LCC Subsidiaries of

Legacy Carriers

Brendan SobieChief Analyst, CAPA – Centre for Aviation

LCC subsidiaries become a common strategy in Asia

1. Of the approximately 50 LCCs in Asia Pacific about 20 are now subsidiaries or affiliates of FSC groups

2. Several LCCs in Asia are owned by more than one FSC

3. In 2004 Jetstar became the first FSC in Asia Pacific with an LCC subsidiary or affiliate. There are now 19

4. Of the top 12 markets/countries in Asia, 10 now have FSC groups that include LCC subsidiaries or affiliates

LCC subsidiaries/affiliates of Asian full-service airline groups

Notes: indirect stakes not included Tigerair Singapore to become subsidiary of SIA; Tigerair Australia to become 100% subsidiary of Virgin Australia

The multi-brand strategy: An Asian phenomenon and success story

New addition: West Air

West Air: CAPA Asia Pacific Start-up of the Year

West Air chairman Zhu Tao with CAPA Executive Chairman Peter Harbison, 14 October 2014

New LCCs in Asia-Pacific launched or aiming to launch in 2014

Two of the record 10 LCCs launching in Asia this year are Chinese. More new LCCs in China are expected in 2015Source: CAPA – Centre for Aviation

LCC subsidiaries:pros

1. Enables an airline group to participate in the fastest growing segment of the market

2. Multi-brand strategy can be an effective and critical response to independent LCCs, which have been expanding faster and in some cases are now larger than their full-service competitors

3. Several markets in Asia have huge opportunities that can only be tapped if fares are low enough to stimulate demand among the fast expanding middle class

Global LCC orders by region

Source: CAPA Fleet Database (as of 9‐Oct‐2014)Note: orders include lease commitments for new aircraft

Independent LCCs aredriving the growth

% ASK growth: 2013 vs 2012

Independent LCCsnow control SE Asia

Southeast Asia capacity share % of seats by airline group:

Oct-2014

Source: CAPA – Centre for Aviation & OAGNote: Group figures include subsidiaries and affiliates

LCC capacity share(% of seats)within Southeast Asia

Source: CAPA – Centre for Aviation and OAG

LCC capacity share(% of seats) within Northeast Asia

Source: CAPA – Centre for Aviation and OAG

LCC subsidiaries:cons

1. There is always a risk of cannibalizing the full-service brand

2. Cost structure is often not low enough to compete effectively with independent LCCs

3. Establishing and expanding LCC brands while strategically important requires resources

4. LCC subsidiaries and affiliates often struggle to achieve profitability

LCC subsidiaries:the risk of losses

Of the over 20 LCC subsidiaries and affiliates in Asia-Pacific only one or two have been profitable this year

Independent LCC have been doing better but on a whole have also been unprofitable this year

Asia is where the biggest growth is but has become a highly competitive and at times irrational market

LCC subsidiaries in Southeast Asia were unprofitable in 1H2014

Source: CAPA, 15‐Sep‐2014Notes: *All figures are for individual airline except MAS and Thai, which only reports figures at the group level# Mandala ceased operations in Jul‐2014

Rapid rise of long-haul low-cost

• Jetstar (2006)• AirAsia X (2007)• Scoot (2012)• Cebu Pacific (2013)• Thai AirAsia X (2014)

• Indonesia AirAsia X (2014)

• NokScoot (2014)• Jin Air (2015)• VietJet (?)

Earlier failures – Oasis Hong Kong and Viva Macau but very different business models

SIA Group Multi-Brand Strategy

SIA brand matrix: Singapore Airlines’ share of its home market has slipped but its group share is still above 50%

Multi-brand strategy also can include regional full-service subsidiaries

Singapore Airlines and SilkAir Cathay Pacific and Dragonair Thai Airways and Thai Smile Philippine Airlines and PAL ExpressMalaysia Airlines and Firefly Garuda and Garuda Explore

LCC subsidiaries:conclusions

1. LCC subsidiaries have proven to be effective weapons when the right model is pursued

2. North Asia including China will inevitably see more LCC subsidiaries as the LCC penetration rate increases

3. Long-haul LCC subsidiaries are also starting to emerge but for now the opportunities in North Asia are primarily in the short-haul market

4. What we are now seeing in China with the Hainan and China Eastern groups is just a start

Thank you!

Brendan SobieChief Analyst, CAPA - Centre for Aviationbsobie@centreforaviation.com