Asia’s air travel is booming but it shows troubling signs
Asia has become a hotspot within the growing aviation industry. The continent is slowly but surely becoming the number one region in carried passengers. While traffic numbers rise, a worrying trend has emerged. Local flag carriers, like Air India or Malaysia Airlines, are not following the growth of the region and contrarily, are regressing as they succumb to pressure locally and internationally.
Over the next 20 years, Asia-Pacific will account for 39% of new aircraft deliveries and will grab 38%, 39% and 37% of the global demand for pilots, maintenance technicians and cabin crew, respectively, according to Boeing. Airbus’ numbers are even higher, as the European manufacturer predicts that Asia-Pacific will receive 42% of new aircraft deliveries between 2018 and 2037. However, both agree that the most popular aircraft type in the region will be the narrow-body aircraft, like the A320 or the 737.
There is no doubt that Asia has become the main target of both Airbus and Boeing sales campaigns. Just recently, Airbus spread the A220’s wings and toured Asia, showcasing the capabilities of the aircraft to potential customers. Back in 2011, the former United States president, Barack Obama, helped Boeing negotiate and ink a deal worth $21.7 billion for 230 Boeing aircraft. The aircraft was the 737 MAX, a narrow-body aircraft that promised “MAX efficiency, MAX reliability and MAX passenger appeal”.
Both manufacturers fight for their bigger piece of the duopoly within Asia-Pacific. The airlines, which are based in the region, have to be booming as well, right? With growing demand and a lot of attention from the manufacturers, the airlines should be entering their own Golden Age, with peace, stability and prosperity being the three words that would perfectly describe the state of a carrier in the region.
But for some, the situation is quite grim – and it has been for some time.
Struggling legacy airlines
According to IATA‘s annual review of 2019, four out of the top five largest origin and destination markets are located within Asia-Pacific, with China‘s domestic routes being the busiest routes out of all Asian markets. The two markets that follow China are domestic routes within India and Indonesia – these markets have seen an increase of around 20 and 10 million passengers in 2018, respectively. However, a worrying trend is that legacy carriers are struggling.
India has seen the collapse of Kingfisher Airlines in 2012, while Jet Airways has also collapsed in 2019. Meanwhile, the flag carrier of India, Air India is struggling financially – reportedly, the airline expects a loss of over $1 billion (₹7,600 crore) in 2018-2019, as it still struggles to post a profit ever since it merged with Indian Airlines in 2007.
Garuda Indonesia, which is partly owned by the Indonesian government, has seen its profits plummet since 2016 when it posted a net profit of $9.4 million, a drop of 88% compared to 2015. In 2017 and 2018, Garuda’s financial statements went red, as the Indonesian airline announced a net loss of $213.4 and $175 million, respectively.
Nearby, the melody seems to be the same – Philippine Airlines are running at a loss since 2016 as its earnings fall further, while Malaysia Airlines have been circulating in the rumors for a buy-out, while the Malaysian government has been even lingering around with the idea of shutting down the airline. Thai Airways, Korean Air and Asiana Airlines are also posting losses.
While Boeing, Airbus, IATA and many others point to growing passenger numbers in the region, financial losses within the region are a rather worrying trend, especially for mainline airlines.
Pressure from the East
Over the past few years, airlines like Etihad, Emirates, Qatar Airways and Singapore Airlines (SIA1) (SINGY) have become synonymous with luxury travel. The four carriers, while different, have one thing in common – the Asia-Pacific market is crucial for them.
For Emirates, the region accounts for 36.3% (27.7% East Asia and Australasia, 8.6% West Asia and the Indian Ocean) of total revenue. Also, the Middle East airline has 23 codeshare partners as of March 31, 2019. Out of those 23, nine airlines are based in the Asia-Pacific region.
While Etihad is not as transparent as Emirates is, as the former has a much more in-depth financial results sheet, Etihad has made very strong in-roads in Asia, especially India. The Abu Dhabi-based airline has recently celebrated 15 years in India, calling it “the largest and busiest market”. The airline also held a minority stake at Jet Airways before it fell apart. Furthermore, Etihad has announced that its strengthening its presence in “the fastest growing air transport region in the world”, as the airline introduced an Airbus A380 on the Abu Dhabi International Airport (AUH) – Seoul Incheon Airport (ICN) route.
Qatar Airways had a fairly bumpy flight these past few years, as a blockade imposed on Qatar forced the carrier to adjust its flight paths. Nevertheless, its expansion westwards is prominent, as Qatar Airways plans to offset the losses of 18 destinations due to the blockade. In 2018, the airline announced new routes to Malaysia and Thailand, while additional destinations to the Philippines and Vietnam are still pending.
Singapore Airlines (SIA1) (SINGY) , just like Etihad, has heavily invested in the Indian market. Together with Tata Sons, SIA launched the Indian airline Vistara in 2013. The Indian branch of Singapore Airlines Group will soon launch international destinations and it plans to introduce 50 Airbus A320 family aircraft, while also adding in six Boeing 787-9 Dreamliners. However, the endeavor is so far unsuccessful – since it launched flights in 2015, Vistara’s financial reports only indicated losses. Reportedly, in FY19, the airline’s losses were equal to $11.5 million (₹831 crore), doubling its negative result from FY18.
But even if the four carriers are expanding their presence in their region in a more traditional way by expanding their route networks and capacity, there is one aspect of their expansion that has put the local airlines under a lot of pressure – brand presence.
Strong brand names
The likes of Malaysia Airlines, Garuda Indonesia and others are also being pressured from elsewhere. Chinese airlines are one of the most valuable brand names in the aviation industry, according to Brand Finance annual report. Out of the total airline brand value of $115.8 billion, Chinese airlines take up 15.3%, while UAE-based airlines account for 6.6%. Japanese and British airlines also bring their fair share of presence at the table, as they account for 6% and 4.8%, respectively, of the total value. Everyone wants a piece of the biggest pie – Asia-Pacific based airlines accounted for 37.1% (1.6 billion passengers) of total worldwide traffic in 2018, according to IATA.
The same Brand Finance report outlines that amongst the dominating Chinese, European, North American and Middle East carriers, the only Asia-Pacific flag carriers in the Top 50 are Korean Air, Thai Airways and Garuda Indonesia. In 2018, Filipino Times presented Emirates as the preferred airline for local residents for the second year in a row, putting the Dubaite Dubai-based airline ahead of the local Philippine Airlines. Skytrax’s Top 10 airline of 2019 rating also usually includes the Chinese, the Middle East and European carriers, with the South East Asian or Indian carriers rarely present.
While these rewards are PR based and airlines can pull a few strings to be on the top of these lists, companies do put a lot of emphasis on the awards to showcase their brilliance and in turn, increase their brand value. So, inbound and outbound international traffic to the Asia-Pacific region is usually left to the “big boys”, as they are well-established brands not only in Asia but in the origin-destination, like the Middle East or Europe. In India and Indonesia, foreign carriers dominate international traffic, as they account for 59% and 60% of total international passenger traffic to these countries, respectively.
Carsten Spohr, the CEO of Lufthansa (LHAB) (LHA) , has put in a grim prediction for long-haul operators worldwide. At a press conference, Spohr noted that international routes will be operated by “a dozen companies”, with small national and regional airlines operating domestically. If the prediction is true and international routes will be left to several companies around the world, trouble is brewing for the aforementioned national flag carriers. And the trouble is located locally, rather than internationally.
Lufthansa (LHAB) (LHA) has been fighting an intra-European price war with low-cost carriers, but the German airline is still hanging on. The situation in Asia-Pacific is very different – low-cost airlines are dominating the domestic routes.