Growing pains being felt in Korea
By Nicholas Iondies
Growing pains are being felt in South Korea, where new airlines have been finding it tougher than expected to compete and where would-be new entrants are facing vehement opposition from the incumbents.
A year ago South Korea's air transport market was one that looked like it had great promise and would become the next hot-spot in Asia for low-cost carrier operations in particular.
But there are allegations protectionism has been rearing its ugly head, leading to uncertainty over important regulatory matters which has been scaring potential investors away. Singapore-based low-cost carrier Tiger Airways, for example, recently dropped plans for an associate carrier in South Korea, citing the economic downturn and "regulatory uncertainty". Tiger announced plans for the new airline in 2007 and it was to have held a minority stake, with Incheon Metropolitan City holding the majority. Incheon is where Seoul's international airport is located.
The aim was to operate international flights to nearby destinations, mainly in China and Japan, but soon after plans were unveiled it faced its first hurdle. The South Korean government unexpectedly announced that new airlines must operate domestic flights for two years before being approved for international operations. This threw operational plans into question, as the domestic market is not seen as having anywhere near as much potential as the international market out of the country. South Korea now has highly liberal air services agreements with nearby China and Japan and that is where most of the growth is expected to be seen in future.
Incheon Tiger Airways also faced opposition from other South Korean carriers, which lobbied the government to block its creation. In August four local airlines - Jeju Air and Yeongnam Air, along with Korean Air's Jin Air and Asiana Airlines' part-owned Busan Air - sent a joint petition to the government calling for it to block Incheon Tiger's establishment.
They argued in part that the new carrier would create unfair competition and complained about Tiger being part-owned by an investment arm of the Singapore government.
Tiger did not directly address the hurdles it faced when it announced the termination of the project, saying only that "the recent global economic situation and continued regulatory uncertainty in Korea have meant that both parties [Tiger and Incheon government] have concluded that the climate is not conducive to the successful launch of a new airline at this time".
Incheon Municipal City then struck a partnership with Korean Air (KAL) under which it agreed to relocate its low-cost subsidiary Jin Air's corporate headquarters to the city. KAL said "in return, Incheon will support Jin Air for its settlement in Incheon as well as for its growth to become the city's only airline".
The Sydney-based Centre for Asia Pacific Aviation says "protectionism" is being seen in South Korea that is "designed solely to protect local airlines from added competition - and the lower fares that competition would bring".
MARKET POTENTIAL
"The Centre has estimated that if the three North Asian markets of Korea, Japan and China were opened up to full and free airline competition, there is potential for over 300 million additional tourist trips annually," CAPA said in a recent report critical of the South Korean aviation policy making. "The beneficial impact of such economic activity would be exponential, in creating new employment and opening up regional centres and their airports to new opportunities, not to mention stimulating cultural ties."
But it is not just foreign would-be new players which have found the South Korean market a tough one to break into. New carriers that have launched in recent years are also finding it difficult, and as a result two were recently forced to suspend operations.
Early in December Fokker 100 operator Yeongnam ceased operations after running out of cash and finding the competition much more intense than expected. Its collapse followed the October failure of Han Sung Airlines, which operated ATR turboprops. It cited financial troubles, high fuel prices and a depreciation of the South Korean won for its collapse. Both Yeongnam and Han Sung sought new investors to relaunch services but both remain grounded.
Their collapse left South Korea's market with three main airline groups: KAL and its low-fare unit Jin Air Asiana and its Air Busan unit and much smaller Jeju Air, which is owned by the Aekyung conglomerate and the Jeju provincial government.
Well-connected and well-capitalised Jeju Air was the first new entrant to be eligible to launch international services after it passed its second year of operations in the middle of 2008.
It currently only operates limited international charter services but in March this year is due to add scheduled international services, to Osaka and Kitakyushu in Japan. It operates Bombardier Q400s on domestic flights and Boeing 737-800s on its international flights.
And the growing pains and regulatory uncertainty have not stopped others from seeking to enter the market.
Independent new low-fare carrier Eastar started operating in early January with a Boeing 737-600 on the Seoul-Jeju route. It is backed by the Korea Insulation Company conglomerate and hopes to eventually add international flights.
Would-be new carrier Kostar Airlines was meanwhile forced to delay its planned launch for the third time recently, saying it wanted to first find a new investor to help improve its financial position. It has already taken delivery of a Fokker 100 and originally said it planned to launch in August 2008.
Copyright © 2009 Aviation News Release