 341 014 8 303 606 4 786 345
BKK: Suvarnabhumi 3 121 004 7 908 217
BKK: Total 11 424 610 12 694 562
Phuket 2 032 638 2 154 626 2 225 031 2 227 238 2 103 474 2 825 009 2 244 883 3 031740 3 512 477
Chiang Mai 2 010 262 2 097 232 2 091 580 1 925 843 1846 405 2 619 938 2 729 255 2 893 435 2 932 759
Hat Yai 609 360 673 572 663 976 622 070 635 517 1 057 579 1 099 293 1154 816 1 309 959
Chiang Rai 516 340 577 540 534 355 462 028 418 299 611 428 684 719 687 742 754 440
Khon Kaen 375 154 397 848 390 751 374 765 383 005 507 946 462 505 388 396 389 084
Ubon Ratchathani 226 554 245163 258 756 229 021 252 057 350 020 386 266 368 377 380 581
Udon Thani 378 989 376 191 367498 348 796 354 650 606 781 662 103 668 134 708 858
Phitsanulok 351 450 330 770 312 095 216 342 208 751 229 586 198 643 178 662 155 266
Burirum 20 917 26 728 32 857 25 303 22 247 30 873 22 110 8796 10 927
Chumporn 1411 1096 2646 5208 5253 12 13
Hua Hin 3862 22 345 22 458 1571 10 374 11 574 5431
Krabi 28 175 138 178 153 699 225 266 348 281 478 149 311 598 547 384 856 029
Lampang 92 847 92 813 83 843 60 588 57 792 60 002 55 964 52 300 44 424
Loei 1791 6887 28 579 7895 7049
Mae Hong Son 206 286 235 594 236 794 171 240 130 401 127439 182 443 104 524 96 975
Mae Sot 23 310 33 916 32 257 23 826 15 992 19 869 15 689 30
Nakhon Phanom 53 565 50 408 50 955 32 850 27 206 32 347 34 792 38 214 32 086
Nakhon Ratchasima 89 279 65 816 62 033 30 737 10 873 11866 36 77 59
Nakhon Si Thammarat 74 712 82 188 91 640 91 068 104 170 131 638 145 668 192 683 395 703
Nan 38 610 40 792 38 842 24 073 19 946 12 491 14 443 12 930 12 685
Narathiwat 25 344 31789 31 565 22 962 15 851 335 30 642 65 005 79 528
Phetchaboon 20 583 35 572 5099 5673 2564 18
Phrae 33 921 44 393 43 098 21 382 17426 1373 47 459
Ranong 20 749 11 053 9561 19 226 48 050 46 207 31785 5375 2560
Roi ET 6530 15 130 15 118 16 732 19 221 22 509 20 168 20 470 14 730
Sakon Nakhon 57 767 57 997 55 227 36 231 30 434 39 048 38 010 39 654 34 412
Samui 602 105 655 809 742 779 783 666 748 174 1 033 468 1 294 105 1 400 259 1 383 710
SukhoThai 37 295 52 183 29 427 34 717 27 911 28 218 37 271 32 021 35154
Surat Thani 172 519 176 895 178 104 163 007 162 753 205 321 204 146 287 192 358 565
Su Rin 515 3405
Trad 14 548 44 578 69 722 81146 70 223
Trang 108 645 149 401 79 543 76 875 79 210 93 602 81 341 89 187 104 546
U-tapao 26 312 31 688 35 980 37 190 48 329 70 036 93 480 98 255 91 221

Total (all carriers) 15 053 922 16 147 957 16 302 555 15 640 838 15 579 573 21 698 775 21 503 065 23 890 900 26 474 505
Growth rate 7.27% 0.96% 4.06% 0.39% 39.28% 0.90% 11.10% 10.81%
LCCs total 4 138 774 6 145 502 8 598 820 11137 757
Share of LCCs 19.1% 28.6% 36.0% 42.1%

Source: Airport Statistics, Department of Civil Aviation, Thai Government.

