Southeast Asia has become an increasingly lucrative market for narrowbody aircraft, with the growth of low-cost travel and relaxation of regulations helping to drive orders throughout the region - and fuelling fears of overcapacity.
|© Tiger Airways
Most of the existing fleet in Southeast Asia consists of widebodies, and several of the legacy airlines have continued to place orders to replace their ageing aircraft and reduce costs. However, narrowbody aircraft will account for the majority of deliveries in the coming years, analysis of Flightglobal's ACAS database reveals. Many of the major carriers in the region already have large backlogs of orders for both Airbus A320s and Boeing 737s, including the re-engined options that became available to order last year. And a handful of orders could be made this year, including one or two at the 2012 Singapore Airshow.
"Although a predominantly widebody market, demand for single-aisle aircraft in the region is expected to accelerate in the coming years, with a requirement for some 5,200 new airliners in the 100-210 seat category," says Airbus in its Global Market Forecast for 2011-2030. "The increase will be driven primarily by the growth of low-cost carriers, as well as the opening of new secondary short-haul routes, especially in China, India and Southeast Asia."
The 10 members of the Association of Southeast Asian Nations have agreed to open skies in the region by 2015, even though Indonesia and Vietnam expressed some reservations about opening up all of their airports. This is likely to give another fillip to the airline industry. Boeing believes the structure of the Asia-Pacific airline industry is changing as carriers go beyond their borders. "The impact of liberalisation is particularly dramatic in the case of low-cost airlines, which are stimulating air travel by lowering fares and opening new markets," says the airframer in its Current Market Outlook report for 2011-2030.
"In order to compete, established airlines are forming low-cost units, further expanding the affordability and availability of air travel. Where market development has outpaced official liberalisation of markets, new airlines have been launched as international joint ventures, carrying established travel brands into new markets."
The airframer projects that air travel to, from, and within Southeast Asia is likely to grow at an average annual rate of 6.8% during the next 20 years. Intra-regional traffic alone is expected to grow at a rate of 7.4% a year. Much of that is driven by low-cost carriers, which have emerged as viable competitors to legacy operators, and more than half of the upcoming deliveries will be single-aisle aircraft, it adds.
Malaysia's AirAsia, Cebu Pacific in the Philippines, and Indonesia's Lion Air have either overtaken or are close to overtaking incumbents, while Singapore Airlines associate Tiger Airways and Qantas associate Jetstar Asia, both based at the island's Changi Airport, are also growing. AirAsia has affiliates in Thailand and Indonesia, and one more coming up in the Philippines, while Tiger has bought a 33% stake in Indonesia's Mandala and plans to acquire 32.5% of Seair in the Philippines.
All this has resulted in an influx of narrowbodies, mostly Airbus A320s. AirAsia has 58 A320s based in Kuala Lumpur; Indonesia AirAsia has 16 A320s and three Boeing 737-300s; and Thai AirAsia has 22 A320s. Cebu Pacific has 10 A319s and 19 A320s, as well as eight ATR-72-500s in the Philippines. Singapore-based Jetstar Asia has 16 A320s, while Tiger has 23 of the same type. In Indonesia, Lion Air has 56 Boeing 737-900ERs and seven 737-400s, while its subsidiary Wings Air has 17 ATR 72-500s. All of them, however, have also placed large orders for aircraft.
In November, Lion Air signed a commitment to purchase 230 aircraft, including 201 737 Max and 29 737-900ERs. This is due to be confirmed in early 2012. It also has 110 737-900ERs and 12 737-800s in its backlog. "From east to west, Indonesia is 5,000 miles [8,000km] long and we have over 100 airports," says Lion Air president director Rusdi Kirana. "In this context, our order is not really that big."
Lion Air has recently ordered 29 737-900ERs
At the 2011 Paris air show, AirAsia made a splash with a firm order for 200 A320neos. It is also believed to have options for another 100 of the aircraft, in addition to a backlog of 79 A320s. While these are for all of the airlines under the AirAsia umbrella, group chief executive Tony Fernandes said at Paris that more and more will go to the affiliates outside Malaysia.
Slowly, full-service carriers have started hitting back. One place where AirAsia was knocked back was in Vietnam, where flag carrier Vietnam Airlines successfully lobbied its government to prevent the entry of the low-cost carrier into its turf in a joint venture with Vietjet, which has just launched operations on its own with leased A320s.
Vietnam Airlines, which also has orders for A321s for its full-service operations, showed its hand in late December when it revealed it was negotiating to buy the government's stake in Jetstar Pacific, a low-cost carrier in which Qantas has a 23% stake. This would allow it to compete with the growing presence of AirAsia, Tiger and Cebu Pacific in Vietnam and enable Qantas, which orders aircraft on behalf of its Jetstar subsidiary, to send more A320s to Vietnam to replace Jetstar Pacific's ageing fleet.
