Endau Analytics

Qatar Airways suffers from blockade, but only just

QR A350 J class

Inside a Qatar Airways A350 business class section. Pic/Shukor Yusof

A month after Saudi Arabia and five other nations cut diplomatic ties with Qatar, the former British protectorate, located on a 11,586 sq km peninsula that protrudes into the Persian Gulf, is still alive and kicking.

Some denizens of Doha, Qatar’s modern capital city, tell us there is no panic, no rationing or shortage of food, no hoarding of petrol and politically, no surrender by the Al-Thani family that runs the gas-rich state.

Indeed, it’s business as usual, according to Malaysians and Singaporeans living in that Gulf state, adding they are now enjoying more tantalizing Turkish food than before. Fresh supplies from Turkey and Iran, close allies of Qatar, have been airflown since the embargo on Jun 5. Some dairy products, say the residents, are cheaper and taste better than those from Saudi Arabia!

What about Qatar Airways, the national carrier? Eighteen regional destinations were automatically severed and several long-haul flights now need to be rerouted via Oman and Iran, adding to operational costs.

As expected QR is experiencing less capacity, about 20% lower while duty free revenue at Hamad International Airport is reportedly down 25%. That’s to be expected given fewer flights and therefore, fewer visitors.

QR’s combative CEO Akbar al-Baker has vowed the schism between his country and the other Arab states won’t stop the airline from expanding during the unveiling of the carrier’s latest product –  the Qsuite – at the Paris Airshow last month.

And he’s got every reason to feel positive: QR was voted the world’s best airline for 2017, it has won reprieve from the dubious laptop ban imposed on Gulf carriers and has got unexpected business from British Airways (QR has a 20% stake in IAG) for the lease of nine A320/321 planes while BA cabin crew goes on a 16-day strike. That has helped to somewhat offset some of the losses within the Gulf region.

QR 772LR GRU Nov 2015 - a

A qatar Airways B777-200LR. Pic/shukor yusof

And to reassert its influence in the industry, QR has scrapped orders for four A350s due to delays at Airbus. QR was the launch customer for the A350 and took delivery of its first aircraft late December 2015. In our view QR’s A350 fleet has the best products in both business and economy classes.

More importantly, QR has the backing of Qatar Investment Authority, one of the world’s largest sovereign wealth fund with USD335 billion worth of assets, is still keen to take a 10% stake in American Airlines. Both are oneworld members but AA is among the three US carriers (together with Delta and United) that are up in arms against the Gulf airlines (QR, Emirates and Etihad), accusing them of operating on an unlevel playing field by being heavily subsidized.

QR is investing in AA not because of hubris but out of necessity. Al-Baker has already approached AA CEO Doug Parker but we aren’t privy to all other details other than AA reiterating its opposition to the Gulf carrier’s alleged unfair practices.

QR has deep pockets, in fact deeper than Emirates. It can easily mop up AA shares in the market and having a larger stake in a US airline would help show Congress it is investing in American jobs. While the laptop ban has been lifted there’s no saying when other limitations on Gulf flights to the US might be imposed, hence QR is buying insurance.

Additionally, Qatar probably expects the standoff with Saudi Arabia and the others to continue indefinitely. Thus, investing more outside of the Gulf makes more business sense especially given that US carriers have been among the most profitable in the world the past couple of years.

A few things to note about Qatar: despite having been downgraded by Standard & Poor’s to AA- (from AA) on June 8, its financial fundamentals are strong and sound. That said, we feel while Qatar may resist and continue to operate as normal now and the near future, the longer this drags on, the more difficult QR will find to operate as the block on air traffic ultimately will result in less business and therefore, less interest from potential investors.

All things being equal, Qatar is an exceptionally wealthy state. Here are some facts: it has enough gas to last 143 years, it has the highest per capita income in the world, Qatar’s bank assets amount to QAR1.1 trillion (USD302 billion), it has the highest quality of education among Arab states and, for what it’s worth, is ranked among the least corrupt countries in the Middle East.

Qatar Airways in a quandary


what, me worry? qatar airways ceo akbar al baker on board a QR a350. pic/shukor yusof

There were reports that Akbar Al Baker, the CEO of Qatar Airways (QR), left the 73rd IATA AGM in Cancun in a hurry on a private plane early Monday morning. Al Baker isn’t one who would exit a major event such as the IATA AGM unless something major has come up.

Indeed, something big is happening in Qatar. The Gulf state is in crisis after Saudi Arabia, the UAE, Bahrain, Yemen, Egypt and Libya severed diplomatic ties on June 5. The move, presumably designed to isolate Qatar and starve it into submission, was ostensibly taken by the six nations due to Qatar’s support for the region’s Islamist groups, including Egypt’s Muslim Brotherhood, and its cosy ties with Iran, a perennial enemy of the Saudis.

