BoQ77
BANNED
- Joined
- Jul 29, 2012
- Messages
- 8,704
- Reaction score
- 0
- Country
- Location
Friday, July 3, 2015, 10:23
Low costs, but high ambitions
By PEARL LIU in Hong Kong
A woman walks past an AirAsia advertisement in Kuala Lumpur on Aug 20, 2014. The Malaysian-based airline is one of several low-cost carriers in the region that is adding new flights, increasing capacity and buying new aircraft.(AFP)
The Idul Fitri holiday in Indonesia marks a busy time of the year for travel. Lasting most of July in 2015, the celebration comes after the fasting month of Ramadan and sees millions of Indonesians returning to their home villages, leading to soaring demand for flight tickets.
This year, AirAsia, one of the best-known low-cost carriers (LCCs) in the region, is adding as many as 90 extra flights and 16,200 seats to cater for demand in Indonesia. Selling more tickets should help the Malaysia-based airline shore up its profitability.
Much like their full-service peers, LCCs in Asia are struggling to be profitable, even as they expand their footprint and the number of routes on offer.
Airlines around the world are finding their way back in the black after years of difficulties, thanks to streamlined operations and lower costs — not least of oil. In Asia, this search for profits has been harder.
The Centre for Asia Pacific Aviation (CAPA), an industry consultancy based in Sydney, says 11 out of a total of 18 Southeast Asian publicly traded airlines reported unprofitable operations and five of the remaining seven saw a reduction in operation profits in 2014.
"Last year, the environment in some countries of the region was quite tough,” says Brendan Sobie, chief analyst at CAPA. “The demand had a bit of a hiccup last year because of the (changing) situation.”
Thailand’s economy, for example, was set back by a prolonged period of political instability. Indonesia was hit by the depreciation of the rupiah, weaker than expected economic growth and a presidential election. In Malaysia, the crashes of Malaysia Airlines MH370 and MH17 contributed to a weaker demand for air travel.
Singapore also saw a slowdown as a result of the decline in these three markets, as well as China, which led to a large drop in the number of outbound visitors traveling to Southeast Asia.
Despite all these changes, LCCs across the region are expanding.
In recent years, more than 1,000 aircraft have been ordered by Southeast Asian airlines alone, particularly budget carrier leaders AirAsia and the Indonesia-based Lion Air.
Last year, VietJetAir signed a deal to buy 63 new Airbus planes for $9 billion. AirAsia is adding planes and routes. Jetstar, a budget airline owned by Australia’s flag-carrier Qantas, has been on an expansionary mode of late, and was last month rejected from setting up a new subsidiary in Hong Kong. Singapore Airlines is also experimenting with Scoot, its long-haul LCC.
The last one is a bold experiment, however. Over the years, LCCs have not had a great track record with long-haul flights.
Risks of expansion
In 2005, Oasis Hong Kong Airlines was founded and offered cheap flights to cities including London and Vancouver. But the airline went bust after three years.
"For long-haul flights, even economical passengers require minimal comfort for such long journeys,” says Jonathan Galaviz, a partner at US-based Global Market Advisors. “The low-cost airline model works best for short to medium-length flights that have high frequency, like a bus.”
However, the expansion of airlines’ capacities seems to be getting ahead of the growth in demand. Some LCCs are struggling to fill their seats.
"When the airlines placed the orders for airplanes, and decided to expand capacity, obviously, they did not know the market conditions would be so difficult,” says CAPA’s Sobie.
"The airline companies usually make their capacity decisions quite ahead of time because of the time it takes them to acquire new aircraft.
"So often what happens is that the airlines get caught because the situation changes so quickly but their asset and capacity cannot change so quickly.”
AirAsia, perhaps the region’s most successful and best-known LCC, has not managed to avoid controversy and doubts about its business plan.
A report released on June 23 by investment house GMT suggests AirAsia needs $1.9 billion in fresh capital to pay down its debt.
The report suggests the airline uses transactions linked to plane leases and maintenance with associates in the Philippines and Indonesia that are losing money, in order to shore up the cash flow of the Malaysia-based parent company. It also suggests the airline is “teetering on default”.
