Budget airline carriers set for price war as competition increases

That will bring fresh challenges to Korea's two full-service airlines, which are already being pummeled by volatile fuel prices, lower cargo demand and a weaker local currency. Though they own or hold stakes in budget carriers, Korean Air and Asiana Airlines will inevitably see their slices shrivel in the aviation market, experts say.

More and more budget-conscious tourists are willing to surrender some comfort in return for lower fares. The number of Koreans using low-cost airlines topped 10 million for the first time last year, up a staggering 32.5 percent from 2010, according to the Transport Ministry.

The combined market share of the country's five low-cost airlines — Jeju Air, Air Busan, Jin Air, Eastar Jet and T'way Air — rose to 16.5 percent last year, up 3.3 percentage points. The five together control more than 41 percent of domestic traffic.

The no-frills carriers operate 25 international itineraries. More than 1.8 million Koreans flew overseas with them last year, doubling their collective market share to 4.3 percent.

Yet that portion could reach 20 percent in the coming years, forecasts analyst Joo Ik-chan at Eugene Investment & Securities.

“It doesn't have much impact on big players at this point because they fully dominate lucrative North American and European routes. But in the long term, budget carriers will bite into their stakes,” he says.

Newcomers

Tapping the Korean market are AirAsia Japan, Jetstar Japan and Peach Aviation from Japan as well as Spring Airlines of China. They are expected to offer cheaper tickets and more choices of destination than their Korean peers, officials say.

Peach, which is set up last year by All Nippon Airways, is set to launch daily flights between Incheon and Osaka in May. Its price-focused strategy surprised the Japanese aviation industry by setting the rates for domestic flights at a third of what its parent ANA charges.

“Although everything else is charged for, we guarantee that fares won't disappoint you,” Kim Woo-geol, chief of Peach's Seoul office, recently told a local travel magazine. The company is planning to introduce a promotional round-trip fare of 10,000 won (US$8.90) to mark the inauguration of its latest route.

AirAsia Japan, a joint venture between ANA and AirAsia, is gearing up to fly from Tokyo to Incheon and Busan starting October. AirAsia X, the long-haul affiliate of Asia's largest low-fare airline, began services between Kuala Lumpur and Seoul in August 2010.

Jetstar Japan, which is owned by Japan Airlines, Mitsubishi Corp. and Qantas Airways, aims to begin operations out of Tokyo in the second half, while Shanghai-based Spring Airlines is reportedly preparing to enter the Korean market by the end of this year.

“The recent inroads by foreign carriers, coupled with the robust performances of local ones, prove that there is clearly a market for budget travel,” says Martin Song, an analyst with Woori Investment & Securities.

“Despite persistently high jet fuel costs, air travel demand is improving, underpinning their business. Competition is unavoidable in such an up-and-coming market — the thing is how to sustain growth.”

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