In Indonesia, Garuda is using its Citilink subsidiary to take on the established low-cost carriers at home and abroad. Citilink - which has three A320s, five 737-300s and four 737-400s in its fleet - has ordered 15 A320 and 10 A320neos. It offers domestic services and plans to go international by year-end. Its aim is to carry four million passengers in 2012, up from 1.6 million last year. "In Indonesia, the demand is greater than the supply," says its advisor Con Korfiatis, who has been hired by Garuda to revamp Citilink. "The capacity we bring in is just going to fulfil the growing demand rather than try and take customers from someone else."
There is a similar situation in Thailand. With Thai AirAsia taking away much of the short-haul traffic, flag carrier Thai Airways tried to respond via a joint venture with Tiger, but it failed to get off the ground because of opposition from Thai politicians. Thai Airways, however, is determined to grab a share of the market. leading it to increase its stake in Nok Air to 49%, giving it more control over the low-cost carrier's strategy.
"If we don't do anything, our market share will decline further," Thai Airways president Piyasvasti Amranan said in 2010, when talking about the airline's plans for the low-cost segment. "We believe this move will provide revenue opportunities for Thai, and allow Thai to be more competitive in the region with the anticipated growth in the low-cost market."
While Philippine Airlines continues to falter amid its own problems and growing competition, owner Lucio Tan has been pushing his other airline, Airphil Express, in a bid to win back market share from Cebu Pacific. Airphil has eight A320s on order, due to be delivered by late 2012, bringing its A320 fleet to 15. These are supplemented by three Bombardier Q300s and five Q400s. The airline could buy A319s to replace some of the turboprops. Freddy Herrera, Airphil's senior vice-president of marketing and sales, says competitors have started using A319s in some of the markets traditionally served by Q400s. "For some of our routes, we are thinking of stepping up and getting a couple of A319s. On certain routes you cannot remain competitive with a Q400 when a rival is using an A319," he says.
Yet there is a real possibility of overcapacity in the Philippines, especially if both AirAsia Philippines and Tiger's joint venture with Seair take off this year. Cebu Pacific has another 24 A320s due to be delivered, and also ordered 30 A321neos. But chief executive Lance Gokongwei suggests yields will start to go down as more aircraft arrive.
"The question is if the other airlines can make enough money to clear their costs," he says. "When a lot of capacity comes in, yields are affected and margins are reduced. All I know is that I am making money in this high fuel environment and have a strong balance sheet. "Of course, I hate it that my yields are not as good as I hoped, but that is part of the industry. But, more importantly, you need a sustainable business model. I'm not in this for market share alone. There is more capacity put in than anticipated, but nobody would want to lose money permanently. Something has to give. All I know is that it is not gonna be me."
Amid the growth of the low-cost market, it is easy to forget that the full-service carriers have also ordered aircraft, either for replacement or in expectation of rising demand for premium services. Some of these are for narrowbodies, as they try to lower costs and revamp their business strategies.
Singapore Airlines (SIA) has continued to grow its widebody fleet, with new Boeing 777-300ERs, Airbus A330-300s, Boeing 787-9s and Airbus A350-900s set to be delivered in the coming years. However, the airline has also retreated from several short-haul routes, leaving its subsidiary and A320 operator Silkair to offer a premium service and compete with the low-cost airlines.
Silkair - which has 13 A320s and nine A319s in its fleet - has another five A320s due to be delivered, plus options for 12 more. These would allow it to expand the SIA network in the coming years with a much lower cost base than that of the main carrier.
Similarly, Thai Airways plans to buy 37 aircraft from 2012 to 2014. These include 11 A320s that will be used by new subsidiary Thai Smile, which is modelled on Silkair and offers a premium service on regional routes where Thai's high-cost base makes the flag carrier's widebody operations unsustainable.
Competition, however, can also lead to overcapacity and falling yields, especially during an economic downturn. That led to a ceasefire between Malaysia Airlines (MAS) and AirAsia in August 2011. MAS had ordered 38 737-800s for its subsidiary Firefly, which it planned to turn into a low-cost airline in direct competition with AirAsia. But Khazanah, the national investment agency that is also Malaysia Airlines' majority shareholder, stepped in as it became increasingly evident a bloodbath and lots of red ink would ensue. It agreed to buy a 10% stake in AirAsia and another 10% in its long-haul affiliate AirAsia X, and sold a 20% stake in MAS to AirAsia's parent company Tune Air.
AirAsia founder Tony Fernandes joined the MAS board and effectively began to help run the airline, resulting in several changes in strategy. One of the most significant was Firefly returning to being a turboprop operator on smaller regional routes, with 737s transferred to a new MAS subsidiary, Sapphire - also modelled on Silkair.
Given the amount of capacity coming into Southeast Asia, and the increasingly depressed outlook for regional economies, more and more governments - which have a stake in many of the legacy carriers - may step in to prevent a meltdown in the airline industry.