Asia-Pacific needs to ensure infrastructure supports growth: AAPA

Hong Kong
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Asia-Pacific needs to "change the way it thinks" in terms of infrastructure development to ensure it has what it takes to support the growth of aviation in the region.

Speaking to the media on the sidelines of the Association of Asia Pacific Airlines' (AAPA) assembly of presidents in Hong Kong, its director general Andrew Herdman says countries in the region typically grow at an annual rate of 6%, which translates into a doubling of the market over 12 years.

Countries such as China, India and Indonesia, however, grow at around 12% annually, which means that the market could double in only six years and place further strain on aviation infrastructure.

"It's never just about buying aircraft. You need airports, you need runways, airspace, efficient airspace management," says Herdman.

"Once you get into that double digit growth, you have to stop thinking in terms of incremental capital expenditure and expanding next year's capacity or a three-year plan. You really have to change the way you think about how many airports we need – don't talk about additional runway but rather when do we go from two to four. So given this long development period for infrastructure, you do need to think in longer term time scales."

Herdman adds that although Asia has generally been "ahead of the curve" in terms of infrastructure development, there is still massive congestion at airports in China, while growth has outpaced runway and terminal capacity in the Philippines and Indonesia.

He also warns that the risk in high growth markets is that demand could be "misjudged collectively", which inevitably affects yields.

"The danger in fast growth markets as we've seen in India and China during some phases is that if you're forecasting continued growth at 10-12%, and you've got to factor that times over the next five years in terms of what fleet do I put in now, you can get mismatches. In a market where people add 10% capacity and the market grows at 5%, it doesn't have a happy ending," says Herdman.

When asked whether the market will be able to absorb the large number of aircraft ordered by carriers in the region such as AirAsia, Lion Air and VietJet Air, he says capacity that enters the market is determined by Airbus and Boeing's production rates and that both players have learnt that the production cycle should not follow the order cycle. The airlines also have "safeguards" such as delaying the deliveries or leasing them to other carriers, considering that some of the aircraft will only be delivered in the long term.

"You buy with enthusiasm and get them wrong, but buy them at a good enough price. Maybe you don't need to use them, so lease them to somebody else, flip them to somebody else ... these future orders also don't have to be financed till near delivery. So its an options game going on here," says Herdman.

"In some cases, carriers in India over-ordered aircraft and the market couldn't absorb it and there's a blood bath. Already many of those aircraft already have been deployed elsewhere by other operators. So a global glut is pretty unlikely given Boeing and Airbus have reasonably stable production. Ironically because there is an order backlog, it encourages over-ordering because if you don't order now and wait till next year, you might have to wait seven years to get an aircraft."

On its outlook, the AAPA believes that with international passenger traffic growing steadily and the world economy gradually pulling out of a recession, Asia-Pacific carriers have a good reason to be optimistic.

“Having tightly controlled costs and invested heavily in the latest generation of fuel efficient aircraft in recent years, airlines from the region are well equipped to compete vigorously amongst themselves and with carriers from outside the region,” says Herdman.