Twenty-seven years ago Boracay had no airport, no Internet connection, no big hotels, no crowds. It had a solitary bar along White Beach that served San Miguels for 50 cents a pop, accompanied by soothing sounds from the 80s. It was bliss.
We’ve not been to Boracay since then, so we can’t smell the cesspool that the Philippine president spoke of recently but it does look like things have gotten very nasty indeed.
Like Bali in Indonesia, Phi Phi in Thailand and many other resort islands around the world, Boracay is plagued not just by plastics but by parasitic peripatetics. The photos of Boracay in its current condition paint a sorry state of affairs. Can the proposed six months of zero tourism fix it?
The airlines that fly into Boracay Airport (also known as Caticlan Airport or by its code MHP) are undoubtedly feeling the brunt of President Duterte’s edict.
The affected carriers include Air Juan, AirSWIFT, Cebu Pacific, Philippine Airlines (PAL Express), Philippine AirAsia and Skyjet.
Air Juan said the Boracay/Caticlan routes account for some 15% of its business.
Cebu Pacific, the airline majority-owned by the JG Summit conglomerate, operates 180 weekly flights to the said routes. It has about 140,000 passengers confirmed for scheduled flights to Caticlan and Kalibo from April 26 to June 25.
PAL Express has five flights a day to the resort island from Manila, Clark and Cebu. Philippine AirAsia has some 100 flights a week to Boracay.
To puts things into perspective, Boracay contributes PHP56 billion (just over USD1 billion) to the Philippine economy. It is, by a long distance, the most popular destination in the Philippines.
The Philippine government has estimated a loss of up to PHP20 billion (USD385 million) for the six months closure. Some 35,000 workers, mostly on Boracay itself, will be affected.
President Duterte has said the displaced workers will receive payments from a PHP2 billion (USD38.5 million) fund. Whilst money and losses from tourist receipts will be severe, Boracay is in serious need of repair.
When we first visited in late January in 1991, the number of tourists that traveled to the archipelago the year before was a mere million. Last year (2017) the Philippines played host to almost 7 million visitors and a third of those (over 2 million) came to Boracay.
The island is tiny, just 4 square miles. Bali by comparison, is 2,200 square miles! Boracay has a resident population of just 30,000.
Access to Boracay in 1991 wasn’t easy. One had to fly from Manila to Kalibo (about an hour), take a bumpy 2-hour ride on a jeepney to Caticlan port and then hop onto an outrigger (known locally as bangka) for about 15 minutes, before arriving on the island (one has to wade in seawater to get ashore as there wasn’t a jetty).
Fridays Boracay, where we stayed for two nights almost three decades ago, sits on the exquisite White Beach, with its fine, almost salt-like sand.
In 1991 Fridays was a row of simple, elegant chalets with hardly any tourists. Today, Fridays boasts of an outdoor pool, beachfront bar and of course, free wifi. TripAdvisor reckons it is worth four stars.
Despite its serenity and splendour, Fridays hides a dark secret. One of its founding owners was found murdered in Manila in a case that has yet to be resolved.
And in 2004 three high profiled, wealthy Europeans and their domestic helper were stabbed to death at a luxury villa in Boracay, purportedly by robbers.
How to save Boracay then? Like Bali and Phi Phi, ecological disaster awaits Boracay, if it hadn’t arrived already. Sustainable tourism is the way to go but that’s unlikely to be practised in these once pristine islands.
There are 7,600 other islands in the Philippines, perhaps tourists can be enticed to go to some of them? Part of Boracay’s many problems is partly self-inflicted, too.
Earlier this year a Macau-based company, Galaxy Entertainment, inked a USD500 million deal with the Philippine government to build a casino along the beach.
Ironically the boss of the gaming firm met with President Duterte in December 2017 to discuss and get approval for the project.
China signalled it is ready to cut purchases of Boeing aircraft after announcing it is imposing 25% tariffs on single-aisle planes weighing between 15 and 45 tonnes. The immensely popular B737 family of aircraft will be affected.
