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Korean LCC market: more growth as Jeju Air commits to 737 MAX 8s

Korea's dynamic LCC sector is poised for more rapid growth following a major aircraft order from the market leader Jeju Air. On 19-Nov-2018 Jeju Air announced an order for 40 firm 737 MAX 8s and 10 options, marking the largest ever aircraft deal from a Korean LCC.

Like most other Korean LCCs, Jeju Air has historically favoured older, secondhand aircraft that came with lower operating costs – the MAX's additional range options and more attractive operating economics will need to make up for the significantly higher acquisition cost. Jeju Air is rolling out a fresh slogan, "New Standard, New Plane" to accompany the new arrival.

Korea now has eight LCCs and one of the highest LCC penetration rates in Asia Pacific. With Jeju Air using the MAX to pursue more growth and fly further, South Korea's international LCC penetration rate will likely exceed 40%.

 Summary

  • Jeju Air has placed orders for 40 737 MAX 8s but the range and cost improvements may not justify high acquisition costs.
  • Jeju Air joins T'way and Air Busan in opting for new generation aircraft (MAX and neo).
  • In the past four years the Korean LCC fleet has expanded by at least 18 aircraft a year.
  • New generation narrowbody aircraft open up new medium haul routes, enabling more rapid growth for the Korean LCC sector.

Jeju Air is Korea's largest LCC by a wide margin

Jeju Air operates a fleet of 39 737-800s across a network of eight domestic and 31 international destinations (based on OAG schedules data for the week commencing 19-Nov-2018). It has one more 737-800 on order in addition to the new commitment for 40 737 MAX 8s, according to the CAPA Fleet Database.

Jeju Air currently has 13 more aircraft than Korea's second largest LCC, Jin Air. The gap with Jin will widen in the short term due to recently imposed government restrictions on the Korean Air subsidiary. Air Busan, one of two LCC subsidiaries of Asiana, could overtake Jin as the second largest Korean LCC by fleet size but is not about to approach Jeju Air in size.

There are currently 143 aircraft operated by Korean LCCs, with Jeju Air accounting for 27% of the total fleet.

South Korean LCCs ranked by fleet size: as of 19-Nov-2018 

Rank Airline Code Widebody Narrowbody Regional Total
1 JEJU Air 7C 0 39 0 39
2 Jin Air LJ 4 22 0 26
3 Air Busan BX 0 25 0 25
4 T'way Air TW 0 23 0 23
5 Eastar Jet ZE 0 19 0 19
6 Air Seoul RS 0 6 0 6
7 Air Philip 3P 0 0 3 3
8 Air Pohang RN 0 0 2 2

Jeju Air has added eight aircraft this year 

The Korean LCC fleet has grown from 122 aircraft, or 17%, since the beginning of 2018.

Jeju has once again been the fastest growing LCC in Korea this year, accounting for eight of the 21 additional aircraft. Jin has added only one aircraft this year (before restrictions on its fleet growth were implemented) and Air Busan has added only two aircraft.

T'way has grown the second fastest, with four additional aircraft, and Eastar Jet has added only one. Air Seoul has not added any aircraft – which is somewhat surprising, since it only launched in 2016.

The other five aircraft added to the Korean LCC fleet so far this year are operated by the start-ups Air Philips and Air Pohang, both of which launched their operations earlier this year. Although they are considered to be LCCs in Korea, Air Philips and Air Pohang are categorised by some as full service regional airlines. 

Jeju Air and LCCs enjoy strong market share in Korea 

In addition to accounting for 27% of the Korean LCC fleet, Jeju Air accounts for a 28% share of total LCC capacity in South Korea. Jin Air is the second largest, but has less than a 19% share.

Top 10 LCCs in South Korea by weekly seat capacity: 19-Nov-2018 to 25-Nov-2018

Rank Airline Code Weekly seats Capacity share
1 JEJU Air 7C 276,696 28.0%
2 Jin Air LJ 183,502 18.6%
3 T'way Air TW 155,584 15.8%
4 Air Busan BX 119,142 12.1%
5 Eastar Jet ZE 69,552 7.0%
6 Air Seoul RS 42,705 4.3%
7 VietJet Air VJ 30,184 3.1%
8 AirAsia X D7 20,358 2.1%
9 Peach MM 17,640 1.8%
10 Spring Airlines 9C 16,926 1.7%

LCCs currently account for approximately a 50% of domestic seat capacity in South Korea and more than a 36% share of international seat capacity. Both are among the highest figures in Asia.

Jeju Air is the largest LCC in both the Korean domestic and international markets. The international market is served by 10 foreign LCCs, led by VietJet Air and AirAsia X. However, the local LCCs dominate, accounting for more than 80% of total international LCC seat capacity. 