That’s what it looks like on paper although some suspect the real reason behind it is nothing more than gas, specifically natural gas. Here’s Bloomberg’s  take on it. It’s possible this is the cause of the schism; in 1995 Qatar made its first shipment of LNG from the world’s largest reservoir that it shares with Iran.

The wealth gas has generated for Qatar is staggering: it has an annual per capita income of USD130,000 and is the world’s largest LNG exporter, second only to Russia’s Gazprom. Qatar has a population of just 2.7 million but in recent years have grown increasingly influential and vocal on the international stage. Standard & Poor’s has a sovereign credit rating of AA with negative outlook on Qatar.

Its flag carrier Qatar Airways now ranks among the world’s best. Its publicly funded international network Al-Jazeera has lured many top anchors from other stations, it is the major sponsor of one of the world’s best soccer clubs (Barcelona), and it has won the right to stage the FIFA World Cup in 2022.

But it is QR and the Hamad International Airport (HIA) in Doha that will be hardest hit by this blockade. In 2016 Al Baker said the airline’s full-year profit quadrupled, driven by cheaper oil and a growing international network.

Since the punitive measures were announced on Monday, Emirates and Etihad have stopped flying to Doha. Discount carrier FlyDubai, Bahrain’s Gulf Air and Egyptair are also suspending flights. One doesn’t need to be a mathematician to calculate the losses QR and HIA will suffer daily until the crisis is resolved – it’s huge.

Just within the Middle East region alone, QR flies to 50 destinations. Geographically it will be squeezed – Saudi airspace to the west is blocked with Bahrain controlling much of the airspace to the south. The Saudis can block its airspace as it isn’t a signatory in a 1945 transit accord allowing for open skies and airlines to fly freely through a country’s airspace. Bahrain and the UAE, however, are signatories. Question is, will they revoke it?

QR operates a 14x daily shuttle service between DOH and DBX that’s been stopped. Additionally there are many international flights that traverse Saudi and Egyptian airspace, including those to Europe and Africa and South America. These will have to be rerouted. Rerouting costs money and time. To make matters worse for Qatar, its citizens aren’t even allowed to transit in the UAE (home of Emirates and Etihad) on their way home.

Doha airport bear

there’ll be less transit passengers at hamad international airport. pic/shukor yusof

So, how deep will the losses be? It depends on how long this goes on. The sanctions will continue unless Qatar capitulates, something it isn’t likely to do. In April this year Al Baker said he was expecting record profits for 2017.

Our analysis suggests optimistically QR could see a decline in second half (2H17) revenue of around 20%-30%, and pessimistically up to 40% if ties aren’t restored soon. It goes to say the revenues at Emirates and Etihad will also be affected although not dramatically.

What will happen next? The six countries that imposed the blockade will wait to see how Qatar respond; there are reports Kuwait is trying to mediate but the Arab states are generally divided and if Qatar does submit, it stands to lose not just its credibility but its pride.

That said, Qatar could, alternatively show the middle finger to all six and leverage on whatever strengths it can use: there’s a major US base in Qatar, there’s the gas exports it controls and most crucially, there’s the relationship with Tehran which will be strengthened. Can the Saudis and the US swallow that?

Let’s wait and see…

A Premium Problem


will the premium passengers please wave their hands… pic/sim kok chwee

In a move that showed it is still a believer in the economics and viability of the premium segment despite recent trends indicating otherwise, Singapore Airlines (SIA) has announced more perks and privileges for its most valuable customers, the PPS-card carrying passengers.

SIA said the changes were made in response to feedback from PPS members – those who have spent at least SGD250,000 (about USD179,000) – over five consecutive years. Premium (business and first) passengers generate around 45% to 50% of SIA’s passenger revenue.

Read the full release here.

Our view remains that premium air travel demand is anemic at best. And legacy carriers such as SIA and Cathay Pacific, both heavily dependent on business class, are in denial. This over-reliance on the J Class segment and inability to accept reality will ultimately do them in.

The reality is the legacy carrier model is under intense pressure. Yields from business class have shrunk every year post-9/11, and especially since the Lehman debacle of 2008. SIA posted a net loss of SGD138.3 million in its 4Q (Jan-Mar 2017) but registered an annual net profit of SGD360.4 million (USD257 million).

Now compare that to Ryanair’s latest earnings: almost EUR1.32 billion (USD1.47 billion) net profit. It flew 120 million passengers in its last financial year and charged customers an average of just EUR41, 13% less than the previous year! This year the airline said it is expecting an 8% rise in profits, to EUR1.45 billion.

Nobody disagrees that business air travel is still relevant and a key part of many airlines. It’s just that it isn’t as lucrative as what it was before. Consumers, including corporate travellers, are more price-sensitive and companies are looking at airlines that provide value for money.

