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Korea's budget airline market getting crowded

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Feb 19, 2008

Korea's two largest airlines have joined the low-cost carrier business, with Korean Air having founded Air Korea and Asiana Airlines having bought a controlling stake in Pusan International Air, which has launched budget carrier Air Pusan.
Jeju Air and Hansung Airlines, which have been operating domestic services for more than two years, both plan to launch international services in the second half of this year.

Even foreign budget airlines have turned their eyes to Korea's domestic market. Tiger Airways, a budget affiliate of Singapore Airlines, is planning to advance into Korea by joining forces with the city of Incheon.

When Hansung Airlines launched its maiden flight in August 2005 on the Jeju-Cheongju route, Korean Air and Asiana didn't think much about the growth possibilities of the budget market. Three years later they seem to have finally recognized its value.

As the term implies, budget carriers charge discount fares, in the range of W50,000 (US$1=W945) per person for a flight between Seoul and Jeju. That's more than 30 percent cheaper than the over W80,000 (not including airport fees) that traditional carriers charge.

Now Korea's budget carriers are poised to launch international services. They are expected to compete most on routes between Korea and China.

"I expect that there will be a huge influx of low-cost flight services at various fare ranges launched on routes between Korea and Japan and China, with which Korea has already signed aviation agreements. New budget routes will also likely be opened from Shandong and Hainan to more remote areas throughout China," an official with the airline industry said. "Korean Air and Asiana have entered the low-cost market as their routes there overlap with budget routes."

The budget carriers will also likely introduce sharply reduced fares for international services, at about 80 percent of non-budget fares. A Jeju Air executive said, "The current non-budget airfare between Korea and Japan is in the W450,000 range. But I think we can reduce that to the W300,000 range."

Each of the budget airlines that have been founded since last year is looking to launch international services. This has prompted concerns about possible ill effects on the growth of Korea's airline industry.

An airline industry official said, "Airlines are established to cover various different routes. But almost all the domestic routes, except the Jeju route, have proved not so profitable. In this situation, the budget airlines that are being established now will focus on international services later, after first flying domestic services, as if domestic services are a 'compulsory' requirement for international ones."

With the growth of the budget airline market, consumer preferences for airline services have been changing drastically. It has created two distinct markets operating simultaneously: a low-cost one where fares are the most important criterion for choice, and a premium one where passengers demand top-quality service.

In this regard, Asiana has been upgrading its service level since last year, reducing the number of seats on international routes and stepping up services for first-class passengers. Korean Air will launch a high-end marketing effort by putting its first-rate A380 aircraft on international routes from next year.

A Korean Air executive said, "While there is a low-cost market controlled by low fares, there also is a premium market. We plan to provide consumers with all kinds of services to suit their various demands."

It seems clear that Korean Air and Asiana have joined the low-cost market, under the brand names Air Korea and Air Pusan, respectively, because they understand that their success will be determined by the clearly distinct services that they can provide separately for budget and premium passengers.

Korea's budget airline market getting crowded
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