Open Sky will provide fertile conditions within which Low-Cost Carriers can develop in the ASEAN region. Low-Cost Carriers have expanded consumer choices and improved the efficiencies of airline industries. They have also forced regulators to change old rules of the game that tended to protect Full-Service Carriers and their key markets. It is likely that an Open Sky environment in ASEAN that removes restrictions on designation, capacity and fares will support the growth and development of the Low-Cost Carriers. On the other hand, the rise of more Low-Cost Carriers in the region will exert pressure for the acceleration of the ASEAN Open Sky.
In the early days, there were no dramatic changes. There was some additional competition on individual routes, mainly the high density ones. During the first five years there was good productivity growth, though it was not spectacular. There was not much change in flexible fares, and there were some increases in the higher fares. Some lower fares were offered, but significantly, many more seats at lower fares were made available. There was not much change in the structure of the airline industry- initially, consolidation had been expected. There were a few mergers and some new alliances were established, but there was no shakeout. Some of the new alliances had stringent conditions put on them, since they had the potential to be anti
competitive.
The big changes came with the development of the Low Cost Carriers (LCCs). Some of
these began earlier, but it was not until about five years ago that they began to have much of
an impact. Some of these have now become quite large airlines, with market capitalisation
greater than those of the established flag carriers. They continue to grow fast. Now that they
have extensive networks, they are beginning to have an impact on the incumbents. They
offer low fares (sometimes very low fares) and the incumbents have been forced to respond.
Sometimes this has taken the form of offering comparably low fares on a restricted basis. In
a few cases, the incumbent airlines have established LCCs of their own. This strategy does
not seem to have been very successful, and the LCC subsidiaries have been sold off. The
major carriers are concerned about competition from the LCCs, and they have had difficulties in devising strategies to combat them. Competition from LCCs is a factor in the poor profitability of the incumbent carriers, though they are not the sole cause.
The impacts of the LCCs have been selective, since they have not been covering the whole of the European market. To date, the strongest carriers have been those based in the UK,
and latterly, Germany. They are now a competitive force in more than half the market, and
their networks are expanding. A single LCC can make a considerable difference to fares,
especially at the lower end of the range. Thus airline competition does not need to be
characterised by large numbers of carriers for it to be working.
Low Cost Carriers are an important and dynamic part of the liberalisation process. When theyset up and enter city pair markets, they greatly increase the competition in them, and lead to
lower fares.Most routes, except the very dense routes, do not have more than two carriers competing. Ifthey are genuinely independent, and especially if one of them is a low cost entrant, this will
The older full service flag carriers have been forced to adapt to competition from the low cost carriers. Some have experienced difficulties, though most have been able to weather the
challenge so far. Competition authorities have had to be vigilant in policing Open Skies, and ensuring that anti-competitive practices are not resorted to. It has, however, been feasible to work out solutions to competition problems, such as predatory behavior, state subsidies and anti-competitive alliances. Market access has been critical- it has led to extensive network development by the new carriers which would have been impossible under the old bilateral arrangements.
Finally, the low cost carriers have not just competed on dense markets, but they have played a valuable role in opening up secondary destinations and neglected regions- they have been willing to serve thin routes and develop new destinations- partly because they have avoided
direct competition with the large airlines by doing so.