Not everyone agrees with these views, however. Most analysts that information provider Reuters tracks have “buy” or “strong buy” ratings on AirAsia, but the GMT report and the selling it generated on the airline’s stock is telling of how fragile these airlines can be.
In a recent interview with the Financial Times, AirAsia CEO Tony Fernandes denounced the report as “rubbish” and said the airline is “doing extremely well”.
The carrier is adding both flights and planes, he said. Setbacks in some main markets last year do not necessarily mean the fundamentals of the markets are souring.
Sobie says overall it is still a “pretty healthy market, as you can still see economic growth, the increasing (size) of the middle class, and people are traveling more”.
LCCs stepped into Southeast Asia quite late, in comparison to other regions, but people have embraced the model eagerly. In the past decade, budget airlines’ share of the region’s aviation market has soared from almost nothing to 58 percent, according to CAPA.
Promising prospects
And the situation is expected to get better across the region this year. Profit margins finally started improving at the beginning of this year, Sobie says, due to lower fuel costs and better market conditions.
Among the 18 publicly traded airlines in Southeast Asia, 12 were profitable in the first quarter of 2015.
In broad strokes, the whole Asia-Pacific airline industry is still promising.
By 2034, nearly half of all global air travel will touch the Asia-Pacific region, making up an expected two-thirds of growth in the global aviation sector, said Tony Tyler, director general and CEO of the International Air Transport Association, speaking to Asia-Pacific airline industry officials in Tokyo last November.
Globalization and a rising middle class in China and other emerging Asian economies are among the factors contributing to the air travel boom.
"The growth of the low-cost carrier model over the last 10 years in Asia has been amazing,” says Galaviz from Global Market Advisors.
"These airlines have rightfully bet on the idea that Asia is in the first stages of significant growth in leisure tourism at the middle-class level.”
"Overall, I see the future of low-cost carriers as being bright, but there will be turbulence along the way from time to time.”
Concerns are often raised that LCC costs are not as low as they could be, especially as the region has some of the most expensive airports in the world, with many running out of capacity and looking for ways to expand. Cheap landing slots are hard for carriers to find.
"Some countries are expanding their airports as a response to this, but it is a very slow process … to build new airports or expand the existing ones,” says Sobie. “Over the long term, it remains a challenge.”
Low costs, but high ambitions
By PEARL LIU in Hong Kong
A woman walks past an AirAsia advertisement in Kuala Lumpur on Aug 20, 2014. The Malaysian-based airline is one of several low-cost carriers in the region that is adding new flights, increasing capacity and buying new aircraft.(AFP)
The Idul Fitri holiday in Indonesia marks a busy time of the year for travel. Lasting most of July in 2015, the celebration comes after the fasting month of Ramadan and sees millions of Indonesians returning to their home villages, leading to soaring demand for flight tickets.
This year, AirAsia, one of the best-known low-cost carriers (LCCs) in the region, is adding as many as 90 extra flights and 16,200 seats to cater for demand in Indonesia. Selling more tickets should help the Malaysia-based airline shore up its profitability.
Much like their full-service peers, LCCs in Asia are struggling to be profitable, even as they expand their footprint and the number of routes on offer.
Airlines around the world are finding their way back in the black after years of difficulties, thanks to streamlined operations and lower costs — not least of oil. In Asia, this search for profits has been harder.
The Centre for Asia Pacific Aviation (CAPA), an industry consultancy based in Sydney, says 11 out of a total of 18 Southeast Asian publicly traded airlines reported unprofitable operations and five of the remaining seven saw a reduction in operation profits in 2014.
"Last year, the environment in some countries of the region was quite tough,” says Brendan Sobie, chief analyst at CAPA. “The demand had a bit of a hiccup last year because of the (changing) situation.”
Thailand’s economy, for example, was set back by a prolonged period of political instability. Indonesia was hit by the depreciation of the rupiah, weaker than expected economic growth and a presidential election. In Malaysia, the crashes of Malaysia Airlines MH370 and MH17 contributed to a weaker demand for air travel.
Singapore also saw a slowdown as a result of the decline in these three markets, as well as China, which led to a large drop in the number of outbound visitors traveling to Southeast Asia.
Despite all these changes, LCCs across the region are expanding.