Beijing revealed its retaliatory plans on April 4, after Washington declared a 25% tariff on about 1,300 Chinese products.
Read our comments on Bloomberg regarding the implications of the dispute.
China’s Ministry of Commerce gave no date for the 25% hike; Chinese officials said it depends on what the US president does and how he reacts to duties placed on Chinese products.
Here’s CNN’s take on the developing story.
Last year Boeing delivered 202 planes to Chinese carriers and half of those were in the narrowbody (B737) category. China is such a huge market for Boeing that B737s sold to Chinese airlines make up a third of Boeing’s production.
In its Current Market Outlook released in Beijing last September 2017, Boeing predicted a demand of 7,240 new aircraft in China over the next two decades. That’s worth some USD1 trillion.
In 2016, the US sold China aircraft worth USD15 billion at list prices.
In May last year Boeing started work on a B737 delivery centre in Zhoushan. It’s slated to deliver its first aircraft end-2018. The plant aims to deliver between eight and 10 planes a month.
It’s unclear if Beijing would actually go ahead with the tariffs, with its trade and airline officials clearly preferring to avoid such a standoff. The CEO of China Eastern Airlines, however, warned it wasn’t afraid of a trade war and is prepared to change aircraft types as well as routes if it comes to that.
But make no mistake: there are no winners in a trade war. In this instance the US stands to lose more, not just Boeing but its airlines. Five US carriers fly directly to mainland China (see the table below).
And according to the US Travel Association, Chinese tourists to the US spend on average almost USD7,000 per trip – more than those of any major inbound market. In 2016 three million Chinese made trips to the US, an increase of 15% year-on-year.
A lengthy and messy trade war (or any other war) is likely to hurt the appetite for air travel.
Travel exports to China, i.e. spending by Chinese tourists and students in the US, and on US airlines, amounted to over USD33 billion in 2016. That’s more than any other country. This includes USD12.5 billion in education-linked spending by Chinese students.
China can inflict severe pain on its opponent. Beijing’s decision to boycott South Korea’s tourism industry over Seoul’s decision to install a US missile system in 2017 cost the Korean economy USD6.8 billion.
China had been the largest source of foreign tourists to Korea; half of the 17 million foreigners who visited the country in 2017 were Chinese.
As it is, US airlines already struggle to gain more direct flights (a protected market) to China. It’s a government-to-government decision on how many flights are allowed between both countries, and there’s usually more capacity than demand. In 2017, United cut flights to Xi’an and Hangzhou, citing poor demand.
There are 59 direct (non-stop) flights between China and the US at the moment. Imagine the fallout to the US economy if there’s a decline of just 10% in Chinese visitors to the US.
That said, China has to be careful in totally brushing aside Boeing. If Beijing completely stops buying the B737s, China loses its leverage with Airbus. It’s never wise to depend on just the one manufacturer.
Chinese carriers flying direct to the US
|Air China||China Eastern||China Southern||Hainan Airlines|
US carriers flying direct to China
Guangzhou Baiyun International (CAN)
Beijing Capital International (PEK)
Shanghai Pudong International (PVG)
Chicago O’Hare (ORD)
Detroit Metropolitan (DTW)
George Bush Intercontinental (IAH)
Honolulu International (HNL)
John F Kennedy (JFK)
Los Angeles (LAX)
Newark Liberty (EWR)
San Francisco (SFO)
Seattle Tacoma (SEA)
Washington Dulles (IAD)
Would you step into an aircraft with “666” as part of its registration – the number of the beast for those who are superstitious – let alone fly in it?
Malaysia’s first Embraer Legacy 500, a midsize business jet made by Brazil’s Embraer, arrived at Senai International Airport in Johor Bahru (JHB) after a long ferry flight from São José dos Campos around mid-March.
With triple sixes in the aircraft’s registration, the USD20 million private plane is the first medium cabin business jet with digital flight controls, based on fly-by-wire technology. It can fly at 45,000 feet and is powered by two Honeywell HTF7500E engines, touted as the “greenest” in its class.