Does SIA give value for money on the front-end of its aircraft? The short answer, in our view, is no. Take a look below at the fares SIA is charging for a return trip to London, and compare that with those being offered by Qatar Airways. It’s a no-brainer, really.

If SIA and Cathay continue to build their strategies around business class, they will get hurt, if they haven’t already. You go too far and too aggressively after high-yielding traffic, you will feel the pain.

In a sign that it’s feeling the pain and strain, for the past year or two SIA has been offering discounts (yes, you read that right) for its business seats – something the carrier had very rarely done, if ever.

AMEX SQ promo

any takers? SIA’s latest promo together with amex

The dynamics of the industry have changed. Forever. Many passengers are quite happy to fly 3-4 hours, or even 6, on economy if the price is right. And many low-cost carriers are getting them right. Now that SIA has shown that it can cut its J class fares, who in their right mind would pay the old fares?

We’ve had many queries on what SIA and Cathay should do, apart from just creating a Transformation Office or cutting management jobs. They can hope and pray that the good old days will return or they can radically change.

To its credit SIA is changing but not enough, and the change has come a tad too late. The airline is being reactive, not proactive. Our point is: why didn’t they do anything 4-5 years ago when the signs already pointed to a permanent decline in premium?

On a separate note, SilkAir is starting 3x weekly non-stop flights to Hiroshima (HIJ) in October 2017. SilkAir is SIA’s regional airline, not low-cost but catering to high-end leisure travellers. It will fly the B737-800 and looks like this will be SilkAir’s longest route.

Can the sector make money? Possible but not easy. The three major mainland Chinese carriers all fly into HIJ as do Korea’s Asiana and Taiwan’s China Airlines. HIJ has no direct expressway connection; neither does it have a railway station, but then again SilkAir’s passengers are typically those who have a bit of cash to burn…

What next for Singapore Airlines after 4Q loss?


sia is banking on the a350s to revive its revenues. pic/sim kok chwee

As it prepares to celebrate its 70th year of operations, Singapore Airlines (SIA) is facing bleak prospects in the near term. SIA announced on May 18 it had posted annual net profit of SGD360.4 million (vs. SGD804.4 million profit in the previous financial year) but in the fourth quarter (January-March 2017) it registered a net loss of SGD138.3 million (vs. SGD224.7 million profit in 4QFY16).

Read the official release here.

The airline attributed the loss to weaker operating profit and SIA Cargo’s SGD132 million provision for competition-related issues. Unlike many other regional airlines, whose losses were due to poor management and leakages, many of SIA’s problems are structural and some beyond its control.

For instance, its over-reliance on the premium segment of the business, which had previously contributed immensely to its coffers, means SIA now has to find new sources of revenue as profits from the front-end of the aircraft has deteriorated every year following the Lehman financial crisis in 2008.

SIA was also slow to react to the advent of low-cost carriers (LCCs) in the region and it wasn’t adequately prepared for the onslaught brought about by the Gulf carriers as well as mainland China’s three main airlines.

In order to compete with the Middle East airlines and China’s rapidly improving carriers, SIA has had to lower its fares. Hence, the severe yield decline (down 3.8% to 10.2 Singapore cents) in both the premium and economy sectors.

The positive for the SIA Group, as has been observed for the past 2-3 years, is in its discount segment, with Tiger Airways and Scoot – housed under Budget Aviation Holdings – registering an operating profit of SGD22 million.

SY with Rico BBC

Endau Analytics discussing sia’s financials with the bbc’s rico hizon at the beeb’s singapore studio mid-week

What can SIA do to reverse the slump? Not much, really. What it can do, the airline has already done it. The reality is, the dynamics and landscape of the commercial airline business have changed – permanently.

In Southeast Asia it began with the arrival of the discount airlines post-9/11, the growth of the Gulf and mainland Chinese carriers and the development of new, more fuel-efficient aircraft that can bypass key hubs such as Changi and Chek Lap Kok.

With parent airline SIA in decline, the Group is understandably aggressively pushing Scoot – its low-cost, long-haul arm – to maintain the momentum, at least in trying to increase the volume of passengers. This summer Scoot, with its fleet of B787 Dreamliners, will begin flights to Athens. Honolulu is probably next and it isn’t unthinkable that the Group may even offer discount travel (via Scoot, of course) to newer destinations in Europe and North America by 2020.

China Airlines Flyaway PhotosJessica Oliver rms276872 cns2014nef

a scoot b787-9. pic/boeing

Fortunately for SIA, it has deep pockets. As of March 2017, the company has cash reserves of at least SGD3.3 billion. The carrier will take delivery of close to 100 aircraft within the next 5-8 years, including Airbus A350s and Boeing 777-9s and 787-10s. Seven A350ULRs will be deployed next year for direct flights from Changi to New York and Los Angeles; SIA is banking on these Airbus planes to rejuvenate its premium income.

