News this morning of an alliance of several low fare carriers in Asia could change the aviation landscape in the region. The Value Alliance will include eight low fare carriers in Asia. The carriers are Vanilla Air (owned by ANA in Japan), Scoot (Owned by Singapore Airlines), Tiger (Owned by Singapore Airlines), Tiger Airways Australia (Owned by Virgin Australia), Nok Airlines based in Thailand, Nok Scoot, (a JV of Nok Airlines and Singapore Airlines), Cebu Pacific, (owned by Cebu Air Inc. in the Philippines), and Jeju Air Co. Ltd. (a South Korean LCC).
The announcement focused on the booking capabilities of each airlines website, which now offer flights of other alliance members for sale. This provides an alternative distribution system for the alliances outside of traditional (and more expensive) GDS systems. It is notable that Asia’s largest LCCs, Air Asia, with operations based in Malaysia, and joint ventures in Indonesia (Lion Air) and India (AirAsia India), India’s largest LCC Indigo, and Jetstar-branded carriers from Qantas were not included in the alliance. Many of the major airlines in the world benefit from increase revenues through participation in an alliance, gaining traffic from alliance partners.
But it is difficult for an LCC to meet many of the requirements of traditional airline alliances. Clearly Singapore and ANA, Star Alliance members who own LCC, understand this well. As a result, to gain similar benefits, a new alliance structure was needed. The initial integration for the alliance is reservations. Most LCCs restrict bookings to their own websites, avoiding the booking fees charged by GDS systems and internet booking engines. By expanding distribution for each carrier through each others websites, their distribution network grows substantially without a significant increase in costs. It also provides customers a seamless way to book travel on any of the carriers – expanding to 166 the total number of destinations for the alliance, far greater than any single carrier in the group.
The follow-on question, of course, is how this alliance could grow. Will code-sharing and gate handling at airports be conducted through alliance members for other airlines? Will ticket counters be consolidated? Can baggage handling be coordinated? Will line maintenance services be offered to partners? There are a number of areas in which this alliance of low cost carriers could avoid duplication of efforts at many airports by having the local party provide ground handling and line maintenance for the others.
Economies of scale can also come into question. Just savings on the purchase of disposables, like napkins, that could be imprinted with the alliance logo rather than that of a single airline, could provide additional savings. And since these smaller LCCs compete against Air Asia, IndiGo and Lion Air, the larger LCCS, this could begin to even up the playing field.
The Bottom Line: An alliance of smaller LCCs into a larger unit with critical mass will help reduce costs through economies of scale and avoiding duplication of efforts. It should also enhance revenues while maintaining low distribution costs. Alliances aren’t just for major airlines anymore, the LCCs can also benefit from synergies in their own low-cost style.