total passenger trafc fell slightly. In 2006 and 2007, total trafc
recovered, growing at 11.1% and 10.8% respectively, while the LCCs
continued to increase their trafc at a fast rate. In effect, the LCCs
grew so fast that the number of Thai Airways domestic passengers
fell in 2007, prompting the carrier to reposition itself by focusing on
the international market for higher yield. With LCCs having 42.1% of
the Thai domestic market in 2007, they are expected to have
a majority share there soon.
Table 6 shows the number of passengers on Thai domestic
routes from/to Bangkok by airline.11 On most of the routes, Thai
Airways had seen its share falling, especially on the Hat Yai route.
On the Hat Yai route Thai AirAsia and Nok Air had more passengers
than Thai Airways in 2007, whereas the three LCCs made signicant
inroad on the Krabi route in 2006 and 2007 at the expense of Thai
Airways. In general Thai AirAsia is the strongest carrier among the
three LCCs; nevertheless, Nok Air is the top carrier on the Udon
Thani route and One-Two-Go is the top carrier on the Surat Thani
route. Finally, the Khon Kaen route is so short that the LCCs
competitor is passenger rail and long-haul buses.
11
Two other major routes that link Bangkok, namely BangkokChiang Mai and
BangkokPhuket, are not included in the table, owing to data unavailability.
3.2. China as a case example
Over the last three decades, Chinese civil aviation has seen
a rapid growth, averaging 17% annual growth rate. As a conse-
quence, China (excluding Hong Kong, Macau, and Taiwan) is now
ranked No. 2 in the world in air passenger kilometers (behind the
US). Although the Chinese domestic market is now large and is,
many industrial observers and operators believe, suitable for the
low-cost model, only one carrier is operating with such a model.
The market is dominated by the big three state-owned carriers,
namely, Air China, China Southern Airlines and China Eastern.
Together, they account for over 80% of the domestic air passenger
market. As elaborated below, barriers for low-cost start-ups to
enter the market and then prosper are signicant, with most of the
barriers being regulatory. Different from the US, Canada and the EU,
many aspects of the industry are regulated in China, including
aircraft purchase, pilot acquisition, fuel purchase, airport charges,
route entry, and pricing:
- Aircraft purchase and eet buildup: It is required by law that
purchasing of aircraft built by overseas companies must be
approved by the National Development and Reform Commis-
sion once every year. For the big three, this requirement does
not have much of an impact, since they usually will get
44 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650

Table 6
Number of passengers on Thai domestic routes from/to Bangkok, by airlines.

From/to Bangkok 2003 2004 2005 2006 2007

Hat Yai [776 km]
Thai Airways 637409 562 810 53% 403 750 37% 349 311 30% 340 782 26%
Thai AirAsia 163 208 15% 252 851 23% 405 749 35% 434 342 33%
One-Two-Go 1137 211 073 20% 143 322 13% 77407 7% 134 135 10%
Nok Air 87 642 8% 279 032 25% 322 617 28% 399 688 31%
Phuket Airlines 32 112 3% 19 145 2%

Total 638 546 1 056 845 1 098 100 1155 084 1 308 947

Chiang Rai [676 km]

Thai Airways 403 844 451813 74% 413 841 60% 373 296 55% 349 722 47%
Thai AirAsia 67 050 11% 143 400 21% 226 892 33% 218 399 29%
One-Two-Go 76 639 13% 127 170 19% 82 752 12% 124 280 17%
Nok Air 59 528 8%
Phuket Airlines 6216 13 819 2%
Air Andaman 7087

Total 417 147 609 321 684 411 682 940 751 929

Udon Thani [453 km]

Thai Airways 361 315 378 287 64% 347 326 51% 269 551 40% 280 128 41%
Thai AirAsia 111 679 19% 82 292 12% 130 922 19% 88 777 13%
One-Two-Go 10 180 2%
Nok Air 85 708 14% 245 379 36% 273 355 41% 314 312 46%
Phuket Airlines 2226 9543 2% 6611 1%

Total 363 541 595 397 681 608 673 828 683 217

Ubon Ratchathani [482 km]

Thai Airways 252 514 306 232 87% 301746 78% 250 779 68% 265 055 70%
Thai AirAsia 44 121 13% 82 614 22% 117 337 32% 78 774 21%
One-Two-Go 2065 0.5%
Nok Air 35 901 9%

Total 252 514 350 353 386 425 368 116 379 730

Krabi [651 km]

Thai Airways 251 272 324 475 71% 265 861 92% 317 395 66% 325 275 43%
Thai AirAsia 141810 30% 245 452 32%
One-Two-Go 19 518 4% 65 516 9%
Nok Air 116 857 15%
Bangkok Airways 14 629 74 205 16% 20 052 7% 11170 1.5%
Phuket Airlines 46 724 59 004 13% 4489 2%

Total 312 625 457 684 290 402 478 723 764 270

Surat Thani [533 km]

Thai Airways 162 055 196 200 100% 184 373 91% 159 789 56% 175 450 49%
Thai AirAsia 57469 20% 93 380 26%
One-Two-Go 19 194 9% 67 999 24% 86 008 24%

Total 162 055 196 200 203 567 285 257 354 838

Khon Kaen [365 km]

Thai Airways 392 739 433 734 86% 435 547 94% 383 867 99% 383 466 98%
Thai AirAsia 72 652 14% 27 127 6% 6032 2%
One-Two-Go 3096 0.8%

Total 392 739 506 386 462 674 386 963 389 498

Source: Airport Statistics, Department of Civil Aviation, Thai Government.