In recent years, more than 1,000 aircraft have been ordered by Southeast Asian airlines alone, particularly budget carrier leaders AirAsia and the Indonesia-based Lion Air.
Last year, VietJetAir signed a deal to buy 63 new Airbus planes for $9 billion. AirAsia is adding planes and routes. Jetstar, a budget airline owned by Australia’s flag-carrier Qantas, has been on an expansionary mode of late, and was last month rejected from setting up a new subsidiary in Hong Kong. Singapore Airlines is also experimenting with Scoot, its long-haul LCC.
The last one is a bold experiment, however. Over the years, LCCs have not had a great track record with long-haul flights.
Risks of expansion
In 2005, Oasis Hong Kong Airlines was founded and offered cheap flights to cities including London and Vancouver. But the airline went bust after three years.
"For long-haul flights, even economical passengers require minimal comfort for such long journeys,” says Jonathan Galaviz, a partner at US-based Global Market Advisors. “The low-cost airline model works best for short to medium-length flights that have high frequency, like a bus.”
However, the expansion of airlines’ capacities seems to be getting ahead of the growth in demand. Some LCCs are struggling to fill their seats.
"When the airlines placed the orders for airplanes, and decided to expand capacity, obviously, they did not know the market conditions would be so difficult,” says CAPA’s Sobie.
"The airline companies usually make their capacity decisions quite ahead of time because of the time it takes them to acquire new aircraft.
"So often what happens is that the airlines get caught because the situation changes so quickly but their asset and capacity cannot change so quickly.”
AirAsia, perhaps the region’s most successful and best-known LCC, has not managed to avoid controversy and doubts about its business plan.
A report released on June 23 by investment house GMT suggests AirAsia needs $1.9 billion in fresh capital to pay down its debt.
The report suggests the airline uses transactions linked to plane leases and maintenance with associates in the Philippines and Indonesia that are losing money, in order to shore up the cash flow of the Malaysia-based parent company. It also suggests the airline is “teetering on default”.
Not everyone agrees with these views, however. Most analysts that information provider Reuters tracks have “buy” or “strong buy” ratings on AirAsia, but the GMT report and the selling it generated on the airline’s stock is telling of how fragile these airlines can be.
In a recent interview with the Financial Times, AirAsia CEO Tony Fernandes denounced the report as “rubbish” and said the airline is “doing extremely well”.
The carrier is adding both flights and planes, he said. Setbacks in some main markets last year do not necessarily mean the fundamentals of the markets are souring.
Sobie says overall it is still a “pretty healthy market, as you can still see economic growth, the increasing (size) of the middle class, and people are traveling more”.
LCCs stepped into Southeast Asia quite late, in comparison to other regions, but people have embraced the model eagerly. In the past decade, budget airlines’ share of the region’s aviation market has soared from almost nothing to 58 percent, according to CAPA.
Promising prospects
And the situation is expected to get better across the region this year. Profit margins finally started improving at the beginning of this year, Sobie says, due to lower fuel costs and better market conditions.
Among the 18 publicly traded airlines in Southeast Asia, 12 were profitable in the first quarter of 2015.
In broad strokes, the whole Asia-Pacific airline industry is still promising.
By 2034, nearly half of all global air travel will touch the Asia-Pacific region, making up an expected two-thirds of growth in the global aviation sector, said Tony Tyler, director general and CEO of the International Air Transport Association, speaking to Asia-Pacific airline industry officials in Tokyo last November.
Globalization and a rising middle class in China and other emerging Asian economies are among the factors contributing to the air travel boom.
"The growth of the low-cost carrier model over the last 10 years in Asia has been amazing,” says Galaviz from Global Market Advisors.
"These airlines have rightfully bet on the idea that Asia is in the first stages of significant growth in leisure tourism at the middle-class level.”
"Overall, I see the future of low-cost carriers as being bright, but there will be turbulence along the way from time to time.”
Concerns are often raised that LCC costs are not as low as they could be, especially as the region has some of the most expensive airports in the world, with many running out of capacity and looking for ways to expand. Cheap landing slots are hard for carriers to find.
"Some countries are expanding their airports as a response to this, but it is a very slow process … to build new airports or expand the existing ones,” says Sobie. “Over the long term, it remains a challenge.”
, that's new to me