In the short-term, SIA is also likely to expand its joint venture Vistara outfit in India as well as continue to explore potential business deals in China.

But how will SIA react to this latest setback? The good old days are gone forever, as are the days when SIA could almost guarantee its investors decent returns. The airline’s stock price has stagnated for several years now and will no doubt take a hit in the coming weeks as the market digests those feeble figures.

Auguri, Alitalia

Rosaria C @ AZ A320

Ciao Alitalia! An AZ staff posing with two of the carrier’s A320s at vincenzo bellini airport. pic/rosaria c

There is a Sicilian proverb that goes: chiu scuru e mezzanotte non po fari, which literally means it can’t get any darker than midnight.

It is an apt description for the circumstances that Italian flag carrier Alitalia now finds itself, having been forced into administration just a day after Labour Day. The airline has debts of about EUR3 billion as of end-February.

The problems are too many to enumerate and have been too long in the making. And, like many of the other major European flag carriers, the unions wield far too much power and influence, limiting the critical changes that management need to perform in order to stay solvent.

But hey, it’s Italy, land of la dolce vita and la bella figura; ah yes, the beautiful figure – a philosophy of life whose meaning remains hard to grasp for outsiders, even for those who have lived there.

The Italians are fabulous at many things: fashion, food, football. They just suck at running an airline. Big time. And Alitalia’s been in dire straits for a long time, kept afloat by successive governments fearful of the loss of jobs, and loss of face. So while Alitalia bled, it nevertheless did so beautifully, elegantly, in true la bella figura style.

Alitalia A319 door

one thing that will always be there: passion! pic/shukor yusof

Philosophy aside, what would an Alitalia collapse do to the real Italian economy? Italy’s Industry Minister reckons it would have grave repercussions on the overall well-being of the country.

He’s right. Alitalia’s importance to the Italian economy is quite significant. Last year it carried over 23 million passengers on over 200,000 flights to destinations within Italy and globally.

In terms of core contribution, Alitalia roughly is responsible for about EUR2 billion of Italy’s GDP while nearly 30,000 jobs are directly and indirectly linked to the carrier. But will the bankruptcy cripple the economy? Will Silvio Berlusconi no longer hold “bunga bunga” parties? Of course not!

The airline has already received from Rome a short-term lifeline of EUR600 million to tide things through; judging by Alitalia’s track record that cashpile would be depleted well before Christmas.

There are some striking similarities between the Italian flag carrier and Malaysia Airlines Berhad (MAB). One of the three commissioners selected to manage Alitalia while under administration, Luigi Gubitosi, noted the airline’s costs for leasing, fuel and maintenance were above market rates.

MAB’s short-lived ex-CEO Christoph Mueller made similar remarks on the carrier paying above market lease rates for aircraft prior to his arrival. Between 2001 and 2014, MAB reported cumulative net adjusted losses of MYR8.4 billion. The airline was paying close to half a billion on interests on debts alone before it was delisted.

The similarities don’t end there. Etihad’s James Hogan, he being the guy who bought a 49% stake in Alitalia in 2014 for EUR560 million, just a year ago said the Italian’s turnaround “has been the most radical and the fastest plan…” Not surprisingly, the Arabs have caught on and Hogan will leave later this year.

Not to be outdone, Peter Bellew the current boss of MAB, went on to pronounce (barely three months into the job) that the greatest turnaround would instead be that of MAB. As far as we know, Peter doesn’t smoke, but whatever he may have inhaled during that interview – mate, it’s certainly more potent than any Irish poteen!

Why are airlines such as Alitalia and indeed, MAB – airlines that have persistently siphoned taxpayers’ money – have the gall to demand more bailouts? An Alitalia demise would be painful for Italy, sure, but Italy won’t die. Low-cost carriers such as Ryanair, easyjet and others will very quickly ensure the system will readjust itself. It always does. La vita va avanti…

VietJet’s 1Q17 / Norwegian to start LGW-SIN

VietJet fleet at Tan Son Nhat International Airport copy

VietJet planes at Tan Son Nhat. Pic/VietJet

Discount carrier VietJet announced its earnings for 1Q17 on April 22, with revenue of around VND5,095 billion (USD225 million), or 44.2% higher than the same period in 2016. The airline said profit was up 6.8%, compared with 1Q16.

VietJet carried 3.7 million passengers in the first three months of 2017, an increase of almost 30% from 1Q16. It launched three new international routes in the same period, and said its load factor averaged 88%

The budget airline was listed end-February; at that time the company was valued at USD1.2 billion. It is majority owned by Madam Nguyen Thi Phuong Thao – she has direct and indirect shares of around 33%. Singapore sovereign wealth fund GIC holds a 5.4% stake.