Perhaps one of the best things about the jet is its range – 3,125 nautical miles, or 5,788 km, with four passengers. That means it can fly non-stop from JHB to Delhi (DEL), Perth (PER) or Tokyo (HND).
Endau Analytics was invited to review the jet this past week.
We took off late morning from JHB in clear, sunny conditions, with two pilots and five passengers. Destination: Penang.
The Legacy 500 can take off in just over 4,000 feet and with the runway at JHB at over 12,000 feet, it was a cinch for the plane to make a quick, swift getaway. Its maximum takeoff weight (MTOW) is 37,919 pounds.
Interestingly the Legacy 500 can land in around half that distance (4,000 feet), meaning this plane is perfect for many small airports in ASEAN.
Once in the air, the first impression is the stillness (very quiet) and the spaciousness (floor-to-ceiling is 6 feet) as well as its simple yet elegant bespoke interior.
We were kindly requested not to show the cabin interior by its owner, a low profile, unassuming businessman.
The Legacy 500 has a fabulous cockpit. It sports Rockwell Collins Pro Line Fusion avionics, with four 15-inch displays, with options like paperless operations capability, auto brakes and the Embraer Enhanced Vision System, which includes a Head Up Display (HUD).
Our commander during the flight was Embraer trainer pilot Captain Luiz Salgado, who took us cruising at 32,000 feet at around Mach 0.8.
In about an hour we landed at Penang’s Bayan Lepas International Airport. The landing was smooth and quick, assisted by the jet’s carbon brakes and brake by wire.
Conclusion: the Legacy 500 is a private jet that punches above its class. At its list price, the jet is certainly value for money, with comfort level, safety and performance matching many aircraft priced higher.
By the way, here in Asia, the number 6 has a different connotation. Our Chinese friends are quick to remind skeptics that “666” or “liuliuliu” in Chinese means smooth or skilled.
Dear John, we are going to break something to you, as gently as we can.
What we are going to say may upset you and your colleagues at that most august of airline abode in Hong Kong – Swire Pacific.
Anyway, here it goes: the airline business has changed, Hong Kong has changed and Cathay Pacific Airways has not, from the look of it, embraced change. Swire Pacific, the airline’s parent company, appears averse to change.
The chairman of Hong Kong’s flag carrier, John Slosar, on March 14 attributed Cathay Pacific’s consecutive annual losses – its first since the airline was formed in 1946 – on over-capacity and declining yields which, he lamented, made it tough to make money.
When the 2016 losses were announced, he blamed weak demand for the airline’s premium cabin as well as intense competition from mainland China.
Tell us something we don’t know, John…
Blaming over-capacity and falling yields is a lame excuse. Period.
How about taking to task whoever it is in the airline that does its fuel hedging? In the 2017 financial results Cathay said losses from wrong-way fuel bets came up to HKD6.4 billion (USD816 million).
Sure, that figure is an improvement on 2016’s hedging losses (HKD8.46 billion) but Cathay seems to have perfected the art of losing heavily in the jet fuel hedging game. Hedging losses in 2015 amounted to HKD8.47 billion.
So, in three years the carrier lost over USD2 billion! Cathay clearly sucks at playing the fuel hedging roulette, but it keeps playing it. Why?
Cathay’s CEO Rupert Hogg said he was confident about market demand in Hong Kong, including those in the premium segment. Hogg said the target was to grow 4% annually until Hong Kong gets its third runway.
But the competition is going to get more intense by then. All this talk that fewer people want to come to Hong Kong to connect on to another flight as one of the key factors hurting Cathay sounds like a broken record.
Indeed, if one is traveling between Europe and Australia, it makes sense to stop over in the UAE, Qatar or Singapore, instead of in Hong Kong.
It is true the mainland Chinese carriers are impacting on Asia’s major legacy airlines –Cathay Pacific and Singapore Airlines. It is true, too, current climate of low jet fuel prices will pressure competition and we continue to witness price dumping in 2018. It is also true the premium segment remains in decline.
