Asia-Pacific Outlook: Near-Term Pain, Long-Term Return To Growth
Almost all Asia-Pacific airlines are overhauling their fleet strategies, resulting in changes to growth trajectories and aircraft mix that will be felt for years to come.
Cutting fleet costs has been an essential step for carriers as they look to offset revenue declines and realign themselves for lower demand forecasts because of the pandemic. Some of these measures, such as parking aircraft, will be relatively short-term, while others such as early retirements and order deferrals will have a longer effect.
In the Asia-Pacific region, there were 8,079 aircraft in service and 2,569 inactive as of March 1, according to the CAPA fleet database. The rate of parked aircraft is higher for the Southeast Asia sub-region, where there are 1,309 in service and 978 inactive. The number of in-service aircraft bottomed out in April and has steadily improved since then.
The rate of parked aircraft has not been equal for all types. For example, very few Airbus A380 operators are flying these aircraft for now. Qantas has said that its 12 A380s will remain grounded for at least three years because of lower expected demand on international routes.
There are just six A380s active in the Asia-Pacific region—five operated by China Southern and one by Korean Air—versus 61 out of service, according to CAPA.
Narrowbodies typically have higher in-service rates for airlines that have strong domestic networks and few restrictions on internal movement. Short-haul routes will be the first international markets to recover in Asia, so narrowbodies will be useful for these markets too.
A comparatively smaller proportion of widebody aircraft are being flown. Within this category more efficient types such as Airbus A350s and Boeing 787s are being used most, while older variants of Boeing 777s will generally remain parked for longer.
Many Asia-Pacific airlines have decided to advance the retirement of some of their older aircraft, particularly widebodies. Airlines will not require their full widebody fleets for some time because international demand is forecast to return only gradually. So it makes sense to retire the least efficient aircraft.
This trend will increase, as many older widebodies that are in storage will realistically never return to service. For example, there were 111 Boeing 777-200s and -200ERs in service in Asia-Pacific in December 2019, before the pandemic. That had reduced to just 31 by the end of January 2021. A large proportion of the inactive 777-200/-200ERs could be retired without resuming service.
All Nippon Airways (ANA) and Japan Airlines (JAL) have both advanced the phaseout of their older 777s, and JAL plans to remove all of its domestic 777s by the end of fiscal 2022. The airline’s 777-200ERs will exit its international fleet by the end of March 2021.
Several other carriers have announced plans for early retirements or lease returns of various aircraft, including Qantas, Singapore Airlines, Cathay Pacific, Thai Airways, Air New Zealand and Virgin Australia.
One result of this trend is that many airlines will have smaller fleets with a younger average age as they emerge from the pandemic. And the disappearance of some types, such as Boeing 747-400s, will be accelerated.
Order deferrals are another important avenue for airlines to alter their fleet plans. Such steps allow airlines to delay expensive growth, or, in combination with retirements, shrink their fleets.
The majority of airlines in the Asia-Pacific region have negotiated deferrals of varying degrees. In the short-term, they simply cannot take on board any more aircraft while so many of their fleets remain parked. It also represents a good way to postpone capital expenditure while revenue remains low.
For example, Singapore Airlines has negotiated deferrals that have enabled it to shift more than S$4 billion ($3 billion) in capital expenditure from the 2020-2023 period to later years.
Korean Air is an example of a carrier using deferrals as one of its tools to reduce its fleet size. The carrier is not expected to take delivery of any aircraft this year and is returning some leased aircraft during the same period.
It is not just the airlines causing aircraft delivery deferrals, however. In some cases, aircraft program delays mean scheduled production and delivery timetables cannot be met. This has occurred with the Boeing 737 MAX and 777X programs, and other aircraft have also had production rate slowdowns. Manufacturers and customers have recalibrated delivery schedules, which can meet the goals of both parties.
There are some notable cases where airlines have opted to keep their deliveries coming with few changes. India’s IndiGo is the best example, having decided to keep its delivery timetable intact while speeding up retirements. The two major Japanese airlines are also planning only minimal deferrals.
More significant fleet moves are still to come for the Asia-Pacific airline industry. Some of the region’s major players are finalizing new fleet plans following negotiations with manufacturers, lessors and creditors. Often these changes are an integral part of airline restructuring efforts as they look to streamline their businesses and cut costs.
Despite all of the cutbacks over the past year, the Asia-Pacific region will remain a very important market for aircraft manufacturers. The growth curve will be shifted out a few years, and will be slightly flatter in the medium term, but the dynamics underpinning long-term expansion are still in place.