approved easily even for tens of aircraft in one year and are able
to borrow millions of dollars from large state-owned banks.
However, the quota made available for those small private
rms are very limited, especially considering the speed of
growth of these carriers. These small carriers seldom know
whether they will get the quota next year; consequently, it is
hard for them to plan, e.g., human resources and cash ow,
accordingly. If they plan the crew in advance but nally do not
get the quota, these carriers will have to bear the cost of the
idle crew. Financing is another problem. Few banks will be
willing to lend money to such risky businesses. If aircraft
purchase is difcult in China, then wet-leasing aircraft is almost
impossible. According to the rule announced by the Civil
Aviation Administration of China (CAAC) on 15 January 2005,
CAAC the industrys regulator, will no longer process any
application for wet-leasing aircraft so as to set up civil air
transport business. It is difcult, therefore, to achieve a large
scale of production within a short period of time, which is vital
for LCCs operation and expansion.
- Pilot acquisition: Pilot shortage is a long-standing problem in
the Chinese airline industry. Even the large established carriers
are encountering this problem. In China, airlines pay the
training costs of their own pilots, a huge investment in time as
well as in cash. To protect such an investment, free ow of
 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650
pilots across airlines has not been allowed since May 2005. For
those new carriers, recruiting pilots is a big headache. They
have to negotiate with both the pilots and the established
carriers that own the pilots. If the agreements are reached,
the new employer must pay the original employer RMB 0.72.1
million as compensation. During this period, the pilots in
question are not allowed ying until everything is settled.
Since the incumbent carriers are short of pilots themselves, the
negotiation is usually a painstaking process. The only LCC,
Spring Airlines, has started training their own pilots, but the
shortage is still expected. The rule regarding pilot recruiting is
impeding further development of Spring and other LCCs.
- Fuel purchase: China Aviation Oil is the monopoly aviation fuel
provider in the country. That is, all the carriers are required to
purchase oil from this company, leaving the LCCs with no
chance of seeking more cost-effective alternatives.
- Airport charges: LCCs pay almost the same airport charges as
FSAs. This is because most airports in China are newly built and
they are luxury and expensive. Since air industry in China did
not develop a lot until 1980s, it is difcult to nd older but
cheaper secondary airports. Meanwhile, in those main airports,
LCC terminals are under-developed.
- Route entry: Routes among the top 20 busiest airports (in
terms of passenger throughput) are not free for entry: entry
permits for these routes are required.12 Because of the grand-
fathering rule, emerging budget carriers nd it difcult to enter
those routes. Moreover, usually, each route is not allowed to
have more than three carriers, even though the demand is
strong. In this sense, LCCs in China are highly limited on the
choice of markets.
- Pricing: According to the regulation, the base air ticket prices
are regulated by CAAC (RMB 0.75 per passenger kilometer).
Each carrier is allowed to increase the price by less than 25% of
the base price and decrease the price by less than 45%. This
prevents LCCs from further increasing the fare gap and fully
exploring their cost advantage. In fact, 45% discount is common
among FSAs. If LCCs are not allowed to offer a deeper fare, they
would not be able to attract enough passengers to ll the
empty seats and cover the cost.
- Others: According to the regulation, air carriers in China are not
allowed to outsource ticket sales and aircraft maintenance.
These regulatory barriers make the low-cost model difcult to
implement in China. Furthermore, they limit the growth of LCCs.
For instance, Spring Airlines wanted to enter Southeast Asia routes
in late 2008, but because of the nancing, aircraft purchasing and
pilot recruiting limitations, it found it hard to reach the desired
level of international exposure by going alone. As a result, Spring is
cooperating with Tiger Airways to launch low-fare service on the
ShanghaiXiamenSingapore route, and with Cebu Pacic to
launch low-fare service on the ShanghaiXiamenManila route. On
both routes, Spring provides domestic feeder services for interna-
tional travelers.
Given the current unfriendly regulatory environment, the
good performance so far achieved by Spring Airlines is quite
remarkable. In addition to Springs low-cost strategies and other
contributing factors analyzed in Section 2, the Springs success may
reveal that Chinese state-owned FSAs were highly inefcient
(Zhang & Chen, 2003). As such, the LCC phenomenon would bring
about further benets to Chinese consumers, just like what has
been experienced elsewhere, if those FSAs are pushed to improve
12
Regulations on the Domestic Route Permits in Chinese Civil Aviation, CAAC,
March 2006, Beijing, China.
45
efciency. A necessary condition for this to happen is, as argued
above, to further engage in domestic regulatory reforms.
4. Regional regulatory environment and liberalization
The emergence of LCCs following recent domestic deregulations
in the region also has implications for intra-Asia regulatory
reforms. A major disadvantage of the LCCs in Asia is the smaller
geographic areas of domestic economies. As LCCs turn their
attention to international routes for expansion opportunities, they
would confront regulatory constraints applying in international
markets. In intra-Asia markets there is an array of regulatory
constraints and barriers, as Asia has a much more restrictive
international regulatory regime than North America or Europe. For