It is understood VietJet is currently preparing for a bond issue of up to USD300 million and the funds will be used for aircraft payments. BNP and JP Morgan are thought to have been mandated to arrange the issuance.

Interestingly, VietJet’s finance director Yvonne Abdullah, a Malaysian who formerly worked for AirAsia X as CFO, is said to have left the company after barely four months on the job!

The carrier is growing very quickly. Last week it received shareholder approval to raise the cap on foreign ownership to 49% (from the current 30%). But that needs the approval of Vietnam’s premier – he will need to convince, among others, flag carrier Vietnam Airlines – that such a move is beneficial to the country and not the company. Not easy.

Norwegian to start LGW-SIN flights


Coming to Singapore Changi soon. Norwegian’s B787-9. Pic/Boeing

Does anyone remember Air Madrid? Long before AirAsia X or Norwegian Air Shuttle there was this Spanish discount carrier owned by, among others, Spanish tycoon Herminio Gil, Spanish supermarket Eroski and a couple of hotel chains. The business model was simple: to capture the high-volume flights for millions of immigrants and tourists between South America and Spain.

Air Madrid was launched in May 2004. By end-2006 its operations were grounded. The airline failed for various reasons, including an inability to manage costs, running different types of aircraft, a diverse route network and expanding staff nearly 10-fold within two years.

We’ve said before that low-cost, long-haul isn’t impossible, but it’s just very, very tricky to succeed.

Norwegian announced it is starting flights from London Gatwick (LGW) to Singapore end-September this year using Boeing B787 Dreamliner planes. Read it here.

The move comes at a time when AirAsia X is also planning to relaunch flights to LGW from Kuala Lumpur. AirAsia X previously flew to Stansted but suspended the sector due to high operating costs.

Norwegian says it will initially fly 4x weekly to Singapore and then increase frequencies to 5x weekly in October 2017. Basic one-way fare is GBP179 while from Singapore the single fare is SGD199.90. There is also a premium option on the Dreamliner, starting at GBP1,339.

This will likely make the Gulf carriers (offering daily flights via the Gulf) take notice, for sure. What it means from September this year is that one can skip Dubai, Abu Dhabi and Doha and at a very competitive price to boot.

It won’t bother Singapore Airlines much because SIA and British Airways cater to a different segment.

It is a cause for concern to SIA subsidiary Scoot though… this summer it starts flying to Athens. It’s interesting to see if SIA (Scoot) might be tempted to collaborate with Norwegian. Norwegian is already flying direct from Scandinavia to Bangkok.

Indeed, AirAsia X might want to hook up with Norwegian, too. But Kuala Lumpur isn’t quite the same as Changi so we suspect there won’t be much interest from the Scandinavian airline.

To put things in perspective, there are over a million passengers flying between Singapore and London annually, and none of that is on a budget airline.

All things being equal, can Norwegian make low-cost, long-haul finally work?

No doubt Norwegian has been performing very well in recent years, expanding in Europe and across the Atlantic to the US and making healthy profits. All these were achieved in an environment of low fuel prices, which the B787 exploits exceptionally well.

There’s a good chance Norwegian will succeed, given Changi’s attractive location as a global air hub and the connections there provide a competitive edge.

The allure of Vietnam

Girl On Saigon Sidewalk

hello tony! a potential airasia flyer… little girl along a saigon sidewalk. pic/shukor yusof

On March 31 AirAsia signed an agreement with Vietnam’s Gumin Co Ltd, Hai Au Aviation Joint Stock Company and Tran Trong Kien (owner of the two firms), to start a low-cost carrier in the country. The plan is for the airline to launch flights early 2018.

AirAsia is hoping it will be third time lucky in 10 years in penetrating the Vietnamese market, having failed twice – once in 2007 (in a planned partnership with Vinashin) and then in 2010 with VietJet.

The project is slated to require an investment of about USD44 million, of which AirAsia needs to inject just 30% and the rest from Gumin.

However, a news portal in Vietnam is casting doubts on the JV, raising the plan’s legitimacy and feasibility. It claims that AirAsia has yet to submit an application to form the JV with Gumin and Hai Au Aviation.

In any case, AirAsia’s desire to have Vietnam is understandable. The country is Southeast Asia’s fastest growing market, with an annual growth of 17% in the past decade. Passenger traffic for the next 10 years is likely to continue to post double-digit figures.

SoldiersHanoi copy

they’d love to fly airasia, too! vietnamese soldiers in hanoi. pic/shukor yusof

Vietnam has a population of around 90 million, and some 70% are between the ages of 15 and 64. Vietnam is also Southeast Asia’s fifth largest aviation market, after Indonesia, Thailand, Malaysia and Singapore. It is estimated that the middle class comprises between 25% and 35% of Vietnam’s population.

