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South Korea may be small with about a 30th of China’s population. Yet, its skies are about to get more crowded with a sixth budget airline, beating its giant neighbor that boasts two major no-frills carriers.
Asiana Airlines Inc.’s fully owned new low-cost unit, Air Seoul Co., is poised to receive a government permit on Wednesday as it takes over some of the short-haul flights that are less profitable for its parent. The carrier will start flying July 11 on the world’s busiest Gimpo-Jeju route for about three months before venturing overseas.
The latest addition is a sign of surging demand for air travel as more Koreans, spoiled for choice, take advantage of affordable fares for a relaxing vacation in Japan’s hot springs or shopping trips to Hong Kong. While competition is good news for fliers, it may hurt some struggling carriers in a crowded market when oil rebounds and weighs on earnings, said Um Kyung A, an analyst at Shinyoung Securities Co.
“In a way, some of the financially unstable ones were saved by the slump in crude oil prices,” Seoul-based Um said in an interview. “The problem will come when oil prices start to rise again. That’s when some of these budget carriers may start having financial difficulties.”
In 2015, all the five existing carriers reported profit as a 26 percent slide in oil prices lowered fuel costs. Still, total debt at Eastar Jet and Tway Air Co. is in excess of their assets. Shares of Jeju Air Co., the only listed Korean budget carrier, have declined 22 percent this year compared with a 1.5 percent gain in the benchmark Kospi index, amid efforts to cap costs.
Promotional offers show how competition for passengers has driven down fares. Jeju Air’s Facebook Inc. page advertised a ticket price of as low as $10 for some of its Japan-Seoul routes, $13 for its Taipei-Busan route and $1.5 for its Beijing-Taegu leg.
Lower fares have resulted in more traffic. About 29 million Korean passengers flew overseas in the first five months of this year, with those flying budget accounting for 17.9 percent of the total, according to the Ministry of Land, Infrastructure and Transport.
Korean fliers on budget carriers accounted for 14.6 percent of the total overseas flights out of Korea last year, compared with a meager 0.03 percent in 2008. The five low-fare airlines operating in the country control more than half of the domestic market. China was the biggest destination for international flights out of Korea in 2015, making up for almost 30 percent of the market.
Besides Korean travelers, an emerging bright spot for the carriers may be China, said Bang Min Jin, an analyst at Eugene Investment & Securities Co. in Seoul and Will Horton, an analyst at CAPA in Hong Kong.
“Unlike Southeast Asia, Korea is far from eyeing a saturation point,” even though five budget carriers are too many, said Horton. “There’s room for growth in the long-term, in general and especially because of China.”
Eugene Investment’s Bang said Korean carriers need to step up efforts to lure Chinese passengers flying overseas out of China.
“Chinese LCCs currently focus a lot more on domestic flights,” she said. “So, there’s an opportunity for Korean LCCs to try to get Chinese travelers to use them to fly overseas.”
Jeju Air started operating in June 2006 and now offers flights to more than 20 cities in Asia. Korean Air Lines Co., the country’s biggest carrier, soon joined the low-fare airline market by setting up Jin Air Co. and started operations in July 2008. It has both narrow and wide-body planes and flies to as far as Honolulu. Air Busan Co., which counts Asiana as a shareholder, had its first flight in October 2008.
While government regulations allow a foreign airline or entity to own as much as 50 percent of a South Korean carrier and have managerial control, aggressive lobbying by incumbents have thwarted moves by some overseas carriers.
Tiger Airways Holdings Ltd. withdrew plans to set up a venture in 2008. Currently, there are no foreign investor in any of the seven airlines operating in South Korea.
Asiana said in an e-mailed statement that it would be able to improve profitability by transferring low-margin routes to Air Seoul, while the latter would be able to “gain competitiveness” in the short-haul routes.
The addition of a sixth budget carrier doesn’t seem to be deterring newer entrants.
The provincial government of Gyeongsangnam-do is considering getting funds from foreign investors for the seventh new budget carrier, dubbed Nambu Air, to start flying at the end of next year.
“There was a lot of skepticism about budget carriers because flying overseas had always been seen as a privilege in South Korea,” said Shinyoung’s Um. “But that’s changed. They’ve opened a whole new way for people to fly. Budget carriers have made overseas trips more affordable to everybody.”
©2016 Bloomberg L.P.
This article was written by Kyunghee Park from Bloomberg and was legally licensed through the NewsCred publisher network.