Cheap flights in Asia aren’t so cheap anymore - Asia Specific podcast, BBC World Service

For more than 20 years, Asia has had the world's lowest airfares. It wasn't hard to find a short international flight for less than $100, and you could even get some long haul bargains, too. But that's fast changing. And especially now with the war, like going to Europe, in the past, you could easily, you know, if you looked out for promos, you'd be able to find something from maybe $800 to $1000 for a round trip. Now, that's like a one way fare. The price of jet fuel spiked after the war in Iran started in February,

and they remain higher than they were before the conflict. Budget airlines, the so-called low cost carriers, are particularly vulnerable. So we're asking, are the glory days of cheap travel over? I'm Mariko in Singapore and this is Asia Specific from the BBC World Service. Twice a week we bring you Asia Pacific stories. unpacked by those who know them best. I have two aviation experts with me in the studio, Shukor Yusof. is the founder of Endau Analytics. Welcome to Asia Specific.

Thank you. I also have Brendan Sobie, an independent analyst and consultant. Thank you so much for coming on the pod. Thank you. So firstly, we're looking at budget airlines today. because jet fuel is back in the news headlines. I mean, we've been talking about it on and off since the war in Iran started. But maybe you can paint the picture for our audience how. that's been affecting Asian airlines, particularly low cost carriers.

Well, first of all, I think even before February 28th, when the war started in Iran, low cost carrier was only in name only because of what happened during Covid. and then post-Covid, things changed very fundamentally. So name only as in... I think it's low cost, but it's not exactly low cost. I would say it's not exactly premium, but it's gone up quite a bit. You know those days when you can fly from Singapore to Bangkok.

for a jug of beer or something, you know, those days are gone. But now it's very different, you pay everything for ancillary for stuff on board and then, you know, they try to squeeze everything out of you. What do you think in terms of this higher jet fuel prices? What's been the impact and why are budget carriers more vulnerable. compared to like legacy carriers? Low cost carriers still have lower costs than full service airlines.

Their costs have increased post pandemic, but they're still a relatively lower cost than fares. are still relatively lower. That means that for a budget airline, their their fuel cost is a higher portion of total costs. So anytime fuel cost goes up, it hits them harder because of the portion of total cost, but also the type of passenger they have is harder to get them to absorb. that additional cost because they tend to be price sensitive passengers. The full service airlines have a lot of premium passengers,

a lot of people who can afford the additional airfare from higher fuel. But budget airline struggles. If they push up the fare too much, which is, you know, sometimes what happens, including recently, is they have fewer passengers and then they have to cut capacity, so you either have to absorb losses either way. So they're really kind of between a rock and a hard place. I actually spoke to a travel blogger, Jaclynn. So let's hear what she had to say in terms. of how much she's noticed about the price hike.

So I started my travel blog, The Occasional Traveler in 2010. Currently, today, I think I've gotten to about 58 countries last that I counted. If you do a lot of pre-planning and you give a lot, a lot of time,, before you actually travel, you can usually look out for some pretty good deals. But yes, overall, I feel that, long haul flights, especially, you know, those travel prices have gone up quite a lot in recent years, and especially now with the war, like going to Europe in the past,

you could easily, you know, if you looked out for promos, you'd be able to find something from maybe $800 to $1000 for a round trip. Now, that's like a one way fare. A lot of my friends, do loyalty programmes, you know, miles hacking, if you have the time and energy to research into that, you can get very good deals out of hacking your miles. and your credit cards and making full use of these loyalty programmes. So she says that she can still find deals in Asia, but you disagree. that those deals are really harder, a lot harder to find these days?

