ANALYSIS: Mergers, cancellations ahead for Asia’s LCCs?

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Consolidation among low-cost carriers in Asia and the future of their massive aircraft backlogs were key themes at the recent ISTAT Asia conference in Hong Kong.

During separate panel discussions, a number of bankers and leasing executives noted that the recent takeover of Tigerair Philippines by Cebu Pacific and Zest Air's sale last year to AirAsia are likely to be the start of a wave of consolidation in the region.

“I suspect that consolidation for the LCCs will continue to happen as it has done in Europe, as it has done in North America, and it will come out here,” says Simon Perkins, chief commercial officer aviation finance at Standard Chartered.

Peter Barrett, chief executive of SMBC Aviation Capital, reflected a similar view, but does not see this as a major issue for the industry. He expects that in time the process will ultimately lead to a the emergence of a few major players, with the market dictating how many are required,

“I think we tend to forget that Asia is a few years behind the process of developing a low-cost airline market,” he says.

While maintaining a positive view of consolidation, BOC Aviation chief executive Robert Martin warns that there are still significant regulatory barriers. He notes that although the Association of Southeast Asian Nations is meant to implement open skies from 2015, it will not bring about key reforms - such as the entrenched 51% local ownership requirements - that have allowed for consolidation elsewhere.

"[Open skies] not going to be the full ambit that was originally anticipated, and so I fear that unfortunately consolidation is going be slower in Asia Pacific than we have seen in other regions," he says.

Even with the talk of further mergers and acquisitions in Asia, there was some suggestion that there may still be room in certain markets for more low-cost carriers to enter the market.

Johnny Lau, head of aircraft leasing at Minsheng Financial Leasing, says that in markets such as China, India and Japan, there is room for more “true low cost carriers” instead of some of the "time wasters" that have not embraced the disciplined cost focus of other carriers.

Nevertheless, attracting financing for new low-cost carriers may be hard to come by. Perkins says that Standard Chartered is now being more selective about which new airlines it extends financing to. “They are not coming on a first-mover basis now,” he adds.

The talk of consolidation in the region was also closely linked to a general sense of skepticism about the delivery timetables and huge aircraft backlog that many of those low-cost carriers hold.

Flightglobal’s Ascend Online database shows that between 2014 and the end of 2017, there are just over 1800 aircraft scheduled for delivery to operators in Asia Pacific, of which nearly one-third are to be operated by low-cost carriers.

Although sources indicate that most of Asia’s fast-growing carriers have already financed their aircraft deliveries for the next year, a number of speakers expect that as consolidation takes place, many will adjust their orders in the coming years.

Marilyn Gan, senior vice president aviation finance with DVB Bank said: “I think the question is not so much whether there will there be deferrals, but how many will there be? You’re already seeing yields under tremendous pressure with the amount of capacity that has been thrown into the market. You’re seeing some LCCs coming under pressure in terms of currency depreciation.”

That has already forced some carriers to act. AirAsia announced in March that it was deferring delivery of 19 Airbus A320s, while rival Tigerair has cancelled orders for nine of the type – albeit while it also ordered up to 50 re-engined A320neos.

The other regional giant, Indonesia's LionAir, has indicated that it has no plans to slow down its growth trajectory, but many analysts do not expect it to take all of the over 500 A320s, Boeing 737s and ATR 72s it has on order.

Even if the region's airlines are forced to adjust their orderbooks, that may open opportunities for other players in the market. Hong Kong Aviation Capital chief executive Donal Boylan says that deferrals or cancellations would open up more short-term acquisition opportunities for leasing companies.

“A number of airlines would back out of orders or not be able to put them into the operation. Lessors have the advantage of being able to move in quickly and pay cash essentially, and place them (aircraft) elsewhere,” he adds.”