example, there is no open-skies agreement currently within
Southeast Asia although the countries of the Association of South-
East Asian Nations (ASEAN) have set up the timetable to gradually
move to regional open skies by 2015 (Forsyth, King, & Rodolfo,
2006).13
4.1. Impact of intra-Asia aviation regimes on LCCs
A restrictive intra-Asia aviation regime exacerbates the
geographic disadvantage of Asian LCCs. While East Asia as a whole
has over two billion people, each economy, with the exception of
China and Japan, has a small domestic airline market, restricted by
either a limited geographic area or a small population base. While
China has a large area and a large population, regulatory barriers
are not conductive to domestic LCC growth as discussed above
and air transportation faces strong competition from land and
surface transportation.
Here, a liberal Asian aviation market will be critical for the
survival and success of regional LCCs, since this opens up numerous
secondary city pairs in the intra-Asia market. These are the markets
where FSAs tend not to operate, but LCCs can thrive with their
business model (i.e., single aircraft type, one fare-class, no-frills
service, and so on). For instance, most intra-ASEAN ights are
under 2000 miles and can be operated by single-aisle aircraft, such
as B737 or A320.
The restrictive intra-Asia aviation regime, together with the
scarcity of secondary airports (see the discussion in Section 5), may
also result in suboptimal networks for the regions LCCs. Unlike
FSAs, LCCs in North America and Europe de-emphasize hub-and-
spoke networks; instead, they tend to provide point-to-point
services using secondary airports in a metro area (OConnell &
Williams, 2005; Tretheway, 2004). As indicated in Zhang, Zhang,
and Clougherty (in press), there are several reasons why these LCCs
prefer point-to-point networks over hub-and-spoke networks:
- In order to save airport charges, avoid congestion and avoid
head-to-head competition with FSAs, the LCCs prefer the use of
secondary airports, which are cheaper than central airports but
less conducive to hub operations;
- The point-to-point operation facilitates fast turnaround time at
airports and thereby improves aircraft utilization, a main
feature of LCC business model as discussed in Section 2;
- LCCs have generally been the entrants over the past several
years; as a consequence, suitable hub airports are in short
supply. Further, the xed costs of entering with a point-to-
point network are much lower than a hub-and-spoke network;
13
ASEAN consists of ten member countries: Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
46 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650
- The lower frequencies of service involved with point-to-point
networks, as compared to hub-and-spoke networks, match
with the lower values of schedule delay LCC customers typi-
cally exhibit (direct ights do involve less time in travel, but
LCC direct ights are often at a days inconvenient times and
come at lower frequencies during the day).14
On the other hand, our examination of the route maps of ten
Southeast Asian LCCs reveals that in general these carriers y from
large cities to small cities, and from large cities to large cities. In
other words, they seldom y from a small city to another city as
implied by a point-to-point network. For instance, AirAsia depends
heavily on hub-city airports (i.e., primary airports) in covering its
main markets of three countries, Malaysia, Indonesia and Thailand.
Furthermore, given the restricted aviation regime, LCCs in Asia
could extend their networks and enter a new regional market only
through joint-venture (JV) arrangements or alliances. For instance,
as discussed earlier, AirAsia in Malaysia expanded its operations
through its JVs in Thailand (Thai AirAsia) and in Indonesia (Indonesia
AirAsia). Tiger Airways in Singapore also established its JVs, namely,
Tiger Airways Australia and Incheon Tiger in South Korea.
By opening up numerous secondary city-pair markets and
promoting use of more efcient networks and secondary (regional,
provincial) airports, the regional aviation liberalization and inte-
gration will facilitate the development of Asian LCCs. We next
discuss recent policy developments, as well as prospects for
regional integration, in this direction.
4.2. Recent policy developments and prospect for regional
integration
As compared to the EU and North America, the pace of trade
liberalization is slow in ASEAN. All tariffs within the proposed
ASEAN free trade area (FTA) are expected to be eliminated by 2015,
and the full liberalization is expected by 2020. For air transport
services, as indicated above, full liberalization is mandated by 2015.
In the late 1990s, ASEAN countries established a framework for
negotiations in services trade known as the ASEAN Framework
Agreement on Services (AFAS). The negotiations under AFAS had
focused on seven priority sectors, including air transport (Findlay
& Nikomborirak, 2002). In 2000 a Memorandum of Understanding
on Air Freight Services was signed by the ten member states of
ASEAN, allowing the designated airlines of each state to operate all-
cargo services of up to 100 tons weekly with no limitations on
frequency or aircraft type. This was intended to serve as a rst step
in the full liberalization of air cargo services. At the time, however,
a majority of the ASEAN countries appeared to be still cautious
about exposing their domestic carriers to competition from foreign
airlines, especially in the passenger market. Consequently, the idea
of establishing an ASEAN open-skies bloc, as proposed by
Singapore, would require more work and evaluation before having
any chance of being implemented.15
Signicant progress has been made lately on the passenger side,
however. In July 2007, ASEAN countries reached an agreement
under which unlimited ights between capital cities in ASEAN will
start at the end of 2008. In addition, it is expected that ASEAN