Indeed, I think and she's also referring to miles and loyalty. and all that stuff, which most discount budget carriers don't offer. Yeah, because I was going to ask, when you say, you know, jet fuel prices account for a much bigger portion of those airlines costs. Why is that? So, legacy carriers make money. and have bigger cost of other things other than jet fuel, Brendan? Budget carrier fares are cheaper, but you know,

the price of fuel is the same for all airlines. So it is proportionately more. And I do think you can get discounts, particularly regionally. Europe is very hard, has been since since the war. But for regional travel there are still a lot of cheap fares. And you know, it depends where you look. I mean, some markets more than others, and you can still, like. if you look at the base fare, there is still a lot of base fares. for a jug of beer around the region. I mean, but the problem is, is that taxes are very high, particularly from Singapore.

So, you know, people to see, oh my, you know, it's going to cost me $100 to get to Bangkok, you know, one way, but then, the base fare might be $1. So it's like, you know, and this really still happens now even when you fly tomorrow, especially in off peak time of year, on those routes that have. the competition, you can get base variance of a dollar. And that's why some of these low cost carriers are not making very much money. And there's fuel surcharges as well, of course, which is, you know, another another area to try to offset the fuel prices.

But a consumer will look at the total price. They won't look at how much. Changi airport is getting, how much the fuel surcharge is, how much you know, the you know, whatever other taxes and fees are. They don't. But, you know, when you take all those away, you're left with $1. How can an airline make money on $1? Of course they can't. I mean, Brendan talked about fuel surcharges. So when prices go up, do carriers always pass that on to passengers. Because I thought, you know, most carriers would use. a strategy called fuel hedging where they buy bulk when prices are cheaper.

And none of the budget carriers in this region hedge. The European budget carriers hedge, but the budget carriers in this region. do not hedge, so that they don't have that lever. But why don't they hedge? I mean, that seems like a smart thing to do. Hedging is very expensive. Number one, it's very, very expensive. and you have to have a very solid balance sheet. And then you go into collaterals, you have collars and whatever options, you know, it's derivatives, basically. Some countries you can't hedge either because there's restrictions like.

like Chinese carriers don't hedge because of Chinese restrictions. It's gambling basically, right? Yeah. And airlines have gotten burned from hedging too, over the years. And the other big difference is the budget carriers in this region sit. on a very price sensitive market. I mean, Singapore is an exception. And it's an exception because they're under Singapore Airlines Group. But almost all the other budget airlines in this region, you know, they sit in a very price sensitive market. They live from hand to mouth basically, you know, and like Scoot. And they don't have the balance sheet. But in like the US,

for example, you know, the airlines talk openly about keeping fares high, even as fuel prices come back down. Maybe they'll go back up again. But they will, you know, they see the demand is sufficient to. not, you know, bring back the prices so fast. But in Asia, it's a little different. Most of these Southeast Asian economies, except for Singapore, they're just so price sensitive that you cannot pass on the cost and. you can't keep those fares high when the fuel costs come down. And the other thing with this particular crisis, the fuel price went up very fast, right?

So it's just, even for an airline in the US and US carriers are. unlike European carriers tend to be not hedged, they have the pricing power now. But for, you know, it's still. it's so fast that they did lose money in that first month or so. because it takes time to, everybody had already purchased their ticket, you know, the lead time. You can't like tell somebody flying tomorrow. You have to pay more now. So it is difficult, especially when fuel prices goes up as quickly as it did, like overnight. It like almost tripled. I mean, we saw,

was it the US low cost carrier Spirit that went under partly because of this. And also I think partly because the business model. of Spirit, I don't know if he'll agree with it, but it's ultra low cost, which is more similar. to Ryan Air than you would with AirAsia or Lion Air, for example, right? But here it's mostly the typical low cost carrier, like they charge you for everything, but with ultra low cost.

it's really, really stringent with everything. What is the difference. between what you describe as ultra low carrier versus low cost carrier? Like, what do they do differently? What's the difference in the business model? Well, they keep very basic stuff. I mean, you can fly for €5 from from London. to Costa del Sol or whatever the case may be, and then that's it. And everything else. And luggage is very strict, strictly enforced. Right. But here, I mean, I've flown several low cost carriers here and.

they're very flexible. I mean, even if it's, they say. it's seven kilos and all that with, with onboard luggage and all that. But you can get away with tens sometimes. So I hope you don't... Spirit, you couldn't even put a bag in the overhead bin. You have to charge for that. They were the, I think, the first ones. That's a good point. Back when they were more successful. under Ben Baldanza, who was this kind of guy who unfortunately passed away. The late Ben? Yeah, he was a good guy. He really brought this ULCC, ultra low cost carrier model.

