Airlines in Asia are on the crest of a wave, with mainline carriers holding their own, low-cost newcomers flourishing and orders booming. But can the growth be sustained?
Things certainly have changed in the Asia-Pacific airline sector since the last Asian Aerospace show in Singapore in 2004.
Who would have thought that India, after years of restrictions on airline growth, would be leading the way in terms of aircraft orders? Who would have thought that low-cost airlines would have grown as quickly as some have and that several would have become buyers, rather than just lessees, of equipment? Who would have thought that the region’s airlines would have recovered so well after the SARS outbreak of 2003, and that for the most part their finances would remain so strong in the face of high fuel prices?
Some will of course say they knew the answers to all these questions but, when the world’s aerospace community met in Singapore in 2004, there was still plenty of uncertainty facing major Asia-Pacific carriers. One cause for concern was the potential impact of bird flu, which fortunately has proven to be minimal – so far.
There were also questions about whether low-cost airlines would be able to thrive in the region in the way they have in North America and Europe – and if so whether they would take business away from the incumbent carriers.
Those bullish on the region’s airline sector have essentially been proved right, as Asia-Pacific airline traffic has grown at a steady pace since early 2004. The Association of Asia Pacific Airlines (AAPA), for example, which represents 17 major airlines in the region – although none from China – reported cumulative international revenue passenger kilometre (RPK) growth for its members of more than 20% in 2004, showing a strong recovery from the SARS-induced downturn of 2003. For 2005, RPK growth was more modest, at just over 5%, but new traffic records were still set.
And, barring a few exceptions – such as Garuda Indonesia, which is in financial difficulty and late last year defaulted on scheduled loan payments – major Asia-Pacific carriers are still generally in better financial health than many of their counterparts in Europe and the USA, say analysts. Not all is rosy, however, as there are problems and this year is expected to be a more challenging one as the industry comes off a generally high base.
The recovery since the SARS outbreak of 2003 has been strong and the healthy passenger and cargo traffic growth in 2004 and 2005 came despite high fuel prices. This year growth is expected to be slower overall, assuming oil prices remain at their current high levels. There are signs overcapacity is hitting the air-freight market in the region, for example, and while Middle Eastern carriers are becoming more aggressive in the Asia-Pacific, currency swings are hitting some airlines particularly hard and slower-than-expected liberalisation developments are threatening to hold back growth.
“I am not overly excited about 2006 at this stage,” says Hong Kong-based JP Morgan regional airline analyst Peter Negline. “If you look at the sum of the parts, it doesn’t make for the rosiest of pictures.” But that, of course, is relative. Negline and others note that many of the region’s major airlines have cut costs over the past two years, putting them in a good position to face any new challenges.
One potential challenge has to do with the apparent overcapacity in the cargo market. In 2005 cargo capacity for the 17 AAPA member airlines grew faster overall than did demand, as traffic growth weakened on the back of slower global economic conditions.
At the group’s annual meeting of member carrier chief executives, in Hong Kong late in 2005, AAPA director general Andrew Herdman warned there could be more difficult times ahead, noting that weakening cargo traffic figures may point to wider problems for the region’s airline sector in 2006.
By early 2006, however, the general view was less pessimistic. In releasing full-year traffic figures for 2005, the AAPA said that, in addition to the more than 5% international RPK growth for its members, passenger load factor improved by an average of 0.4 points, to 73.3% over 2004’s 72.9%. The number of international passengers carried increased 5%, to a record 128 million from 121.9 million.
Cargo traffic in terms of freight tonne kilometres (FTK) increased 3.3% over 2004, while capacity in terms of available freight tonne kilometres increased 4.9%. Freight load factor fell one percentage point to 66.4%. The December statistics were better, however, and Herdman says now: “The outlook for Asia Pacific’s aviation industry in 2006 remains fairly positive, although the burden of high oil prices on the global economy remains a concern.”
So far, high oil prices have not affected demand much. The new wave of low-cost airlines in South-East Asia is one factor helping spur traffic growth – and importantly it has not come at the expense of the full-service airlines.
In India alone there have been huge developments in the market over the past two years after the government eased many restrictions on airline operations that for so long had stifled growth. Indian carrier Jet Airways, for instance, last month acquired rival Air Sahara in India’s first airline consolidation deal. At last year’s Paris air show, privately owned Indian carriers announced orders for hundreds of new aircraft from Airbus and Boeing. Five new scheduled carriers launched services in 2005 and several more are planning to launch this year.
One well-used statistic is that more people used to travel by train in India in a single day than travelled by aircraft in an entire year but, with air fares plummeting, that is changing. Domestic traffic is growing at some 20% annually and a similar trend is seen in the market for services to and from India, after the government liberalised its once-restrictive air services policies and approved widebody aircraft orders for state-owned Air India.
China’s market also continues to grow at a rapid rate, with no let-up in sight. New airlines have been approved for launch and several started operating last year to challenge the incumbent carriers. All said they wanted to follow the low-cost model even though it has not worked so far in China, due in part to restrictive pricing regulations. However, this will certainly change in China as it has in other parts of Asia, say observers.
Low-cost airlines still only carry a small percentage of overall traffic in Asia and that will remain so for some time. But it is a segment that is growing quickly, cannot be ignored and is helping create a new class of travellers who had not previously been able to travel by air. Indonesia is a key example of this trend, with several new airlines helping the domestic market grow at double-digit percentage rates. Elsewhere, there are several groups planning to test a long-haul low-cost model, such as start-up carriers Oasis Hong Kong Airlines, Viva Macau and even Australia’s Qantas Airways’ Jetstar subsidiary.
