While US and European LCCs enjoyed five years of high growth through the late 1990s to early 2000s, their South-east Asian counterparts seem to be heading for a premature consolidation.

'2005 has generally not been great to LCCs in the region,' noted Standard & Poor's regional aviation analyst Shukor Yusof. 'While they have continued to increase market share, they have suffered from a weak industry environment marked by high jet fuel prices, industry over-capacity and pressure on pricing.' Analysts reckon these trends could continue over the near term.

But there is also a lot of good news. The advent of cheap air tickets has broken the monopoly of the incumbent legacy airlines, commoditised air travel, benefited regional tourism, stimulated unprecedented aviation infrastructure development and attracted huge numbers of people to fly around the region - many for the first time in their lives. In spite of cut-throat competition, protected skies, rising fuel costs and unexpected travel sector crises, the region's LCCs have largely managed to keep on flying.

Yes, there has been some consolidation and restructuring at the margins, the most notable of which was the takeover of troubled, privately-owned, Singapore discount carrier Valuair by the Qantas group. And some domestic players in Indonesia, The Philippines and Thailand are also struggling with weak balance sheets.

On the other hand, the most successful regional player remains Malaysian-based AirAsia. While many of its competitors have been struggling to maintain yields and clinch new routes, AirAsia continues to grow from strength to strength through a combination of savvy marketing and creative cross-border partnerships. Though started in Malaysia, it now has associates in Thailand (Thai AirAsia) and Indonesia (Indonesian AirAsia). And despite failing to get its Air Operators licence in Singapore, AirAsia's maverick chief executive Tony Fernandes last week hinted to BT that he could re-apply to start up a Singapore AirAsia. To fuel its expansion, AirAsia has ordered 60 new A320 planes to replace its ageing 737 aircraft, the first two of which have been commissioned in service.

AirAsia's main LCC challenge comes from Singapore-based Tiger Airways. Besides operating to a dozen destinations in the South-east Asian region, the Singapore Airline's LCC associate also flies further afield to Darwin in Australia, and has rights to operate to Kolkata in India. And following the China-Singapore expanded air services agreement late last year, it is eyeing destinations in that vast country.

Meanwhile, Qantas' Singapore-based LCC, Jetstar Asia, has survived a bruising first year is poised for a better 2006 after securing more lucrative routes to destinations like Bangalore, Macau and Manila. Elsewhere in the region, it has been a mixed bag of results for the numerous privately-owned low-cost operators serving the vast Indonesian market. Further north in Thailand, the success of Thai Airline's Nok Air and 1-2-Go in servicing the popular domestic tourism routes is spurring new start-ups. It's a similar story in the Philippines where Cebu Pacific's growth is encouraging more players to enter the market.

But nowhere has the explosion of LCC operators been as great as in India, where players like Kingfisher, SpiceJet, IndiGo, Air India Express and Air Deccan are being followed by new names like Premier Air, Air One, Air Dravida and Jagson Airlines. Not surprisingly, India is proving to be a gold mine for aircraft makers, with new plane orders already surpassing some US$12 billion last year alone. China has also started issuing licences for private airline operators, though restrictions on LCCs remain. Despite the huge strides, regional LCCs continue to face considerable challenges. Unlike Europe or the US, Asia-Pacific LCCs struggle to get unencumbered air space. Flying within the region essentially means crossing international borders. So bilateral agreements are pivotal in determining the growth of LCCs. But for all their pronouncements of solidarity, many countries in this part of the world remain driven by nationalist and protectionist instincts.

The absence of open skies forces LCCs to compete on crowed, skinny and seasonal routes, such as those between Singapore and Thailand. The result has been poor and unpredictable yields.

Indeed, this 40-minute hop remains an anachronism at a time when the regional aviation scene is undergoing rapid changes. The two national carriers of the respective countries control most of the more than 200 flights per week between the two destinations. This has meant high fares: a round trip between Changi and Sepang costs well over S$350, double the fare between Changi and Bangkok's Don Muang via a low-cost carrier. As analysts point out, it is cheaper to fly from Singapore to Kuala Lumpur via Bangkok with an LCC.