Everyone seems to know the reasons for the decline but how to make full service carriers like Cathay and SIA competitive again?
Could it be that Cathay is not doing enough to control its costs? Or that it doesn’t quite know what its mid- to long-term strategy ought to be?
Does Dennis Muilenburg know what saudade mean?
The Boeing CEO should, or at least people around him must acquaint their boss with saudade, given that the company he leads is said to be keen to buy 51% of Brazilian aircraft maker Embraer.
Saudade is not easily translated into English, but to a Brazilian and of course, to a Portuguese, it’s a word that evokes a sense of yearning, a longing for a thing or a person.
Embraer’s employees – in São José dos Campos and around the world – are currently deep in saudade, not knowing what to expect or what will become of the company, the world’s third biggest plane-maker.
We know Boeing is after Embraer following Airbus’ 50.01% acquisition of Bombardier’s C-Series programme, the C-Series Aircraft Limited Partnership or CSALP. Apparently Airbus got it for almost nothing.
It would appear Muilenburg and his team realizes there is a significant (and potentially lucrative) market in the regional aircraft (100-130 seat) market.
It would also appear both Airbus and Boeing understand that in the near future there will likely be less orders for their A320 and B737 family of planes, respectively, judging from the backlog both manufacturers have.
That leaves the regional plane segment as the new battleground between the two giants.
“Not a must do” or till cash do us part?
Boeing and Embraer management have given vastly differing clues on how the talks are going.
Another very senior Embraer executive told us there were many aspects to the potential collaboration, not just nuts and bolts. Critically, he added, the financial figures have not been fully discussed, or even talked about in great depth.
What is a fair valuation, then? What’s Embraer E2 series worth to Boeing, for example? The military programme, it has been reported, will be kept entirely in Brazilian hands.
Various numbers have been bandied about since the talks were made public, ranging from USD3 billion to USD4 billion. That’s peanuts for Boeing. Embraer is worth a lot more than that.
The US giant anticipates total revenue of between USD96 billion and USD98 billion this year. Operating cashflow will rise to USD15 billion. And Boeing’s shares are soaring through the roof. Muilenburg’s compensation reflects that: in 2016 his total pay was USD15 million.
In São José dos Campos, Embraer employees aren’t as well paid as their Seattle counterparts. But what they lack financially, they make up in artistry and passion – check out the fantastic hand painted livery of the 190-E2 aircraft recently exhibited at the Singapore Airshow – executed by an Embraer worker named Clodoaldo Quintana.
The bottom line is, what can a Boeing-owned Embraer do that the Airbus-Bombardier partnership can’t, or won’t? We know Embraer does very well in the US; in fact much of its revenue is derived from North America. But what about in Asia Pacific, where the markets are more complex and more challenging?
Here, in this region, we feel the Airbus CSALP venture might have the upper hand because: (a) the CS aircraft are seriously good, and appeal to many Asian airlines, (b) Airbus traditionally has a more imaginative approach to pricing its aircraft (read whatever you want into that), and (c) Bombardier has sold more airplanes in Asia than Embraer – whether those planes (turboprops and jets) made money to the airlines that bought them is another debate – but the Canadians have a pretty strong track record.
There is a chance the deal might not happen but one gets the impression Embraer’s management wants it to happen. Will Embraer be severely disadvantaged if the deal doesn’t go through?
Not necessarily. The E2 series has solid potential, provided Embraer plays its cards well and reads the market (especially in Asia) astutely. It needs to take a leaf from Brazil’s other great export – its football. Joga bonito, Embraer!
Airbus announced on Feb. 15 that it registered an 8% rise in adjusted 2017 operating profit of EUR4.25 billion (USD5.26 billion) on revenues of EUR66.8 billion. That’s despite the European plane maker disclosing that it took a hit of EUR1.3 billion on its problematic A400M military plane programme.
See the full release here.
Strong demand in the commercial aircraft sector is underpinning the manufacturer’s solid market position. As of end-2017 the company’s order backlog stood at 7,265 aircraft valued at just over USD1 trillion.