That said, Vietnam’s economic growth slowed to around 5.1% in 1Q17 – the slowest in three years – with the industrial sector suffering from its smallest expansion since 2011.

Annual inflation in March was around 4.6%, the slowest pace since November 2016. But a hike in higher food demand and fuel prices rising 35% in 1Q17 pushed the CPI up an average 5% year-on-year. That’s a four-year high. Read Bloomberg’s report on Vietnam’s economy here.

VietnamAirlines 2005

come join the party… a vietnam airlines a321 at noi bai airport. pic/shukor yusof

AirAsia’s thrust into Vietnam makes commercial sense, as it pushes for a pan-Asian discount carrier and it is relatively inexpensive, too, with the 30% investment amounting to less than MYR60 million. It’s a cheap price to pay to get a foothold in a market that still has strong upside in the next decade.

But AirAsia may find the going considerably tough, given that VietJet now controls almost half of the domestic market, with Vietnam Airlines and Jetstar Pacific sharing the remainder.

Indeed, the competition is going to become more intense following VietJet’s recent IPO and aggressive fleet expansion. In our view, Vietnam will see close to 50 million passengers in 2017 as low fuel prices ensure lower fares amongst the key players.

Low cost, long-haul: not a LEVEL playing field


A Scoot Dreamliner taking off from Changi. Pic/Sim Kok Chwee

A quick check at Scoot’s website for a return flight from Singapore to Athens sometime end-June this year showed a fare of around SGD1,300 to SGD1,400 (about USD928 and USD1,000) and that’s exclusive of check-in luggage, meals or seats with wider pitch. One attraction is you get to fly direct on a 787 Dreamliner, but surely not at that price?

Comparatively, if one were to fly on Qatar Airways around the same period, to the same destination, the Gulf carrier charges SGD1,636 or thereabouts, with food, 30kg baggage allowance and the comfort of flying from Singapore to Doha (and back) on the airline’s latest A350XWB. And you get your miles.

It’s a no-brainer, really… That said, can low cost, long-haul carriers – especially those in Asia Pacific – make money?

In February this year AirAsia X, Malaysia’s long-haul budget airline, said its 4Q16 profit slumped 80% from a year ago, mostly as a result of forex volatility (the Malaysian ringgit has been one of the worst performers in the region).

The good news was that the airline registered a net profit of MYR39 million (USD8.8 million) and, more importantly, its fifth straight quarter of profits, largely due to weakened oil prices. Since then AirAsia X has begun flying to Tehran (4x weekly) and has announced flights to Honolulu (4x weekly via Osaka) at the end of June this year.

Airlines have been enjoying sub-USD50/bbl oil prices for quite a while now and that’s been reflected in the positive figures coming out of not just AirAsia X, but also Scoot, Jetstar and of course, Norwegian Air Shuttle.

Can history tell us anything?

In the past, track records of long-haul budget airlines have been nothing short of abysmal. Laker Airways introduced its “Skytrain” in 1977 between LGW and JFK and was successful in its first year.

However, due to an economic downturn in the early 1980s and a combination of the company expanding too quickly, draining its finances, Laker declared bankruptcy in 1982. The company’s debts were denominated in USD when GBP revalued from USD2.40 to USD1.80. Ouch!

Next there’s the failure of People Express in the 1980s and Hong Kong-based Oasis in the early 2000s. Interestingly, others tried the reverse: going all-business class only – Silverjet, MaxJet and Eos – and all folded between 2007 and 2008.

Then there were others that came up with long-haul LCC ideas, including FlyAZUL, which was to be an incredibly ambitious B747-200 service from Buenos Aires to Madrid and onwards to Delhi/Tokyo. From South Africa, there was Civair, which had planned to fly a B747-300 from Cape Town to London Stansted. Both didn’t take off as they couldn’t get the financial backing.

Closer to home, Viva Macau started long-haul operations about a decade ago, flying within Southeast Asia as well as to Australia. It even got an award from CAPA (Centre for Asia Pacific Aviation) in 2007 for its contribution to tourism to Macau.

Viva Macau operated under a concession from Air Macau and, using B767-200/300s, it flew to among others, Melbourne, Sydney and Tokyo. In 2010, the airline collapsed, having ran out of money.

Back to the future…

While history is littered with the carcasses of failed long-haul LCCs, times have changed.

It’s true the cost advantages of LCCs doing short-haul routes can’t be replicated on long-haul segments. For one, turnaround times on long-haul flights tend to be longer than the 20-25 minutes achieved by LCCs as an aircraft needs more refueling time as well as for servicing.

Additionally, cost efficiencies are impacted by utilisation of crew, nighttime curfews at airports and of course, fuel costs. Moreover, long-haul means the aircraft would need to carry food for sale and IFE and since widebody planes on long-haul low cost flights typically cram as many passengers as it can, there’s less potential to eke out revenue from cargo.

