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October 09, 2005

Low cost airlines in China and other markets

Of course, everyone knows about the low-cost revolution in the US skies thanks to pioneers like Southwest Airlines and more recent entrants like JetBlue. But how about other countries? Did you know for example, that the Mexican government is set to license five new budget airlines - which would essentially look at competing with long-distance buses? And that in Brazil, low-cost carrier Gol Linhas AĆ©reas Inteligentes has captured a quarter of that country's air travel in just four years?

A recent Knowledge@Wharton provides a great international perspective - including from the US, Europe and China - on the dynamics of low-cost airline industry.

Some extracts from the article's section on the action in China:
Over the last six months, China's airline industry, which for a decade hadn't registered any new members, showed sudden signs of growth. Three private airlines -- Okay Airlines, Spring Airlines and United Eagle Airlines -- made their debut. Even more notably, Shanghai's Spring Airlines became the first carrier in China to offer low-cost airfares. On July 18, the opening day of the carrier, a flight from Shanghai to Yantai cost 199 yuan (about $24). The move by Spring Airlines -- which is owned by Shanghai Spring Travel Agency, the largest privately-owned travel agency in China -- stirred discussions in the media about low-cost airfares. In April, Thailand's Asia Airline opened its China flights and charged 99 yuan ($12) for a ticket from Xiamen to Bangkok. The move marked the first step by foreign air carriers to launch low-cost services.

...In addition, according to press reports during the World Economic Forum in Beijing in September 2004, CEOs from some of the world's well-known low-cost carriers -- including Asia Airline, Britain's Easy Group and Australia's Qantas -- all said they believed that it's time for them to enter the Chinese market, noting that in developed countries, an air ticket on average represents 0.5% of a passenger's annual income, while in China the ratio is as high as 10% to 15%. This suggests a huge demand from Chinese consumers for low-cost air services.

...The year 2004 saw a record for China's aviation industry in terms of transportation volume, which jumped 35.3% over 2003. A total of 121 million people -- or one in every 10 Chinese -- traveled by air, up 38.1% from a year earlier. Like the rest of China's economy, the air transportation industry has become one of the fastest-growing industries and has attracted attention from carriers throughout the world.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.