Hong Kong-based Oasis plans to launch services around the middle of this year using leased Boeing 747-400s, while Macau-based Viva Macau plans to launch with twin-engined widebodies, also around the middle of this year. Jetstar, which operates narrowbody aircraft on Australian domestic routes as well as to New Zealand, plans to go long haul using widebodies by early 2007.
Asian governments have traditionally been slow in liberalising, as in many countries the national carriers are still owned by the state. But more and more are recognising that liberalisation leads to economic growth, and more and more air services agreements are being opened up. There are some markets, such as north Asia, where much more still can be done, but most observers believe liberalisation will also sweep that area eventually although the speed of liberalisation will ultimately dictate how successful new airlines may be.
Infrastructure developments are also moving at a worryingly slow pace in some markets, such as India, where there are warnings that the phenomenal growth of the past two years may come to a halt unless there is more airport capacity.
Last year the International Air Transport Association urged the Indian government to improve its airport infrastructure, warning of “chaos” unless upgrade work on key hub facilities starts soon.
IATA director general and chief executive Giovanni Bisignani said at a meeting hosted by the Confederation of Indian Industry in New Delhi: “Airport and airspace capacity must be expanded to fully gain the benefits of a vibrant airline sector. Without massive change, infrastructure will not be able to handle growth.
“Airports in Delhi, Mumbai, Chennai, Kolkata and Bangalore are not adequate. Among them, Mumbai is the worst with poor service levels and insufficient capacity. A commercial centre needs an efficient airport. Delays due to bottlenecks in the air traffic control system are common. They are costly to airlines and inconvenient to passengers. And when all the aircraft orders made during the Paris air show are delivered, we risk chaos if we do not move quickly now.”
Bisignani added: “The Indian air transport sector is among the most vibrant and fastest growing in the world, but it could be a much greater catalyst for economic growth if critical bottlenecks in the system are removed. The most urgent is infrastructure, particularly Mumbai airport. Government policy is moving in the right direction. Now we need to see some results urgently to keep pace with rapid growth. We need results fast or a great start could turn into a disaster.
“The challenges that face India are enormous. Urgent decisions on infrastructure, liberalisation, safety oversight and taxation are critical. And we must move quickly. IATA has strengthened its presence in India to help both its members and the government at this time of great potential. The stakes are high but the rewards for our efforts will be enormous.”
The Indian government seems to have listened, saying it recognises the need to improve the country’s infrastructure. Delhi and Mumbai airports are finally in the process of being privatised, for example, and this promises to bring in badly needed cash to fund improvement works.
But industry observers also warn that shortages of skilled personnel, particularly pilots, may impact Asia-Pacific airlines further in 2006, especially in emerging markets such as India and China where airlines have suffered severe crew shortages, forcing many to slow expansion plans. The shortage has also increased the poaching of staff, pushing up salaries and, of course, overall costs.
Those concerns aside, the aircraft manufacturers are happy, having sold plenty of aircraft to Asia-Pacific airlines over the past two years. They say they are not worried about personnel shortages over the long term and note that they are trying to help. Airbus and Boeing have promised to assist pilot training in India, for example, while also helping to support the development of in-house maintenance capabilities.
Low-cost airlines dominated the headlines with narrowbody orders in 2004 and 2005 – from India, where the market is booming, to Malaysia, where AirAsia ordered dozens of aircraft, and to Singapore, where Tiger Airways followed up lease agreements with purchase deals. More such orders will almost certainly come this year as new low-cost airlines are established in India and elsewhere, such as Macau.
In China, more orders are also expected on the narrowbody front, after the government supported a major focus in 2004 and the first half of 2005 on widebodies, with multiple orders for Airbus A330s and Boeing 787s. Late in 2005 the focus shifted to narrowbody orders, with Beijing ordering 70 Boeing 737-700/800s and 150 Airbus A319/A320/A321s on behalf of several airlines. A bulk order for another 80 737s is expected in the coming months, possibly in April if Chinese president Hu Jintao visits the USA as scheduled.
Elsewhere in Asia-Pacific more widebody orders have been seen over the past six months, with major deals by Air India for Boeing 777-200LR/300ERs and 787s, Cathay Pacific Airways for 777-300ERs and Qantas Airways for 787s. Singapore Airlines is also finalising plans for a major order for Airbus A350s or 787s, as well as more Airbus A380s or Boeing 747-8s.
Cargo also saw significant developments in Asia in 2004 and 2005, with orders for new-build aircraft and the launch of the 747-400 Boeing Converted Freighter programme on the back of an initial order from Cathay Pacific. Cathay’s launch deal to have at least six 747-400 passenger aircraft converted into freighters was followed by orders for conversions from other airlines in Asia, including Dragonair, Japan Airlines, Korean Air and SIA Cargo.
Nevertheless, some are warning of turbulence ahead, with the key factor being fuel prices and their impact on global economic growth. As the Sydney-based Centre for Asia Pacific Aviation consultancy group said recently in detailing its forecasts for this year: “As we enter 2006, there is a higher than usual level of unpredictability, as the still-unknown impact of higher fuel costs continues to flow through to consumer spending. As the airline industry is in the frontline of economic indicators, any change will be quickly felt.”
Indeed, there are many challenges, but there always are in the airline business – and at least the region’s major carriers are facing potential difficulty from a generally strong position.
NICHOLAS IONIDES / SINGAPORE