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Asia-Pacific Aviation Market Will Remain Robust In 2016


27 December 2015

Asian carriers are expected to post profits of USD6.6 billion in 2016 (from USD5.8 billion) in 2015 according to the International Air Transport Association (IATA). Notwithstanding marginal slowness in the Chinese economy, Asian economies overall have generally been fairly resilient, and Endau Analytics anticipates this – together with weakened oil prices – will translate into incremental growth and profits for many Asian airlines, including discount carriers.

We expect oil prices to stay relatively soft in the first half of 2016 (between USD30/bbl and USD42/bbl) and therefore help improve the profitability of many airlines. Year-to-date through November 2015 the price of Nymex WTI and Brent crude averaged between USD42 and USD43.50/bbl, respectively, compared to around USD50.50 and USD55.80/bbl. That’s a decline of about 20%. Additionally, the premium of jet fuel over the price of crude has seen a significant fall in the past six months at least.

Since jet fuel typically accounts for at least a third of an airline’s operating costs, the fall in both the crude oil price and jet fuel premium ought to contribute to a drop in airfares but this has not happened and some airlines continue to include fuel surcharges in its fares.

Why? Before you criticise the airlines and scream “blue murder!”, consider this: most airlines don’t buy fuel as and when their aircraft need it (quite unlike motorists going to pump petrol when the tank is low). Instead, they hedge in the futures market, thus locking in a certain volume at a certain price for a certain period. They do this so they can better manage their costs and is part of risk management.

Many Asian carriers have hedged at levels that are considerably more than the current jet fuel prices, at least into 1H16. Additionally, the airline business is all about demand and supply and since there’s a big demand for seats, where’s the incentive to cut fares? The money airlines save from lower fuel will likely go towards paying for new aircraft or upgrading their products or perhaps even rewarding its staff with bonuses (you wish!).

Bottomline, a 17% change in oil price is linked to just a 1% shift in average airfares. That effectively means a 50% fall in oil prices equates to a mere 3% decline in fares.

Outlook for 2016

Overall, our forecast for 1H16 remains positive for Asia Pacific airlines. The revenue outlook for Asian carriers is based on several factors and incorporates several key indicators in Endau’s economic forecast, including our outlook on the US economic recovery and the Eurozone. In this respect we expect Asian airlines to remain mostly solvent in 1H16, despite China’s slowing economy and stagnant airfreight demand.

Traffic Update – still looking positive…

International Scheduled Services of Asia Pacific Airlines 

International Oct-15  Oct-14  % Change  Jan-Oct 2015  Jan-Oct 2014  % Change 
Passengers (000) 23,179 21,757 + 6.5% 229,385 211,951 + 8.2%
RPK (mn.) 83,987 77,274 + 8.7% 830,452 767,832 + 8.2%
ASK (mn.) 109,214 102,615 + 6.4% 1,057,659 995,359 + 6.3%
Passenger Load Factor 76.9% 75.3% + 1.6 pp 78.5% 77.1% + 1.4 pp
FTK (mn.) 5,607 5,649 – 0.7% 53,530 52,375 + 2.2%
FATK (mn.) 8,739 8,508 + 2.7% 84,311 81,165 + 3.9%
Freight Load Factor 64.2% 66.4% – 2.2 pp 63.5% 64.5% – 1.0 pp

Source: Association of Asia Pacific Airlines (AAPA)

With the nature of the airline business being cyclical and energy-intensive, our view of Asian airlines, especially the budget carriers, mainly reflects indicators that have the strongest correlations with general economic activity and energy prices.

The weakness for many legacy carriers, such as Singapore Airlines, is still in the premium segment. In contrast, leisure demand – particularly for discount travel – continues to grow. Expect to see an increase in intra-Asia travel in 2016, boosting demand. Airlines have not sufficiently reduced or slowed capacity (as measured by available seat kilometres or ASK) and we think this trend will continue into 2016.

Legacy or flag carriers will continue to experience depressed yields at the front of the aircraft as more travellers migrate to LCCs, mainly on routes that are under three hours. Indeed, according to IATA’s latest Premium Traffic Monitor of September 2015 (Premium-Monitor-Sep15): “In 2013 and early 2014, when premium travel was expanding at a faster pace than economy travel, there was a boost to the share of premium travel from total travel. This was positive for airline yield growth and revenues. That trend reversed in 2015, with relatively stronger growth in economy class travel placing downward pressure on the share of premium seats from the total.”

Economic growth within Southeast Asia will continue, albeit at a slower pace. Emerging markets such as Indonesia, the Philippines and Vietnam (whose economy grew 6.68% in 2015), represent ample opportunities for low-cost carriers (LCCs) to maintain their annual growth rate of 3%-5% annually. Asian airlines will prop up aircraft manufacturers in terms of orders, and this will have an adverse impact on the secondary market for used planes.

We expect LCCs to continue to erode full service carriers’ profits in 2016 and for the rest of the decade. AirAsia, the region’s first budget airline, has been hit hard the past year by a tragic accident in Indonesia as well as from a GMT Research report that questioned its financials. That said, we feel the airline is still a formidable carrier (especially when compared to its feeble, full service neighbour at KLIA).

2016 will probably see more aggressive moves from Vietjet Air, a budget carrier from Vietnam. This is an airline with huge potential, notwithstanding the fact we feel it is growing a tad too quickly (on average almost one A320 a month – it has ordered 107 from Airbus); moreover, it has a very enthusiastic cabin crew (see pic below). Vietjet now flies to, among others, India and South Korea. It has also engaged JPMorgan Chase to advise and arrange ECA-supported financing.

Vietjet Xmas 2015 copy

Come fly with them!

Source: Vietjet Air

In the low-cost, long-haul segment, our forecast is for incumbents such as AirAsia X and to a lesser extent, Scoot, to struggle to make ends meet. AirAsia X has been finding it hard to generate sufficient traffic on high-volume city pairs. In our view, making money on low-cost, long-haul flights remains an elusive dream despite the fall in oil prices. Such operations, typically over seven hours, according to our calculations could only achieve at best 20%-25% cost advantage compared with almost 50% for low- to medium-haul flights.

What else to expect in 2016?

ASEAN Open Skies: Disappointing thus far and will stay a non-event in 2016. The bloc’s goal of becoming a single aviation market is not going to happen anytime soon.

Aircraft that’s setting the standard: Airbus A350XWB. Following its maiden flight on June 14, 2013 this plane was delivered to launch customer Qatar Airways end-December 2014. The onboard experience is worth leaving home for… In our considered opinion, the A350 will dominate the widebody sector in the foreseeable future due to its outstanding economics, competitive pricing and customer comfort.

Airline that’s setting the standard: Qatar Airways. There’s method in Akbar Al Baker’s madness, and of the three Gulf carriers (ME3), we have little doubt that QR is the real thing. The airline will expand in 2016 and its CEO will continue to create headlines… Doha airport is a growing transit experience although this can be improved (we didn’t quite appreciate being bused from the terminal to the A350 at 1am on a recent flight to SIN).

Save the date: February 25, 2016. Brazilian planemaker Embraer (click here) – what, you didn’t know Brazil produces things that fly, apart from its overpaid, mediocre, globe-trotting footballers? – will roll out the first of three Next Gen aircraft starting with the E190-E2 at its factory in verdant São José dos Campos. We had the privilege of being up close and personal with the E2 in November (more in an upcoming post) and suffice to say, the boys at Embraer are more skilful and talented than their compatriots on the soccer field.

Happy New Year!


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