South Korea international LCC seat capacity by airline: 19-Nov-2018 to 25-Nov-2018

Rank Airline code Weekly seats Capacity share
1 JEJU Air 7C 172,368 23.6%
2 Jin Air LJ 120,935 16.6%
3 T'way Air TW 96,866 13.3%
4 Air Busan BX 87,440 12.0%
5 Eastar Jet ZE 69,552 9.5%
6 Air Seoul RS 42,705 5.8%
7 VietJet Air VJ 30,184 4.1%
8 AirAsia X D7 20,358 2.8%
9 Peach MM 17,640 2.4%
10 Spring Airlines 9C 16,926 2.3%
11 Thai AirAsia X XJ 15,414 2.1%
12 Philippines AirAsia Z2 12,600 1.7%
13 Cebu Pacific 5J 10,758 1.5%
14 HK Express UO 10,110 1.4%
15 Tigerair Taiwan IT 3,960 0.5%
16 Scoot TR 2,250 0.3%

Jeju Air to use 737 MAX 8s to launch new medium haul routes

The Jeju Air order for MAX aircraft reinforces its position as the leading LCC in South Korea but does not come as a surprise. 

Jeju Air CFO Kim Tae-yoon originally told local media in Jul-2018 that Jeju was planning to take 737 MAX aircraft from 2019. He stated at the time that the MAX would be used to launch new medium haul services, such as to Singapore and Malaysia

Jeju Air already serves Kota Kinabalu in east Malaysia but does not serve Kuala Lumpur. Kota Kinabalu is approximately a five-hour flight from Seoul, whereas to Kuala Lumpur is more than six hours. Singapore-Seoul is also more than six hours, but could prove to be hard for Jeju Air to enter because of bilateral restrictions. 

Mr Kim said that Jeju Air did not plan to enter long haul markets, such as to Europe and Australia. Jin Air was the first, and is so far the only, Korean LCC to launch widebody, long haul flying.

While Jeju Air will use the increased range of the 737 MAX 8 to fly deeper into Southeast Asia, some of the 40 aircraft being acquired will likely be used to replace existing 737-800s. Jeju Air's average fleet age is 11 years and almost all of its aircraft were acquired secondhand. Three of the 737-800s Jeju Air has added this year are new aircraft but the rest of its fleet are at least seven years old, and 23 aircraft are at least 12 years old. 

Korean LCCs have historically favoured older secondhand aircraft that have lower lease rates. However, Jeju Air is not the only Korean LCC to commit to new generation re-engined narrowbodies. In late 2017 T'way announced plans to acquire 737 8 MAXs from 2019, and Air Busan is planning to start taking A321neos in 2020.

Jeju Air receives its first new and owned aircraft

The three new 737-800s that Jeju Air received earlier this year were not only the first aircraft acquired new from Boeing (rather than secondhand) but also the first to be bought outright (as opposed to a lease).

Opportunistic pricing and production slots persuaded Jeju Air to pursue these three aircraft. By buying the aircraft Jeju Air was also able to use the proceeds of its late 2015 IPO, which was so successful that Jeju Air at one point had a larger market capitalisation than Asiana Airlines.

At the time the placement was announced, Jeju stressed that the deal was one-off as the airline was not again expecting a favourable combination of pricing and production slots. The order for MAX 8s is a different kind of deal, since Jeju Air is committing to production slots that are in relatively high demand.

Jeju Air seeks to prove that new MAXs are a better strategy

Jeju Air is therefore signalling a change in approach with aircraft acquisition, at a time that follows a significant management change.

Until now, Jeju’s strategy has called for low capital expenditure and high returns by using older aircraft. Jeju Air and Korea’s other LCCs historically did not have the size, visibility and high profile backers that equipped other LCCs to order new aircraft.

An aircraft acquired direct from the manufacturer allows an airline to specify elements from operational to interior design – although this is not a high priority for Jeju, since all 737s have the same engine and Jeju has been able to take sister aircraft (such as from Ryanair) to ensure some commonality.

The 737 MAX brings fuel efficiency benefits at a time when oil prices are on the rise. As highlighted earlier in this report, the MAX also brings range improvements and therefore new network options, even though the core opportunity for Korea’s LCCs will continue to be short haul flights. 

Korea’s LCCs have found international success in markets where passengers can take quick trips. As flying time (and fares) increase the market changes, but LCCs need to determine if it is worth pursuing with additional cost and complexity and possibly lower revenue. (For example, ancillary sales currently do not increase in proportion to flight distance; yields are also generally lower on longer routes.)

LCC growth in South Korea continues at a rapid pace

The Korean LCC sector has added at least 18 aircraft each year since 2015. As Jeju Air and T'way both prepare to take MAX 8s in 2019, it appears the Korean LCC sector is poised to continue its rapid growth trajectory.

Growth in recent years has been admirable – given the increasing slot and traffic right constraints. As Korea now has one of the world's highest LCC penetration rates it also becomes harder to gain market share.

New generation narrowbody technology should support a new wave of growth as it opens up new medium haul markets. However, competition in these markets is intense, and in some markets there are no available traffic rights. 

More South Korean LCCs, including Jeju Air, eventually may need to add widebody aircraft in order to maintain their rapid growth rates. Sixth freedom traffic, which is already a staple for Asiana and Korean Air, will inevitably become more of a focus.

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