The backlog (almost 10 years) is focused mostly in the single-aisle, narrowbody segment of the A320 family of aircraft. This reflects the market demand for this plane. Airbus’ friends in Seattle, however, sold more aircraft in 2017 – for the sixth consecutive year.
The widebody, twin-aisle market remains controlled by Boeing as Airbus struggles to sell its A380. The European company is doing better with the A350XWB (it delivered 78 of these in 2017, up almost 60% year-on-year).
In our view, Airbus’ backlog is its main strength. It provides investors with a positive view over the medium term on the company’s forward revenue. That said, the backlog is a double-edged sword, as there is a long waiting period for customers.
Airbus has said it will ramp up production in Europe (Hamburg and Toulouse), the US (Mobile, Alabama) and at its plant in Tianjin, China to 60 aircraft per month by mid-2019. It also plans to produce 10 A350XWB by end-2018.
From the profitability standpoint, Airbus appears to perform below average in this sector but it is making good progress with the development of the A320neo (new engine option) programme.
But ramping up production and developing new engine options (for the A320 and A330) costs money, so there will be volatility in the company’s financial performance near-term.
Compounding this is the EUR:USD exchange rate, and we expect Airbus’ margins this year and next to be affected by fluctuations in the forex market. A large chunk of Airbus’ costs are denominated in EUR while its revenues (at least 65%) are received in USD. Airbus does have a long-term hedging plan in place and is also doing much to raise its assets in the US.
Which is the (financially) stronger airplane maker – Airbus or Boeing?
Right now and until the end of this decade, it’s Boeing.
Just take a look at Boeing’s share price (around USD355 as of Feb. 16). It’s gained quite a lot in 2H17 but we think it has more upside, particularly in 2019 and 2020 when the B777X starts to make its appearance. Simply put, Boeing’s return on capital and equity is just awesome.
Boeing is also in talks with Brazil’s Embraer for a possible tie-up, although it’s unclear in what form at this stage. What is clear is that Boeing has sufficient cash to buy up all of São José dos Campos – lock, stock and barrel.
Meanwhile, Airbus (its share price is hovering under EUR95) will be looking to officially seal its collaboration with Bombardier on the C Series programme by year-end.
And it does have an advantage over Boeing with that backlog, which is fantastic, but does Airbus have the capacity to build more aircraft annually than what it is currently doing (under 700 planes)?
So while it’s great to have almost 10 years of production locked in, Airbus may not be able to sell more planes in the coming years. Unless they can churn out over 750 per year, which begs the question: how do you do that with the existing facilities?
That’s the billion euro question for Airbus’ new chief salesman Eric Schulz and whoever replaces current CEO Tom Enders in April 2019, to answer…
A tiger show without stunts involving darts, ping-pong balls and beer bottles? You bet!
The Singapore Airshow (from Feb 6-9) has been devoid of any major aircraft deals, save for a USD120 million ATR contract from Bangkok Airways for four turboprop planes from the Italian manufacturer and two orders from Malaysia’s Berjaya Hotels & Resorts. It’s not a big deal. Really.
There was a smaller but significant deal: US-based HondaJet struck a deal with France’s air taxi company Wijet for 16 planes. The company showcased its 7-seater business jet, each with a catalogue price of USD4.9 million, at the Changi Exhibition Centre.
But back to the tiger show…
Brazilian plane maker Embraer brought its hard-nosed “tiger” – the latest E190-E2 aircraft – to the airshow. The “tiger”, also dubbed “profit hunter”, was possibly the most photographed item on static display. Read more about it here.
The E2 is Embraer’s latest iteration of its popular E-jet series, used mostly in North America and Europe. The first E2 jet is slated for delivery to Norwegian carrier Wideroe this coming spring.
The airshow pitted Embraer’s products against its biggest and fiercest rival, Canada’s Bombardier.
On offer from Bombardier is the CSeries, namely the -100 and -300 variants, although only the CS300 was on display at the airshow, in airBaltic livery. It is an impressive plane, with a very comfortable cabin (we didn’t like the middle seat, though) and a sleek cockpit.
