After more than a decade of light-speed expansion, Asia’s aviation growth and profitability have slowed in the past two years. Brendan Sobie, Singapore-based chief analyst for the Centre for Aviation (CAPA) responds to recent slowdowns and anticipates what’s ahead for Asia Pacific carriers.
Let’s start with the basics: Where did Asia’s aviation growth originate and where has it landed now?
A lot it has come from the growing middle class, where a larger sector of the population is reaching income levels that can afford to fly. The growth of LCCs has driven down fares and driven up growth rates even further.
In the last 10 years, the growth has been regional in Asia, particularly in Southeast Asia. LCCs — which account for almost 60 percent of traffic within Southeast Asia — are now penetrating the medium-haul market, which is Southeast Asia to north Asia, Australia to Asia.
In previous decades, a lot of the growth in Southeast Asia was driven by the expansion of flag carriers in long-haul markets. Some of these are the same long-haul markets that Gulf carriers are now penetrating. Long-haul stuff is a mature market and it’s not growing as fast.
Is there concern about the glut of LCCs in Asia? Are they expanding too fast?
We have seen overcapacity in the past year or two. Some of those issues could be short term: Thailand, one of the largest LCC markets, had political instability that impacted demand; Indonesia had a political election and slowed down; China had a slowdown in demand to Southeast Asia after MH370.
There are 25 LCCs in Southeast Asia alone and more than 50 in Asia. A lot of them are part of larger airlines, which use a common website and one distribution system, and they’re sometimes better off because they can absorb the losses.
The smaller LCCs or the ones just starting out can have a tough time. The fares can be so low that they aren’t making money, which raises the question of how long this can continue.
Eventually we see airlines exit, we see adjustments and consolidations. We’ll see more restructuring as well, particularly with Malaysia Airlines and Thai Airways which are trying to recover their profitability.
Are there smaller airlines that have succeeded, and if so, what was their secret?
There are a lot of smaller airlines out there that are successful, both LCCs and full-service. They’re not overly ambitious and focus on having a good presence in one market. Cebu Pacific in the Philippines is one of the more established LCCs in Asia — they focus on the market they know the best without being greedy. On the full-service side, Bangkok Airways is very focused on the Thai market.
Do airlines emerge even when there’s not necessarily a need for them?
With fuel prices so low right now, there’s a lot of temptation for what we call “strategic growth” which means pursuing capacity when the market can’t absorb it. They muscle in even when it’s not profitable. It’s an opportunity to grab market share and airport slots, maybe preventing another airline from making the same moves.
Does bidding for limited slots naturally curb growth?
Slots are so constrained in major airports that, in order to keep growing, airlines forced to look at secondary markets. They’ve discovered there is demand out there.
Growth isn’t always in cities like Jakarta, Bangkok or Kuala Lumpur. It’s happening secondary cities as well, where we see more point-to-point flying catering to the local populations. We’ve seen big growth in cities like Krabi, Mandalay, Da Nang, Phú Quốc, and Bali.
CAPA has reported an eight-fold growth in Asia’s LCCs and only 45 percent in full-service carriers (FSC). What efforts are FSCs putting into growth?
Singapore Airlines, Cathay, Thai, Garuda, a lot of these airlines groups have multi-brand strategies so they’re able capture some of the faster-growing segments of the market. They’re focusing a lot on regional growth on the full-service side as well as the low-cost side.
Singapore Airlines is traditionally a long-haul carrier and they’re very much focused on the premium market. They continue to invest in their product, but they don’t necessarily want to play this low-yielding game with the Gulf carriers and other competitors. That’s why you’re seeing Singapore Airlines introducing premium economy seats this year. It will reduce the total number of seats in some of the mature markets but it will appeal to the passengers they want to keep.
SilkAir, which is a full-service brand, was growing at double-digit clips recently, because of the opportunities in the regional market. Passengers from North Asia, Australia, Europe and the U.S are connecting through Kuala Lumpur, Singapore and Bangkok and going through regional destinations that don’t have nonstop services.
There have been recent reports of Thai airline facing additional scrutiny from the International Civil Aviation Organization (ICAO) and you recently authored a report that suggested an audit could put Cambodia’s airlines on ICAO’s blacklist. Is this a safety issue?
There has been such growth that officials are looking more closely when a new airline tries to launch from another Asian market into their country. With Thailand and Cambodia, it’s that these countries might not be meeting normal international standards. It’s not a reflection on the safety of specific airlines, but the authorities overseeing regulation. In some cases, there hasn’t been sufficient investment into resources and training in relation to their growth.
How have airlines responded to circumstances that are out of their control?
If Thailand’s airlines can’t fly to China, Japan, Korea or Australia because of regulatory issues that they can’t control, they have to find other markets for these airplanes. Thailand had domestic overcapacity issues this year because of new competition and because of political instability that led to a a sharp reduction in inbound demand.
Airlines may reduce utilization by trying to sell the airplanes or park them for a period of time. They may defer their orders, which depends on their relationship with the manufacture and takes time. In Southeast Asia alone, the LCC order book consists of nearly 1,200 aircraft — by deferring, airlines may not take them next year, but they will take them eventually. And they have to hope the market is better by 2018.
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