Even China, in spite of its expanded air services agreement with Singapore, still bars Singapore's LCCs from flying into its major metropolitan centres like Shanghai, Beijing and Guangzhou. Ditto for Mumbai, Chennai and New Delhi in India.

Meanwhile, regional LCCs also have to endure cost pressures due to the lack of a good network of cheaper secondary airports and longer flying times. As a result, the cost differential between full-service carriers and LCCs in Asia is much smaller compared to operators in the US or Europe; analysts estimate it to be only about 20 per cent, against 60 per cent in Europe.

The absence of clear and enforceable laws against unfair competition also makes regional LCCs more vulnerable to predatory pricing from full-service carriers. For example, Qantas and SIA dropped their return fares for the Singapore-Perth route to under S$200 just as Valuair announced that it would start flying that route.

But the biggest challenge remains fuel prices. At over US$70 per barrel, jet fuel accounts for half the total operating costs of regional LCC operators. How many will survive at near-US$100 per barrel remains to be seen. Still, it is not all negative. Supply has created its own demand. Today, city slickers from Singapore and Kuala Lumpur think nothing of a quick weekend getaway to Phuket, Macau, Bangkok, Manila or other regional destinations, paying as little as S$9 each way for a ticket. 'Despite the challenges, regional LCCs have proven they can operate profitably and have even spawned an increase in travel by enticing those who had previously used land or sea transportation,' noted S&P's Mr Shukor.

Regulators and airport operators are beginning to recognise this. Singapore and Kuala Lumpur will be opening their respective purpose-built low-cost airline terminals next month in what some observers see as a looming regional battle for low-cost flight hub status. Thailand could be next if it converts its existing Don Muang Airport into a low-cost base after it shifts mainline functions to its new Suvarnabhumi Airport.

Meanwhile, some previously closed skies are starting to open up. Just weeks after signing the Singapore-India Comprehensive Economic Cooperation Agreement (CECA) last year, India surprised the market by offering Singapore-based carriers almost 3,000 extra seats to Bangalore, Hyderabad and Kolkata. Singapore's Air Traffic Rights Committee subsequently granted budget carrier Tiger Airways and its rival Jetstar Asia critically needed new routes to two of these three destinations.

No sooner had this piece of good news sunk in when Indonesia granted Jetstar's sister discount carrier, Valuair, the rights to operate flights to Denpasar in Bali and Surabaya. Meanwhile, some players like Tiger Airways are contemplating tying up cross-border partnerships in order to get around the issue of bilaterals. AirAsia has shown this can be done.

Going forward, some low-cost carriers are broadening their business models. In Australia, Virgin Blue's chief executive has already coined a new phrase, New World Carrier, or NWC, which would attract more corporate travellers with frequent flyer programmes, interline code-share arrangements and selected frills. Virgin Blue plans to start flying the lucrative Sydney-Los Angeles route - which is currently a duopoly controlled by Qantas and United Airlines - by 2008.

Meanwhile, Jetstar's chief executive Alan Joyce is gearing up to start longer haul services on international routes. Under the branding of Jetstar International, the Qantas subsidiary plans to start the world's first long-haul low-cost flights early next year, initially with Airbus 330-200 aircraft, then upgrading to the Australian carrier's new Boeing 787 Dreamliner planes in 2008. Tickets on its yet-to-be-named long-haul routes of between six and 10 hours will be sold in the middle of this year.

Further north in Macau and Hong Kong, two new LCC start-ups plan to focus exclusively on long-haul routes. Oasis Hong Kong Airlines, established a year ago by Raymond Lee and his wife Priscilla Lee, is planning flights between Hong Kong Hub and London's Gatwick Airport within a year, using leased Boeing 747-400 planes. Incidentally, Oasis' chief executive is former Dragonair boss Steve Miller.

In Macau, start-up budget carrier Viva Macau plans to fly its B767-200 planes initially to Western European destinations like Lisbon and Madrid. These will later be replaced by B787 Dreamliners, according to Andrew Pyne, its CEO.

Mr Ionides reckons these are still early days for regional LCCs: 'There will no doubt be many more developments in the sector in the coming years.' South-east Asia, with a population as large as Western Europe whose appetite for air travel has been whetted by cheap air tickets, is still a huge potential growth market for low-cost carriers.

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