nations will sign an agreement as early as December 2008, under
which ASEANs carriers will be able to (Asia Times, 2008):
14
That said, it should be pointed out that some LCCs have begun to experiment
with hub-and-spoke networks (Southwest hubs 20% of its passengers now); hence,
we may begin to see networks being increasingly employed by LCCs in the future.
15
Several possibilities for facilitating the move to open skies within the ASEAN
are examined by Forsyth et al. (2006).
- overy a member country without landing;
- stop in a member country for refuel or maintenance without
transferring passengers or cargo;
- carry passengers and cargo from one country to another and
vice versa.
The positive policy developments are due largely to the positive
effects of liberalization, both domestically and regionally. Malaysia
may serve a case for domestic liberalization. After maintaining
strict closed-skies aviation policies for many decades, more
recently Malaysia has seen a boom in air trafc growth due to
greater domestic competition led by AirAsia. This, together with the
success of other regional LCCs, has prompted the Malaysian and
other ASEAN governments to push for a more liberalized regulatory
regime (Asia Times, 2008).
As a case of regional liberalization, consider the lucrative
SingaporeKuala Lumpur route. This route had for years been
restricted by Malaysia to protect Malaysian Airlines, and was
dominated by Malaysian Airlines and Singapore Airlines as
a duopoly. In late 2007, the Malaysian government decided to allow
AirAsia to operate on the route, paving the way for Tiger Airways
(from the Singaporean side) to enter the route as well. The liber-
alization policy started with allowing two ights daily from each
LCC, and was extended to six daily ights in September 2008. As
can be seen from Table 7, the entry by AirAsia and Tiger Airways
forced the two incumbents to lower their fares, to the clear benet
of passengers.
For the three principal countries in Northeast Asia (China, Japan,
South Korea) air transport is a signicant sector. Considerable
attention has thus been paid to the formation of optimal aviation
policies in each country. Despite some important progress made in
recent years, the regional air transport market is fragmented and
restricted, owing to an array of laws and regulations and other
barriers that prohibit the free ow of people, goods and service
providers. As a result, the existing air transport system appears to
be ill-equipped for providing an efcient market in Northeast Asia.
Since the late 1990s there has been an increasing interest in
economic cooperation among the Northeast Asia (NEA) countries in
general and in liberalization and integration in air transportation
in particular owing to a number of important political, economic
and social developments. For example, the 19971998 Asian
nancial crisis triggered a sense of the East Asian region identity,
leading to the creation of ASEAN 3 (China, Japan and Korea) as
a formula for regional integration. Meanwhile, air transport
markets are being continentalized by the creation of the single
aviation market in European Union, the USCanada open-skies bloc
(and an increasing call for creating a single aviation market in North
America), and the Trans-Tasmanian single aviation market
between Australia and New Zealand. Furthermore, the US and the
EU have signed a rst-stage agreement for an open aviation area,
and are currently negotiating a second-stage agreement with the
aim to create not only a single North Atlantic market, but also
a single EU/US market. These international developments have also
Table 7
One-way fare comparison before and after LCC entry, SingaporeKuala Lumpur
(in S$).
Airline Fare before Fare after Website source
entry entrya
AirAsia 18.93b www.airasia.com
Malaysian Airlines 220.00 26.00 www.malaysiaairlines.com
Tiger Airways 42.00b www.tigerairways.com
Singapore Airlines 220.00 156.00 www.singaporeair.com
a
Average fare of 3Q08, before tax and fees (around US$80).
b
AirAsia and Tiger Airways even offer limited free seats (before tax and fees).
 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650
added some urgency for aviation liberalization in the NEA region.
With competition occurring at not only the country level but also
the bloc level, an efcient and integrated air transport system
becomes critical owing to its role in improving the competitiveness
of regional industrial bases. Furthermore, there will be mutual
gains from the liberalization, particularly in terms of facilitating LCC
developments.
During the ASEAN 3 summit convened in Singapore in
November 2000, the idea of extending the ASEAN FTA to Northeast
Asia to create a greater East Asia trade and economic grouping the
ASEAN 3 FTA was suggested by the then President Kim Dae-
jung of Korea. Two years later at the ASEAN 3 Cambodia summit,
the leaders of the three NEA countries reached an agreement on
launching a joint effort to study the feasibility of establishing
a Northeast Asian FTA. Early in 2004, the rst meeting attended by
senior ofcials was held under this agreement, where views and
opinions were exchanged on the work program for the joint
research. It was believed that the research would pave the way for,
and eventually bring about, an ofcial negotiation for an FTA among
the three economies.
In air transportation, South Korea signed an agreement with
China for open skies with Chinas Shandong province and Hainan
province in June 2006. As discussed in Lee (2008), the South Korea
Shandong open-skies agreement has reduced fares on bilateral
routes. Furthermore, the two countries signed a Memorandum of
Understanding, with open skies (mainly liberalization of third-/
fourth-freedom trafc rights) being scheduled to extend to all
regions of China by 2010 (Lee, 2008). In addition, South Korea
signed an open-skies agreement with Japan (liberalization of
third-/fourth-freedom trafc rights) in August 2007. The triangle