And it was quite successful for a few years, but I think it got dated, especially post Covid with all these additional costs. And spirit just didn't adjust to the times fast enough. And they were very weak already entering this crisis. They were twice into bankruptcy like within the last couple of years. So, I mean, you don't get, you know, this crisis doesn't kill any airline. It kills an airline that was already weak. But in this part of the world, we saw the headline of Jetstar closing last year. I mean, are we thinking that another airline could go under in this part of the world?

Well, there's a reason for that. I think Singapore is a very expensive place to run an airline, any airline. And even if you're an Australian airline, which is very well funded by Qantas and all that, but it's just day to day. It's just very expensive. And so I think after so many years of not making profit, I think they did the right thing by exiting. But low cost carriers are also struggling now in Philippines. and other parts because this just, the yields have just have shrunk. And the cost of money in this country, the currencies in Indonesia.

and the Philippines, in Malaysia, they've shrunk versus the greenback. So that, you know, if you're AirAsia of you're Lion Air, then you see your costs are in US dollars right? Fuels, US dollars. You're leasing the aircraft in US dollars. But your revenue income stream is in the local currency. How does that work? You know, so. That's always an issue. Yeah. But it's the smaller airlines that tend to fail. I mean, Spirit was a big airline, but they were small. in the US contacts only a few percent market share. So it's, you know, so the bigger airlines you never really see fail.

because they're too big for the economy, for the ecosystem, the government or some supplier will kind of, or suppliers will bail them out, basically will support them through thick and thin. in order to keep them going, because there's too much impact on. on the government and the economy and the suppliers if they go under. But smaller airlines, Jetstar Asia was a Singapore based affiliate of Jetstar. They were quite small. Jetstar kind of pulled the plug on them, you know, so that you could see more of that kind of example, you know, where smaller affiliates of bigger groups go or smaller airlines,

but you won't see a big airline usually fail and including in this region, In other, other parts of Asean? No, I mean, you'll see the smaller ones fail. You won't, like in AirAsia, for example, you know, you won't see like Malaysia. or Thailand fail because they're number one. No, I'm saying low cost. Yeah. Well, AirAsia is low cost carrier, right? Yeah. But it's not backed by the government. Yeah, no, but it doesn't matter because they are number one. Governments are not going to allow, you know,

if they have a stake in whether it's low cost, it's in imperative for them to keep it. Yeah. They will bail out in AirAsia if necessary, because the share of the market is their share of the market. their critical role in the economy. I agree. This is too important. And in fact this is something that could happen. What form of bailout is you know, it could just, it could be a loan. It doesn't have to be a stake. There would be some sort of measure. Yes, indeed. Yeah. I think Asia is, is a very good example of a privately run airline.

But it is, for many years it's been seen as de facto the national airline. of Malaysia because it brings more tourists into Malaysia. than does the national airline. We've been talking about AirAsia. And in their most recent financial results, they did acknowledge. that they're under quite a bit of cost pressure, didn't they? And they said that they have cut capacity in some routes. Also, they added a fuel surcharge. in order to try and stay ahead of the cost curve. I mean, Brendan, you talked about how passengers.

in Asia are quite price conscious compared to the rest of the world. But compared to, you know, during the pandemic, at least there's demand for traveling, right? Like people are still quite keen to travel in Asia. Compared to other parts of the world. Is that right? I mean, I wouldn't say compared to other parts of the world, but you have a growing middle class in this part of the world, you have, you know, a young population. And what was happening is, you know, at least until recently was. discretionary income, middle class populations. They were on the rise.