The market for regional jets is small. It’s a niche market but one that has a big upside in Asia, particularly Southeast Asia where many countries are archipelagic in nature.
There’s a lot to be said about right-sizing in a marketplace marked by overcapacity. Regional planes are a lot cheaper to operate and much more fuel-efficient. It’s a matter of time before some airlines in the region look at flying the right size, right type of aircraft.
It’s becoming a crowded market for regional jet players. Bombardier and Embraer aside, Mitsubishi remains optimistic about its MRJ plane, which has been delayed five times. The Japanese company aims to sell over 650 of the MRJs. It’s unlikely to happen.
China is a ripe market for regional aircraft and the Chinese has come up with its own model, the ARJ21 made by local state-owned manufacturer Comac. The Russians are at it, too, with the Sukhoi Superjet 100.
But the battle royale will be between the Bombardier CSeries (with Airbus soon to provide the know-how) and Embraer’s E2 (perhaps soon to be acquired by Boeing?)…
Embraer and Boeing have been careful with their words, about any potential tie-up. The Brazilians have got a good thing going. Let’s see if the price reflects that.
There is a good chance that Tsai Ing-wen has read Immanuel Hsu’s brilliant tome, “The Rise of Modern China”, a book that describes China’s transformation from a traditional empire into the modern, technologically advanced, global power that it is today.
Taiwan’s president shouldn’t mess with Beijing. It isn’t good for her and especially for the 23 or so million people on that island just 180km off the southeastern coast of mainland China.
Since Tsai took office in May 2016 relations between Beijing and Taipei have soured. That’s because Tsai refused to acquiesce to Beijing’s demand that Taiwan accept the “1992 Consensus” and along with it, the “One China” principle.
This past week it has gotten worse after two Chinese carriers cancelled almost 200 flights to Taiwan. With the Lunar New Year fast approaching (Feb. 16-17), expect to see a lot of cross-strait air travel chaos as we approach the Year of the Dog.
On Jan. 4 Beijing announced the opening of four new flight routes over the Taiwan Strait. The new paths comprise of one northbound route (M503) and three east-west extension routes. This is one Taiwan’s newspaper take on it.
Tsai and her government protested Beijing’s decision, saying it violated a 2015 accord and could cause passenger safety issues. Taipei also interpreted China’s move as undermining the island’s sovereignty.
What Taiwan did next was to refuse to approve new flights by China Eastern and Xiamen Air. Both airlines therefore had little choice but to cancel almost 180 flights during the upcoming holidays. This mainly affects the 50,000 Taiwanese living on the mainland. Taiwan says it will deploy military planes to ferry its people home but there’s a snag: the planes can only transport less than a thousand people a day.
Amidst the escalating tensions, Taiwan on Jan. 30 staged live firing exercises to simulate fending off an invasion. Not a very well thought out move.
Will Beijing compromise? Unlikely. Although both sides agreed in 2015 that before China were to open new routes, it needs to consult Taiwan, that’s not going to happen under President Tsai’s reign. That’s because her party – the Democratic Progress party – has a negative stance towards the mainland, with a more pro-independence posture for the island.
The danger in this altercation in the realm of commercial aviation is clear: if Taiwan isn’t involved in the opening of new routes, there are higher risks from miscommunication and thus, harmful to airline safety.
It is estimated some 60 million passengers pass through Taiwan’s Flight Information Region (FIR). President Tsai has made Taiwan’s opposition to China’s unilateral move known to the International Civil Aviation Organisation (ICAO). ICAO is a member of the United Nations. Taiwan is neither a member of the UN nor the ICAO. To make matters a bit more complex, the secretary general of the ICAO is a Chinese national.
Any future negotiations between Beijing and Taipei are fraught with difficulties because China doesn’t see Taiwan as an equal. President’s Tsai’s defiance of China will need to be tempered by the realisation that: (i) China isn’t going to give up on its One China, reunification policy (similar to Hong Kong and Macau) and (ii) Taiwan’s economy is becoming more and more dependent on the mainland.