shuttle services among Shanghais Hongqiao airport, Seouls Gimpo
airport and Tokyos Haneda airport the three airports which
were considered as the domestic airports in their respective
countries started in late 2006.
Perhaps more importantly, the NAFTA and EU experiences have
demonstrated that signicant benets e.g., from the emergence
and growth of LCCs can be gained from the regional liberalization
and integration in air transport markets. These, together with the
on-going negotiations for an open aviation area across the North
Atlantic, have put pressure on East Asia to respond. Therefore,
further aviation liberalization and integration in the region will not
only have an addition boost to the regional air transport market and
benet consumers and overall economies, but also help the NEA
aviation sector to compete and prosper in an increasingly
competitive world market. For the past few years there have been
integrative activities across the NEA and ASEAN regions. In 2001
China and ASEAN announced an agreement, under which the two
sides would establish an FTA by 2010. Following this agreement,
Japan launched bilateral trade talks with Philippines, Thailand,
Malaysia and Indonesia, and planned to sign an FTA and economic
partnership agreement with ASEAN by 2012. Meanwhile, Korea
planned to sign similar agreements with ASEAN by 2009. Similarly,
separate liberal bilateral air-service agreements have been signed:
e.g., China and Thailand have agreed to unlimited air ights
between their borders. A more liberal and integrated East Asian
aviation market would certainly give a boost to the further devel-
opment of LCCs in the region.
5. Secondary airports and low-cost terminals
An important source of cost savings for LCCs in North America
and Europe is from the use of uncongested secondary airports,
leading to lower airport charges and shorter aircraft turnaround
time. For instance, Francis, Fidato, and Humphreys (2003) and
Francis, Humphreys, and Ison (2004) analyzed the airportairline
47
relationship from the cases of European LCCs and airports, where
most secondary airports exempt or reduce landing and other
charges. These airports may nonetheless still benet from having
the presence of LCCs, owing to various non-aeronautical revenues
and other aviation-related economic activities.
Airports that are used by LCCs as their base airports may be
categorized into three types: primary airports, secondary airports,
and low-cost terminals inside the primary airports. As compared to
North America and Europe, Asia has much less secondary airports
in metro areas that are available for LCCs.16 If they do exist, they are
either primary airports prior to the opening of new airports (e.g.,
Gimpo Airport in Seoul, Hongqiao Airport in Shanghai, and Don
Muang Airport in Bangkok), or newly built airports (e.g., Kobe
airport in the Osaka area), or airports that belong to different
jurisdictions. Examples for the latter include Macau airport or
Shenzhen airport (in Mainland China) which may serve as
a secondary airport for Hong Kong, and Johor Bahru Senai airport
located on the Malaysian side of the border which may serve as
a secondary airport for Singapore. As a result of these situations,
these secondary airports can be expensive, or unprepared/ill-
equipped for the LCC type of operation, or inconvenient owing to
cumbersome border crossing and customs procedures. Due largely
to this reason, Asian LCCs rely mainly on primary airports for their
base operation. For instance, Murakami (in press) pointed out that
none of the low-fare carriers in Japan use secondary airports as
their base airports (see also Table 1). As mentioned earlier, the lack
of secondary airports slows down the development of low-cost
aviation in Asia.
Primary airports have made some adjustments so as to facilitate
LCCs operation. In Hong Kong International Airport (HKIA), for
example, four LCCs (AirAsia, Cebu Pacic, Oriental Thai and JetStar
Asia) have operation. Although they account for only 2% of the
airports total trafc, HKIA does provide specic services catering
for the needs of LCCs: e.g., cheaper and better arranged gates, and
simplied procedures that may reduce the aircraft turnaround
time. Primary airports may, more dramatically, invest in so-called
low-cost terminals, which are specically designed to suit for the
LCC business model. For example, there may be no travelators,
escalators and aerobridges in a low-cost terminal; this, together
with other features, is to ensure a short turnaround time for
aircraft. Several airport charges (landing, handling, etc.) are dis-
counted for LCCs, and passenger facility service charge is usually
half of the airports main terminals (CAPA, 2008). The low-cost
terminals include the low-cost carriers terminal (LCCT) at Kuala
Lumpur International Airport (KLIA) and the budget terminal (BT)
at Singapore Changi International Airport (SCIA). JetBlues new
terminal at New Yorks JFK airport, currently under construction, is
also a low-cost terminal.
LCCT at KLIA is used by AirAsia, Cebu Pacic and Tiger Airways.
Jetstar, an Australian LCC, uses the KLIAs main terminal since LCCT
is located very far (20 km) from the main terminal about 30 min
by bus from the main terminal.17 In contrast, BT at SCIA is located
next to a main terminal, Terminal 2, 5 min by free shuttle bus. At
SCIA, both Tiger Airways and Cebu Pacic use BT, but AirAsia and
Jetstar do not use it. The Jetstars reason might again be that BT is
not convenient for transit passengers. Even though BT is close to the
main terminal, transit passengers need to pass through the immi-
gration and pick up their luggage before going to BT. Therefore,
most passengers using LCCT and BT are likely to be terminal
16
See Button (2008) for a general discussion on air transportation infrastructure
in developing countries.
17
However, LCCT will be moved to a location next to the main terminal in 2012.
48 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650