So why is there now a proliferation of budget long-haul airlines, especially in Europe? Markets and planes have changed; the advent of the B787 Dreamliner, with the lowest consumption of fuel per block hour, makes it possible for Norwegian Air Shuttle to successfully carve a niche in long-haul, low cost flights, particularly across the Atlantic.

It would seem Norwegian is on to something; in mid-March IAG, the owner of British Airways, introduced LEVEL, a new budget long-haul airline that would initially fly to Los Angeles, Oakland, Buenos Aires and Punta Cana in the Dominican Republic from June 2017. Fares are to start from USD149 one-way.


WOW Air female pilots attending a class at Airbus Asia Training Centre in Singapore. Pic/Shukor Yusof

About the same time, Icelandic discount carrier WOW Air also announced it, too, would go transatlantic with four weekly flights to Chicago from July 13, using A321 planes.

Indeed, the battle for the long-haul budget business has taken on another dimension when German flag carrier Lufthansa said it would offer non-stop flights from Köln/Bonn to the U.S. come July by using its low cost unit, Eurowings. Its aircraft of choice: the A330.

Bottom line is, airlines investing in discount, long-haul travel have learned much from past failures. More fuel- efficient aircraft such as the B787 and A350XWB have opened up new possibilities not available 10 years ago.

Point-to-Point (PTP) network concept is also contributing to the success of some of these budget carriers. However, PTP appears to work well mostly on medium-haul (7-8 hour segments). Hence, the attraction of transatlantic flights from Europe. Intercontinental budget trips from Asia to Europe or the U.S. are another ballgame altogether. The risks and challenges are too many to enumerate. But it appears unstoppable.

It was the best of times, it was the worst of times…

Changi T2 retail

Changi Airport Terminal 2. Pic/Shukor Yusof

When we ran briefly into Lee Siow Hiang, the CEO of Changi Airport Group and his team in Dublin mid-2016, they were courteous, polite and unassuming.

If you didn’t know them, you probably wouldn’t have guessed it was the core team behind the success of Changi Airport – voted this week by Skytrax as the World’s Best Airport for the 5th consecutive year.

The award isn’t a surprise to anyone who’s been to Changi – either as a passenger or just as a person who takes pleasure in functionality, in things that work, day in, day out.

Flying ought to be a pleasant experience and that starts almost always when one arrives at Changi. Getting there is easy, too, depending on your pocket. For less than USD3 one can reach any of Changi’s three terminals from pretty much any MRT station on the island, with spare change left.

To be sure, Changi isn’t an architectural marvel, unlike Beijing Capital Airport (designed by Sir Norman Foster) or its next-door neighbour KLIA (Airport in the Forest, Forest in the Airport – maybe a good place for someone who has problem seeing the forest for the trees).

One word that best describes Changi is efficiency. Just about everything works at this airport, and works very well, too. Washrooms are clean and hygienic, check-in super easy (and fast), security processes not intimidating, ample choice of wifi networks, good and inexpensive food, and the list goes on.

Changi T2 fast checkin

fast check-in at changi… pic/shukor yusof

Sure, it hasn’t quite got the artistic class and panache of Incheon – once while waiting for a flight out of Seoul we were entertained for over an hour by a delightful classical quartet – for free!

But unlike Incheon, Changi isn’t just a place for people going somewhere. It’s a nice place to just hang out, shop, eat, and where parents with children (usually during school holidays) can hop from one terminal to another effortlessly on the monorail or just walk leisurely around the departure halls and marvel at over 100 flights flying to some 380 cities in about 90 countries. In 2016 alone Changi handled close to 59 million passengers…

So there you have it: Changi is great at making you feel good, even if you’re about to fly on cattle class for 13 hours to Europe. Get a foot massage from a machine or charge your smartphones for free or surf (yes, free) on many of the available computers. The choice is yours.

In fact people might even be tempted to make Changi their permanent home, like this woman. Changi looks set to have the best of times in many years to come.

“Be not afraid of growing slowly, be afraid only of standing still” – Chinese proverb

Cathay Pacific Airways is in a bit of a bother. It just registered its first loss since 2008 and only its third since 1946. Net loss amounted HKD575 million while sales fell 9.4% to HKD92.8 billion.

Once again, Cathay’s fuel hedging losses were quite significant, HKD8.46 billion in 2016, versus HKD8.47 billion in 2015. The airline is expecting hedging losses in 2017, too, but less than last year.

Hedging losses aside (quite unforgivable really, that this happens so often, at such scale), the main problem in our view is structural. Read our comments on Bloomberg here.

Apart from intense competition from Chinese carriers, Cathay is becoming less relevant as a gateway to the mainland. Instead of using HK as a transit point, passengers can now fly between China and Taiwan directly. Indeed, there is going to be less and less feed from HK on Cathay, meaning fewer stopovers at Chek Lap Kok.

