LCC passengers are mostly price-sensitive or infrequent travellers, and the growing popularityof mass tourism (i.e. leisure travel, visiting families and friends) is the major driving force behindthe growth in the industry. We believe the US and Europe provide good pointers for how theLCC industry can develop in China. These markets tell us that LCCs start to prosper when flyingloses the luxury cachet associated with the wealthy and business travel. The two key indicatorsto watch are GDP per capita and the price of air fares as a percentage of average disposableincome.

The growing popularity of mass tourism in the 1970s – mainly leisure travel, visiting families andfriends – was the major growth driver. This fuelled the rapid expansion of Southwest Airlines,the trailblazer of the LCC industry.

In the 1990s the number of air trips per capita in Europe increased at a CAGR of 10%. As in theUS, Ryanair and EasyJet, the largest two LCCs in Europe, recorded robust growth in the nextdecade despite a slowdown in the overall aviation industry after 2000. Between 2000 and 2010,

Ryanair’s volume of passenger traffic grew at a CAGR that was 21.2% higher than the aviationindustry average. During the same period, GDP per capita in Europe was USD34,000-37,000.

China also has the most developed high-speed rail network in the world, raising questions abouthow much this will affect LCCs, especially over distances of less than 1,000km. We don’tbelieve the competitive threat is significant as the average domestic air fare of Spring Airlines isonly RMB546, which is similar to the price of a high-speed rail ticket for a journey of 1,500km.Flying saves time, so we think more people will prefer to book a flight rather than take a longtrain journey.