Table 8
Low-cost terminals in Southeast Asia.

Airport Size (m2) Accessibility Capacity Passenger Discounted Carriers served

to/from main throughput airport charges
terminal
Low-cost carriers Kuala Lumpur 35 290 30 mins by bus 10.0 million passengers 4.7 million Parking; ofce rent; AirAsia; Cebu
terminal (LCCT) International (charge) (expansion to 15.0 (2006); counter; passenger Pacic;
Airport (KLIA) million 7.4 million service Tiger Airways
passengers in March (2007)
2009)
Budget terminal Singapore Changi 25 000 5 min by 2.7 million passengers 1.4 million Ofce rent; counter; Tiger Airways;
(BT) International bus (free shuttle) (expansion to 7.0 million (2006); passenger service Cebu Pacic
Airport (SCIA) passengers in 2009) 2.0 million
(2007)

passengers. Information of the two low-cost terminals is summa- overseas LCCs and seek their cooperation. Although both airports
rized in Table 8. adopt this strategy, it seems that Xiamen airport might have
In China, the rst low-cost terminal was established in May a better chance to succeed. As can be seen from Table 9, the airport
2008 at Xinzheng airport which is located in Zhengzhou, the has already been serving Spring, Tiger, and Cebu, the most LCCs
capital city of Henan province but a secondary city in the context of being served at any Chinese airports. As a result, it has more
Chinese aviation providing dedicated service for Spring Airlines. experiences in low-cost operation, particularly in facilitating the
Even prior to the opening of this low-cost terminal, the airport had partnership of domestic and foreign LCCs in their connecting
beneted from Spring, its home carrier. After the entry of Spring ights. The airport is also strategically located in taking advantage
Airlines in 2007, the carrier operated 608 ights at Zhengzhou of impending direct ights between Taiwan and Mainland China
airport annually, serving one million passengers with a load factor and likely booming of LCC trafc through Xiamen (Chang & Hsu,
of almost 95%. Its annual passenger departures on the Zhengzhou 2007).
Shanghai route reached 100,000, with over 90% load factor. In Since almost all the low-cost terminals in Asia have operated for
addition to Xinzheng, Xiamen airport will complete a low-cost only one or two years, their impact on LCCs is difcult to assess. In
terminal at the end of 2008. Information about these two airports is KLIA, LCCT was opened in March 2006, and its major user is AirAsia.
given in Table 9. Low-cost terminals are also under construction at The AirAsia Group had reported data separately for AirAsia in
several other Chinese airports, such as Kunming, Dalian, Hongqiao, Malaysia, Thai AirAsia and Indonesia AirAsia until 1Q07 (the rst
and Shenyang. quarter of 2007). This may allow us to compare the performance of
Both Xinzheng and Xiamen airports aim to become a hub of AirAsia (Malaysia) before and after the opening of LCCT. Based on
low-cost aviation. As discussed in Sections 2 and 3, the domestic the 3Q063Q05 and 4Q064Q05 comparisons (see Table 10) we can
market has only one LCC (Spring Airlines). In order to survive, see that after the LCCT opening, AirAsia has added capacity,
therefore, low-cost terminals in Chinese airports must attract increased output in terms of both the number of passengers and the
revenue-passenger kilometers. More importantly, AirAsia has
further lowered its cost per ASK (available seat kilometer) which
Table 9
is already very low according to the industry standard while
Low-cost terminals in China.
improving its load factor. It seems that with lower airport charge
Airport (city) Xinzheng (Zhengzhou) Xiamen (Xiamen) and higher aircraft utilization, LCCT has contributed to AirAsias
Establishment May 2008 End of 2008 cost reduction and output expansion.18
Converted by Old international terminal Cargo terminal While low-cost terminals are likely to be benecial to LCCs, it
(short run) is less clear whether low-cost terminals represent a viable busi-
Old passenger terminal ness model and an alternative to secondary airports. A low-cost
(long run) terminal can attract LCCs and produce a strong, positive impact
LCCs served Spring Airlines Spring Airlines, Tiger
Airways, Cebu Pacic
on trafc volume for its airport. Nevertheless, airport owners
Low-cost 23 million passengers might incur nancial problems since airport charges are usually
terminal (short run) heavily discounted at the low-cost terminal for LCCs. As inde-
capacity pendent nancial statements of LCCT and BT are not available to
58 million passengers
(long run) us, we are unable to judge the real nancial status of both low-
Area 3800 m2 cost terminals. LCCT has a signicant, positive effect in terms of
Facility With: check-in counters, gates, Simpler facilities; more passenger volume of KLIA, but the overall nancial impact is
security system, and baggage streamlined processes;
unclear. More generally, given that these two low-cost terminals
terminal closer to runway
handling equipment are still at the initial stage of their operations in their respective
Without: VIP room, smoking airports, it is difcult to fully assess their potential and
room, cafes, restaurants, shops,
shuttle bus
Strategy Increase international ights and Coordinate domestic and
domestic connecting ights; overseas LCCs to promote 18
Compared with AirAsias evaluation, the evaluation using Thai AirAsias data
increase trafc volume via lower the one-stop low-fare
would produce less clear-cut results. Based in Thailand, Thai AirAsia uses LCCT
airport charge; promote regional domestic/international
much less intensively than AirAsia which is based at LCCT. Furthermore, after
ights service
moving to the new Bangkok (Suvarnabhumi) airport in September 2006, the cost
Future airport 10 million passengers Over 10 million in 2008a
per ASK of Thai AirAsia increased 26% and 21% in the 4Q064Q05 and 1Q071Q06
passenger
comparisons, respectively. These cost increases are, however, due mainly to that the
volume
Airport of Thailand (AOT) raised the charges of the new airport. Similar comments
a
8.7 million passengers went through Xiamen airport in 2007. apply to use of Indonesia AirAsias data.
 A. Zhang et al. / Research in Transportation Economics 24 (2008) 3650 49

Table 10
Operational and nancial statistics of AirAsia (Malaysia).