Expect to see mainland Chinese carriers make Cathay’s life more difficult in the coming years when they open up more second tier cities in the mainland that fly direct to North America and Europe. Nothing the Swire boys can do about it…

In fact, the Swire Group – Cathay’s parent company – is as much an obstacle as are the mainland’s aggressive airlines. It would appear the Swire conglomerate, still with its base in Westminster, has lost its mojo, at least with Cathay.


nice plane, but can cx innovate? pic/shukor yusof

The airline is encountering similar issues with many of Europe’s flag carriers, with unexciting products, decline in premium revenue, very powerful unions, and overall a significant decline in quality.

Cathay needs to be creative and innovative, but can it? The company constantly speaks of change but is probably loath to make the most effective change of all – at the highest level and at the core of it all is its parent.

A case might be made for having less Swire control and influence over the carrier; surely Cathay’s (and Hong Kong’s) future lies with its ability to amalgamate with the mainland, structurally and even operationally?

All things being equal, things aren’t all that bleak for Cathay as it has deep pockets and a good pedigree. There’s been a paradigm shift on the mainland and Cathay has to act soon. As another Chinese proverb goes: “The best time to plant a tree was 20 years ago. The second best time is now.”

Investing in airline stocks? Caveat Emptor!


vietjet A320s at tan son nhat airport. pic/vietjet

Why are investors buying airline stocks? Is it because Warren Buffett, the Sage of Omaha, has gone into it or because there really is value in airline shares?

Buffett once described the airline industry as a “death trap”, so what changed his mind?

Vietnamese low cost carrier VietJet Aviation Joint Stock Company saw its shares surpassed the 20% daily limit (from the listing price of VND90,000 to VND108,000 or USD4.74) when it made its debut on the Ho Chi Minh Stock Exchange on February 28.

In 2016 VietJet posted net profits of around USD105 million, on revenues of USD1.2 billion. That puts the carrier ahead of many listed flag carriers in the region, in terms of return on invested capital, or ROIC.

At the closing price on its first trading day, the LCC was valued at around VND32.4 trillion, or USD1.4 billion. The IPO raised almost USD170 million and was the 3rd largest listing for a Vietnamese company.

Among the foreign investors that stood out was Singapore’s GIC, the island’s state wealth fund, which is now the second largest shareholder after VietJet’s CEO and founder Nguyen Thi Phuong Thao. She has direct and indirect stakes that amount to 60%.

So if reputed and savvy investors like Buffett and GIC have bought into airlines, surely it’s a good time for retail and institutional investors to go into other carriers, too, right?

Not so quick… Buffett has purchased select US carriers – Southwest (the world’s first LCC), American, Delta and United Continental – those airlines were among the best performers in 2015-16.

This is largely due to a revival in North America attributed to low fuel prices, consolidation, capacity management, and smart new ways of making money via the ancillary business.

Indeed, there are a lot of positives for airlines today – especially with crude at current levels. As long as oil stays below USD70/bbl there’s a very good chance carriers will see profits.

Airline valuations appear attractive, too, particularly the discount carriers, such as Cebu Pacific and AirAsia. P/E multiples are below historical average for many airlines. AirAsia’s P/E ratio is 3.7 while Cebu’s is 7, according to figures from Bloomberg.

What’s clear is that both airlines have managed to improve their revenues while reducing expenses – something full service airlines find so tough to achieve. We think Cebu is really cool (its profits grew very significantly over the past few years – well over 100%).


Alone in its class. An AirAsia A320 at JHB. Pic/Shukor Yusof

Malaysia’s AirAsia remains ahead of the pack though, with its expansive network, growing A320 fleet and slick advertising. The airline shares are likely to outperform in the next 2-3 quarters. At under MYR3 (67 US cents), the share is inexpensive.

AirAsia has the first mover advantage in Southeast Asia and the airline is forecasting a 10% revenue growth in 2017. Its rivals – Malaysia Airlines and Malindo Air – aren’t really hurting AirAsia – so it’s worth considering…

Shares of established airlines such as Singapore Airlines and Cathay Pacific should be given a wide berth. Both have performed poorly in the past two years at least and are unlikely to provide solid returns like those from VietJet and other listed discount airlines.

It would seem flag carriers’ shares are certain to stay stagnant or worsen. The Indian government is considering selling Air India’s stake to a strategic partner after a billion dollar bailout failed. Air India has debts of around USD7 billion.

Likewise, Alitalia – Italy’s national airline – is teetering on the brink of bankruptcy (again). We think Etihad made a big mistake investing in that airline. But then, anyone foolish enough to inject billions into an ill run airline deserves to lose money. That reminds us of one flag carrier in the region…

Follow me on Twitter


%d bloggers like this: