Southeast Asia LCCs are expanding fast and placing record-breaking aircraft orders. But some say they have overextended themselves
Both and have released glowing predictions about the market for aircraft in Southeast Asia, although there are signs that some of the airlines may have been overly optimistic.
Airbus forecasts that Asia as a whole will take more than 7,000 widebody and more than 20,000 narrowbody aircraft over the next 20 years. Boeing is equally bullish, saying that approximately 50% of air traffic growth will be driven by the Asia-Pacific region in the next two decades.
So far, the trend estimates seem to be on target. Established players such ashave placed orders for hundreds of aircraft. Indonesia-based Lion Air has started taking delivery of its record order of 500-plus Airbus and -800s. Relative newcomers like Vietnam's VietJet are poised for more than 90 new A320s, and Thailand's Nok Air is buying 15 737s.
There is no doubt airlines are convinced there is a strong case for market expansion, and aircraft manufacturers, leasing companies and banks all happily agree. It is really good business for them, after all. According to Airbus, low-cost carriers (LCC) currently comprise about 25% of the total seats sold across Southeast Asia. In 2003, it was a mere 2%.
This dramatic expansion is partly due to Southeast Asia's unique geography of either old or nonexistent rail links, slow and uncomfortable road connections or relatively unsafe ferry services. All these make the prospect of a fast, cheap and readily available alternative look highly attractive to the rapidly expanding regional middle classes, with their new and increasing levels of disposable income.
Indonesia alone has almost 240 million inhabitants, and its domestic aviation market grew in 2012 by 20%—to 72.5 million passengers from 60.2 million, according to government data. Even so, recent indicators show that a mere 10-20% of Indonesians fly across the region, leaving significant potential for growth. Estimates point to average middle-class wages of about $15,000 a year by 2030.
According to Organization for Economic Cooperation and Development figures, average gross-domestic-product increases across what it calls the Asian “emerging countries” will be 7% between 2014-18.
Add to the mix the dangling carrot of an open skies agreement in 2015 that could dramatically release cross-border aviation across the countries in the Association of Southeast Asian Nations, and the potential market for any regional operator could be up to one billion passengers.
Given these indicators, the case for explosive growth in air travel—and LCCs in particular—is clear in many Southeast Asian countries.
But warning signs suggest the suppliers of the aviation growth are not being realistic about the opportunity. Some players are making expansion plans that are hard to justify—and may be hard to pay for in the long term.
Recent figures from AirAsia reported a fourth-quarter profit drop of 19%. Batik Air canceled an order for five(although it reportedly wants to replace them with 737s). Tigerair Singapore reported an operating loss of $13 million in third-quarter 2013, compared to an operating profit of $21 million in 2012. (AAX) put delivery of seven new on hold until “the timing is right,” says an airline official. The reason cited was poor figures, allied to uncertainty about the political situation in Thailand. AirAsia X bought only an additional 25 A330-300s in late 2013.
This bleak news is arriving on the heels of reportedly great load factors, indicating that airlines are already opting for bulking these up at the expense of yields. For example, Lion Air CEO Rusdi Kirana underlines his company's success in filling aircraft: “We are still seeing load factors of 90 percent or so, and the market is growing by 15 percent a year,” he said recently. The same is true for AirAsia. In the fourth quarter of last year, the whole AirAsia group recorded an increase in load factor to 81%, compared to 80% in the same quarter in 2013.
Indeed, financial analysts from Malaysia's CIMB bank have noted that “some airlines have given up the goal of high yields in order to push up aircraft utilization and defend . . . market share.”
Potentially, the Southeast Asia market is approaching a situation where there could be too much choice, even for that massive one-billion-passenger estimated market. And that brings the prospect of a scaling back by some of the more prominent players involved in the relentless market expansion.
As in other regions, strong personalities and big egos are involved, not always to the benefit of bottom lines. For some, it is all very personal.
In a recent series of remarks that went out on Twitter just before the dismal figures for AirAsia were released, CEO Tony Fernandes hit the social media with harsh criticism of Malaysian Airline Services () for reporting a 1 billion ringgit ($305 million) loss.
“Malaysia Airlines lost over a billion,” Fernandes tweeted. “So much money wasted. If people were more efficient, Malaysians would spend less on travel.” Given that just days later his AAX posted a pre-tax loss of $64 million in fiscal 2013, this seemed to be a paradoxical comment.
In Australia, too, a bitter fight for market share and public support is raging.placed a series of advertisements in the country's mainstream media lambasting for potentially wanting to take on public debt. The ads blatantly criticized Qantas, advising foreign investors to think twice before investing in Australia if the government helped bail out the flag carrier following its reported $225 million loss in 2013. This was just before Virgin Australia—which also has a 60% stake in LCC Tiger Australia—announced 2013 group losses, after tax, of $83.7 million.
Not all commentators agree with ongoing expansion predictions for the region. “In my opinion, there is too much spare capacity in this region,” warns Steven Greenway, head of commercial at Singapore-based long-haul LCC Scoot. “The problem with many of the LCCs is that is if you look at the figures [for entities] like AirAsia, Jetstar and even Tiger, the short-haul narrowbody market has way too much capacity floating around.”
Which means that for players who have already committed to large orders, yields have to drop in order to maintain market share.
Lion Air's Kirana was tight-lipped on the subject of yield, but Tigerair Group CEO Koay Peng Yen, commenting on Tigerair's third-quarter 2013 results, is more candid. “Our third-quarter operating performance was dragged down by industry overcapacity which . . . led to weaker yields and lower load factors,” he admits. Others put it more strongly.
“Some of these people are really bleeding,” asserts Scoot's Greenway.
As a result, some are now taking action. Fernandes has announced that AirAsia will put off delivery of seven A320s in 2014, and 12 A320s in 2015—ostensibly to wait for delivery of. Fernandes also committed to “slashing costs” by up to 5% in 2014 through sales of less-fuel-efficient aircraft and by reducing staff.
TigerPhilippines has sold off its TigerairPhilippines subsidiary to Cebu Air, following exceptional charges on losses. “The disposal of TigerairPhilippines will put us on a better footing going forward . . . [but] the macro environment remains difficult,” says Tigerair's Koay.
Merpati has surrendered some of its longer-haul routes in East Nusa Tenggara to Indonesian flag carrier Garuda, citing a move to “improve services.”
Jetstar has deferred delivery of three 787s, “restructured” its A320 orderbook, and put expansion plans for Jetstar Asia on ice.
According to Garuda CEO Emirsyah Satar, other changes are looming. “I think . . . there is going to be consolidation,” he said in a recent interview. “You see it at airlines in Indonesia. Some of them are already closing their routes; they will be consolidated.”
Consolidation is only one alternative to potential overcapacity—and anathema to some of the high-brand-value players. Alternatively, carriers may dispose of older, less-fuel-efficient aircraft to keep up yields—as AirAsia has said it will do. The problem then arises of a corresponding glut of older, inefficient aircraft that are unattractive to all but the cheapest of buyers. This scenario will not add cash to empty coffers.
The last option for overstretched LCCs is to open up new routes to as yet unserved destinations. This could result in a rash of new LCC routes into potential markets such as Australia or China (traffic rights permitting)—or a boom in more local Southeast Asian services using highly efficient turboprop aircraft instead of airport-limited jets.
As Nok Air Chief Executive Officer Patee Sarasin says, running a profitable LCC operation is not just about having more capacity or filling more seats than your competitors. As the recent sets of results have shown, it is about ensuring that seats pay for themselves.
“It is not about price,” Sarasin cautions. “It is about value.”
|Air Asia X||39||10|
|Sources: Airbus and Boeing|