Average load factor Passengers (thousand) RPK (million) ASK (million) Revenue/RPK (US cents) Cost/ASK (US cents) Aircraft
AprJun 2005 76% 1203 1447 1903 3.63 2.40 19
AprJun 2006 83% 1623 1979 2388 3.35 2.32 26
Change 7% point 35% 37% 25% 8% 3% 37%
JulSep 2005 70% 1193 1358 1953 3.61 2.41 21
JulSep 2006 79% 1945 2152 2713 3.08 2.20 30
Change 9% point 63% 59% 39% 15% 9% 43%
OctDec 2005 76% 1344 1532 2009 3.27 2.69 23
OctDec 2006 82% 2273 3060 2505 3.62 2.66 32
Change 6% point 69% 64% 52% 11% 1% 39%
JanMar 2006 80% 1560 1833 2296 3.02 2.74 24
JanMar 2007 77% 2160 2461 3215 3.52 2.91 33
Change 3% point 39% 34% 40% 17% 6% 38%

Notes: (1) low-cost carriers terminal (LCCT) was opened in March 2006; (2) RPK revenue-passenger kilometer; ASK available seat kilometer.

sustainability. One possible scenario here is that a low-cost
terminal can improve the runway efciency before the primary
airport reaches its capacity for airport movements. However, the
low-cost terminal might not necessarily be a net contributor to
the airports nancial performance when the primary airport
reaches its capacity.
6. Concluding remarks
A strong trend that emerged with deregulation and liberaliza-
tion in the United States, Canada and European Union was the
disappearance of weaker airlines through bankruptcies or mergers
but at the same time the birth of upstart competitors. Well-
established brands like PanAm, Eastern Airlines and Canadian
Airlines International disappeared, while Southwest and several
new brands (e.g., JetBlue, Ryanair, Westjet) emerged. These low-
cost carriers have imposed signicant competitive pressures on the
established full-service airlines, especially on the lower-end of the
fare spectrum. In Asia, there are LCCs in, among others, Japan,
South Korea, China, Malaysia, Thailand, the Philippines, Indonesia
and Singapore. AirAsia, based in Malaysia, and Spring Airlines,
based in China, and are among the success stories. One disadvan-
tage of these carriers in Asia, as compared to their counterparts in
the US, Canada and EU, is the smaller geographic areas of econo-
mies. China does have a large domestic airline market; neverthe-
less, as elaborated in the paper, its various regulatory barriers make
entry and growth of LCCs difcult. In order to succeed and survive,
therefore, Asian LCCs need to expand their operation from
domestic routes to intra-Asia regional routes. Here they would
confront the regulatory constraints applying in international
markets. Unfortunately, the aviation regime across Asian countries
is much more restrictive than the ones in the EU and North
America.
If the experience in North America, Europe and elsewhere is any
indication, LCCs are here to stay and provide a welcome, competi-
tive stimulus in regional markets. These carriers provide a major
challenge to the traditional full-service operators, many of whom
are government owned in Asia, while also helping more and more
people with access to air transport, which is important given
numerous islands in the region, relatively poor road and surface
transportation in developing Asian economies and the emergence
of a large segment of middle-income population. Our analysis has
suggested that the Southwest effect i.e. a rapid increase in
trafc and a simultaneous fall in fares on routes where, or close to
where, Southwest operates found in North America and Europe
may also exist in Asia. In effect, Morrison (2001) estimated that the
savings due to competition from Southwest Airlines amount to
more than half the fare reductions attributed to the US airline
deregulation. This striking nding, together with the analysis of
this paper, suggests that policies that encourage LCC entry and
growth may have a large impact on passenger welfare and national
and regional economic development. The present paper has
examined three such policies, namely, further relaxing domestic
regulatory constraints, liberalizing bilateral and multilateral air-
service agreements in Asia, and developing low-cost terminals or
secondary airports in the region.
For the past few years there have been deregulations in
a number of Asian countries, and there have been liberalization and
integration activities within ASEAN and within Northeast Asia, as
well as between Northeast Asia and ASEAN. On the issue of
secondary airports, some encouraging developments are
happening in the region. For example, AirAsia started to grow Clark
airport into a secondary airport in Manila. Further, there is unused
capacity available in Japans secondary airports as a result of over-
development in the past, a consequence of the government airport
policy and strong local political pressures (Yamauchi, 2000, 2002).
Capacity now becomes available at South Koreas secondary
airports as well, owing to stagnant/declining domestic trafc, and
will likely become available in China as the government invests
further in secondary airports as part of its developing the west
strategic plan. Moreover, China plans to convert some military
airports near metro areas (e.g., Beijing, Guangzhou) to low-cost
airports. Together with low-cost terminals, these developments
will enable LCCs to implement key aspects of the typical LCC model
and will be particularly important for the growth of Asian LCCs in
the long run.
Acknowledgement
We would like to thank Steve Ison and Ken Button for helpful
comments, and Zhuo Lin and especially Sarah Wan for excellent
research assistance.
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