Right. And these people had the money to start traveling. This was happening pre-COVID. And a lot of the Southeast Asian countries, you had the rise of the middle class, increasing discretionary income and, and the expansion of budget carriers and lower fares. So it was like this perfect situation. where both things were going in the right direction. And of course, that was a recipe for. very rapid growth of budget carriers in this region. But post-pandemic, what's happened is, you know, the costs are increasing, the fares are higher. They're not quite as low as they used to be.

The cost of traveling is more for various reasons. And very recently, I would say there's pressure on on discretionary income as well. If you look at the market like Indonesia, you know, where there, you know, the economy hasn't been doing that well, and you know, when price of fuel goes up, it doesn't only go up for, for airlines, it goes up for your bills at home too, right? So everything transport, you know, especially in a country like Indonesia is expensive. So these people have less money to spend. I was just reading an article, I think from Bloomberg about the role of AI.

and how, you know, it used to be that airlines might have human analysts. to, you know, decide whether to raise prices. because there's strong demand or whatever. Now, that's been replaced by maybe AI, that it's impossible for an ordinary human passenger to beat the system, beat the machine and find that, you know, potential rare bargain that we might have been able to find. What's your view on that? So these AI based. revenue management tools help airlines improve their revenue management ability and, you know,

and maximize the profitability. But again, you know, if demand is low, they're going to have to reduce the fares, you know, in order to fill the seats, whether it's AI or or a non-AI solution, it's still, the supply. and demand and economics 101 are still the same, right? So I mean, but of course, you know, these like mistake fares or, you know, yeah, maybe fewer of those. So if you're, if these bloggers out there who are like expert. at finding this rare deal, I mean,

yeah, maybe some of those, you know, examples could be close to some extent. Airfares in Asia. Are they going to keep going up after the war, or are they going to go back to where they used to be? Well, they're not going to go back to where they used to be. I mean, and what do you mean by used to be pre-war or pre-Covid? Pre-Covid. No way. I mean too many costs have gone up. If they go back to pre-Covid then everybody loses. The airlines will go out of business and there'll be nobody. to fly these anyone anymore. So I mean that's never going to happen. But I think they will normalise to some extent.

You know, once we have some stability in the world, which could be three months. from now or three years from now or 30 years from now, who knows? Right? I mean, so in terms of airfares, it's all about supply and demand. Again, it's an economic thing. It's outside our control where airfares go. I mean, airlines of course want to raise fares, but it's about supply and demand. If demand goes down because economies are poor, you know, they have to stimulate. in order to just get the passenger on the plane, even if they're losing money, they don't want to lose money, but sometimes they have to lose money. Like now, in the last quarter, everyone's basically was losing money, you know,

and it's about competition, right? These airlines, they'll want to put the capacity back because, you know, they want to be their subscale now with all these capacity cuts. and they have overhead and too many people and, that will put pressure, you know, on the fares, in some markets more. than others, but it's not going to come back to pre-Covid. And that's unrealistic. That should have never happened anyway. The fares were actually too low even pre-Covid. because the competition was so high. One of the things.

we really need to understand and people forget. But the cost of money, in 2001, post 9.11, when AirAsia was the first, became the first low cost carrier in this part of the world. 50 bucks then, it's very different from what the value is today. So please remember that. I have to say though, I'm so glad that I made the most of it. in my 20s when the flights were really cheap. and when I was still single and kidless and I could fly everywhere. You could say for the for all of us, I think.

Yeah. Thank you so much for joining me, Brendan and Shukor. It's a pleasure speaking to you, Mariko. Thank you. You've been watching Asia Specific. from the BBC World Service with me, Mariko Oi in Singapore. If you have any questions or thoughts on what we covered in this episode. or any other stories from the region, please leave us a comment below. You can also get in touch with us on email asiaspecific@bbc.co.uk. and click like and subscribe so you never miss an episode. See you next time. Bye bye.