Overcapacity in South East Asia?

At the recent Singapore airshow, low-cost carriers across the South East region are placing more orders for aircrafts hoping to expand their market share in one of the world’s fastly expanded aviation market. Vietnam’s VietJetAir has placed orders which include lease agreements and purchasing rights of 101 Airbus A320-family jets. While Thailand’s Nok Air has placed an order of 15 Boeing 737-family jets. Airlines in South East Asia have committed themselves to new planes primarily from both Boeing and Airbus. Looking at the number of aircraft being ordered over the past few years, I’m thinking is there any possibility of overconfidence in projecting the future growth of air travel market among airlines in the region? Let’s take a look at the numbers.

Currently, the largest low-cost airline group in the region - Airasia (including Airasia X) currently operates 175 aircrafts in Malaysia, Thailand, Indonesia and Philippines. The group is expect to received at least 300 aircrafts in the coming years which include both Airbus 320 and Airbus 330 aircrafts. With the airline securing operating certificate in India and seeking to re-launch a new venture in Japan, it is expected that some of the new aircrafts from the existing order book is likely to be allocated outside the region.

Lion Air, currently the number two player in the region currently operates 149 aircrafts in the region with franchise in Malaysia and Thailand apart from its home market - Indonesia. With the growing middle class in the country, the airline has record order deals with both Boeing and Airbus in 2011 and 2013 respectively and the carrier is anticipating the arrival of at least another 500 aircrafts. The region’s other players like SIA-backed Tigerair Group having orders of at least 70 aircrafts. Together with other smaller low-cost carriers, there are at least 1000 new planes poised to enter the region in the coming years. With a total population of 610 million in the South East Asia, surely there are lots of seats waiting to be filled although most of these planes are narrowbodies like the Airbus A320 or Boeing 737.

In fact, there are signs that low-cost airlines in the region are slowing down growth. According to CAPA, Tigerair Mandala is planning to slash its total capacity by 40% in response to overcapacity and tough market condition. Indonesia Airasia too has also decide to slow down expansion in 2014 and had deferred its plans to add two new Airbus A320 aircrafts into the fleet. Philippines Cebu Pacific’s first long-haul route Manila-Dubai reportedly suffered poor load factors and struggling to fill the seats.

A recent news report suggested that Tigerair reported a group loss of SGD119 million (USD93 million) for the quarter ending 31-December 2013 with its Philippines venture incuring a loss of USD9 million forcing Tigerair to agree to sell its 40% stake in Tigerair Philippines to Cebu Pacific. The deal also marks a broader strategic alliance between the two carriers which is a new trend among small players in the region to reduce their losses. Tigerair has interline agreements with India’s Spicejet on flights between Singapore and India and teaming up with Taiwan’s largest carrier-China Airlines to set up Tigerair Taiwan. SIA’s long-haul low-cost subsidiary Scoot has also join forces with Thailand’s Nok Air to set up NokScoot, a long-haul low-cost airline based in Thailand. While Qantas-backed Jetstar Asia Airways have formed a code-share partnership with the parent company, allowing the carrier to be the regional feed of its parent company in the region.

In the meantime, Jakarta Soekarno-Hatta Airport, the region’s busiest airport is facing serious issues of running over capacity. Just this month, Garuda Indonesia was forced to cancel their Boeing 777-300ER operation because the airport’s short runways. To ease the congestion facing at Soekarno Airport, government officials decides to reopen the old Jakarta Halim Airport at the start of the year to allow carriers operating domestic scheduled flights. While there are plans to build a new airport in the city, but it takes at least a few years before the plan is materialized. The city of Bangkok, Thailand had also made a similar decision last year, reopening the old Don Mueang Airport to cater the growth of low-cost carriers in the country. Airports in the region primarily in Indonesia are facing problems where airport facilities are not keeping up with the growth of the airlines. While airlines received new planes each year, it’s not only an issue of filling up the empty seats, a bigger issue is to obtain airport slots to operate scheduled flights.

While the region’s two giants - Airasia and Lion Air appears to be heading into the positive direction, the others are still scrambling to find their feet. I wouldn’t be surprise if these new planes orders are being shifted to other parts of the worlds. With thousands of new planes joining the congested skies of South-East Asia, time would tell whether these new aircrafts will be part of the “overcapacity issues” that many feared.

By,

Zhe Xu

1st March 2014