Airbus makes China an offer that it can (and should) refuse
Fresh from his China tour with the French president in early Jan., outgoing Airbus COO & President Commercial Aircraft Fabrice Brégier said his company has outsold Boeing in 2017.
The Toulouse-based aircraft maker said on Jan. 15 it had surpassed its 2017 target by delivering 718 planes to customers, compared to Boeing’s 763. Orders were up 52% to 1,109 last year, against Boeing’s 912 .
But we are obliged to point out that Boeing remains the world’s largest airplane manufacturer – for the sixth consecutive year – and made considerably more money in 2017 than its European rival. Check it out here.
Boeing’s share price soared 25% in 3Q17; on Friday (Jan. 12) it closed just a tad above USD336, a remarkable value indeed.
Brégier, who is leaving Airbus next month, said Airbus faces “challenges” although these were “manageable”. He added the company plans to ramp up production this year and next and has aimed to deliver more planes than Boeing by 2020.
Whilst in China, Brégier announced the Airbus plant in Tianjin would up production of the A320 to six a month in 2020 (from the current four). The Tianjin FAL (final assembly line) was opened in 2008 and has produced over 350 A320s.
Additionally Airbus said it was in talks with the Chinese on some sort of partnership on the A380, possibly handing over some menial tasks like painting and doing up the interiors of the plane’s cabin. However Airbus will only let China do this if Chinese carriers buy more A380s.
Today only one Chinese airline – China Southern – operates the A380, and then only five of them. Putting on finishing touches on an A380 is an offer the Chinese can refuse and we suspect they will unless politics come into play (as it almost always does when politicians are involved).
India puts national airline up for sale
Here’s another offer, this time by the Indian government, for a 49% stake in troubled flag carrier Air India. Read the FT article here.
Air India was founded by the Tata family in 1932. It was known as Tata Airlines until Jul. 29, 1946 (about a year before the country’s independence) when it was changed to Air India.
It is thus quite understandable that the Tata Group is now contemplating reacquiring its baby 85 years after it was taken away. Tata and Singapore Airlines (SIA) together own an Indian carrier known as Vistara. A week ago Vistara’s Singaporean CEO said SIA is keeping “an open mind”. But why even bother?
Air India has debts close to USD8 billion. It is saddled with bureaucracy and any new buyer will have to contend with thousands of workers who will likely make restructuring almost impossible. To make matters worse, the government will retain a 26% stake in the carrier. And the government has been known to interfere in how the airline is run.
Granted, the potential in India is huge and air traffic will no doubt grow rapidly in the next few decades. The airline also has some lucrative slots, including those at London Heathrow. Air India reportedly also has some very lovely land bank worth over USD1 billion.
However, Air India only has about 15% of the domestic market and 44% of the international market among Indian airlines. It appears unlikely – especially with the likes of Indigo and Spicejet aggressively capturing the local market share – Air India can grow profitably domestically.
Moreover, nobody really can say how much the airline is worth. It hasn’t published its annual report for the past two years. All we have to go by are some figures from IATA: almost 80 million Indians took to the skies between April and November 2017. IATA adds that India will be the world’s third biggest market by 2025 (after China and the US). Read it here.
So far just one airline – Indigo – has officially expressed real interest in Air India. Qatar Airways and Spicejet are also said to be keen. As for SIA’s position, here’s what we think of it.
Investors considering putting money in a loss-making flag carrier should study the slew of national airlines that have gone bust recently (Alitalia, Malaysia Airlines). Both examples revealed that it’s tough to drain the swamp.
There is a steakhouse in downtown Seattle appropriately named The Grill from Ipanema and it serves caipirinhas to complement the exotic Brazilian dishes and the mesa de frios.
Apparently Brazilian fare is quite popular in that part of Washington state and our friends in Seattle (to paraphrase John Leahy) certainly seem to have acquired an appetite for Brazilian products, notably its airplanes.
On Dec. 21, 2017 The Wall Street Journal reported that Boeing was keen to buy Embraer, the Brazilian aerospace company and the world’s third biggest aircraft maker, for USD3.7 billion. Both companies confirmed the WSJ article.
