Interview: Lance Gokongwei

How much room is there for further growth of low-cost airlines in South-east Asia?

LANCE GOKONGWEI: There is still significant growth potential in low-cost air travel. With rising incomes and an emerging middle class in the Philippines, it appears we are just scratching the surface. However, the first major constraint to industry expansion will be insufficient infrastructure. The private sector needs to continue playing a part in driving the development of airport expansion so capacity can keep up with rising demand.

Does Air Asia’s recent purchase of 200 Airbus aircraft indicate the beginning of increased competition, and how will the industry respond?

GOKONGWEI: Competition is certainly intensifying. Cebu Pacific recently purchased 33 new aircraft and another 60 will join the fleet by 2021. By the end of 2011 we will operate 37 aircraft with an average age of 3.5 years and have orders in place for an additional 55 new aircrafts, including 30 Airbus 321 NEOs.

The key for low-cost carriers (LCCs) is providing a predictable and affordable journey, both for first time and frequent flyers. But since experience is similar across various carriers and there are limits on lowering price, investment in branding becomes all the more important. Brand competition will be especially fierce in large growth markets, such as China, Japan and Korea.

Another consideration in attracting new customers is regulation. For example, Japanese air rights are relatively tight. However, the region is trending towards liberalisation. In the Philippines, there is some concern over regulator credibility, but with recent improvements, I expect the country’s category two rating will be raised to category one within the next year.

What will be the overall effects of the new open skies policy on Philippine air travel?

GOKONGWEI: The open skies policy should have a positive impact by stimulating greater regional competition. After all, the liberalisation of Philippine air travel in the mid-1990s was what made LCCs and increased competition possible. Local carriers are not against pocket open skies per say, but they believe such an open skies policy should be negotiated on a reciprocal basis. Otherwise, it may hinder the ability of local carriers to compete on a level playing field with foreign carriers.

Tourism also stands to gain from the opening of Philippine airports to more carriers. But despite the Philippines’ growing reputation as an international tourism hotspot, the country is not yet prepared to meet the needs of a continued rise in visitors. Outside of Manila, there is no major gateway for international air travel, which is likely to be an issue in coming years.

Hopefully the open skies policy and the public-private partnership initiative will provide a boost to the upgrading and expansion of additional airports.

What are the main challenges to operating a low-cost airline in the region?

GOKONGWEI: Beyond infrastructure-related obstacles, one primary challenge involves differences in foreign carrier regulation from country to country. Some governments’ air rights policies are far more protectionist than ones by other governments.

The volatility and rise of oil prices over time also poses a significant challenge. With more than 50% of a given carrier’s costs out of its control, it can be difficult to predict how affordable air travel will be for consumers in the future. Nevertheless, regional LCCs must remain internationally competitive and continue to offer competitive wages to attract quality staff.

At the same time, the external focus needs to continue to rest on consumer choice and the à la carte model already proven so successful for low-cost air travel. But carriers must be disciplined in terms of their balance sheets and in what they offer consumers. This makes the industry difficult and competitive. However, this is also a sector continuing to grow and draw significant attention from international players looking to gain from a not yet fully tapped regional market.