Why is Boeing interested in Embraer?
Few people out here in Asia know Embraer (or have even heard of the company) but the São Paulo-based company is a top class aircraft manufacturer, particularly in regional planes (typically those with 70 to 120 seats). See our previous review of the company here.
Boeing’s sudden zest for Embraer clearly was sparked by Airbus’ acquisition of Bombardier’s CSeries aircraft programme, announced in October. The CSeries planes (CS100 and CS300) have gained considerable attention and praise for its efficiency and versatility. And yes, it is a cute little aircraft.
Go regional in 2018
Airlines in North America and Europe have embraced Embraer’s hardworking E-jets but demand for the Brazilian planes in Southeast Asia can be best described as lukewarm. It is actually quite poor. But then, ironically, the deployment of regional aircraft isn’t such a popular concept amongst Southeast Asian carriers who mostly opt for either Airbus or Boeing narrowbodies.
That is likely to change in 2018.
Some airlines have already had informal talks with Bombardier since its CSeries was adopted by Airbus, signaling a changing mindset. Embraer, too, is also making progress – in Northeast Asia – with Fuji Dream Airlines (Japan) and Korea Express Air (South Korea) both flying its planes.
But the regional market is extremely tough in Southeast Asia where many carriers would rather an A320 or a B737 instead of a CS100 or an E2 jet. However, with overcapacity and intense pricing competition, there’s every reason to believe an airline can make money using regional aircraft.
Amidst intense competition, right-sizing is critical. That means aircraft offering fewer seats could extract higher yields. Granted a bigger plane can generate higher overall profit but the number of seats sold at very low fares will cut the unit revenue. It’s all about yields: an aircraft with a high load factor do not necessarily equate to profitability.
Over-capacity is an issue in the industry and will continue to be in 2018. Imagine deploying a plane with the “right” capacity – this would ensure seat and revenue management are maximized leading to better yields. Of course this concept isn’t applicable to all airlines, but for several carriers (particularly in Southeast Asia), this could transform their cashflow.
Can the takeover succeed?
Unlikely. Brazil’s president Michel Temer has already voiced his disapproval. The Brazilian government has a golden share in Embraer and can use it to veto any attempts of a takeover.
Temer had planned to tour Southeast Asia in the week of Jan. 8, with planned state visits to Indonesia, East Timor, Singapore and Vietnam but has cancelled the trip following minor surgery late December. He was keen to, among others, peddle Embraer’s products (including its business jets, such as the Legacy 450 shown below), especially in Indonesia and Vietnam, two countries that are geographically perfect for regional planes (if the airlines there could only see the value).
The market for planes in the 70-120 seat segment is small – perhaps 7% at most – but this is bound to rise significantly in the next decade (mostly in Asia) where demand for air travel is growing at a phenomenal pace.
If Boeing succeeds in the takeover, it would – just as Bombardier did by seceding its CSeries programme to Airbus – give the new E2 jets a further outreach (particularly in Asia, where Embraer is weak) and a solid marketing and branding supporting power. But that’s a big if…
Even if a deal were to take place, Boeing likely won’t have full control of the Brazilian company. And Embraer isn’t as desperate as Bombardier was, when it gave 50.01% of the CS programme to Airbus for almost nothing.
Our view is that Brasilia will have a hard time telling Embraer’s management to spurn Boeing’s offer. That said, Boeing needs Embraer more than Embraer needs Boeing, following Airbus’ coup with the CSeries.
All things considered, the E2 programme will benefit under Boeing’s wings and with Brazil’s national debt (78% of GDP in 2016) growing rapidly, flogging Embraer to the Americans would bring in much needed greenbacks – not a bad deal given that the workers at São Jose dos Campos are paid in Brazilian real (BRL). But that’s only part of the issue here.
At the end of it, there probably will be no deal or at most, a mini-deal, where both will just upgrade their existing partnerships.
* It’ll take a while, if it ever gets done