Endau Analytics

Home » Economics

Economics

Advertisements

Pain in airline industry just beginning…

QR A350 DOH-SIN

a qatar airways a350 bound for sin from doh with fewer than 100 passengers on board in early october. pic/shukor yusof

 

Latest figures from the International Air Transport Association (IATA) for September 2018 indicate a slowdown in the worldwide growth of passengers. Read the entire report here.

Revenue Passenger Kilometre (RPK), which measures passenger demand, grew 5.5% year-on-year but the rate at which demand is rising has slowed considerably. In August the RPK was 6.4%.

One of the factors that have contributed to the slowdown, according to IATA, is weather (including hurricanes and typhoons).

But there are other reasons that will ensure the airline business will stay volatile for the rest of 2018 and into the first quarter of 2019. These are firmer crude oil prices and the on-going trade spat between the US and China.

Overcapacity is also a critical issue.

There are far too many seats, not just in Europe but here in Asia Pacific, too. Both legacy and low-cost carriers are defending their market positions by adding more capacity. At the same time, airfares remain relatively stagnant.

Our research shows that while airlines worldwide generally have shown marked improvements in profitability in recent years, this has not been uniform across the continents.

Carriers in the US have done well for the past five years but profits of airlines in other regions – especially in Asia Pacific – have weakened.

Bottomline: the industry has yet to earn its cost of capital and with several airlines still adamant on acquiring widebody planes, the problem of overcapacity will persist.

When there is overcapacity the airline industry’s return on invested capital (ROIC) is going to be lower than the weighted average cost of capital (WACC) the airlines.

Negative signs in the marketplace

It’s still early days yet but Singapore Airlines’ foray into the ultra long-haul market may run into severe headwinds if it cannot make money from those flights to the US (New York, Los Angeles and soon Seattle).

A few weeks ago a tweet from prominent German aviation journalist Andreas Spaeth showed the premium economy cabin of an SIA flight to Newark, New York with less than 50% of its seats occupied.

Andreas Spaeth 181018 twitter

screenshot of tweet from andreas spaeth

Other recent SQ travellers to the Big Apple told us similar tales – that there was plenty of real estate in premium economy. SIA has configured its A350ULRs with just 161 seats, comprising 94 in premium economy and 67 in business class.

In contrast the airline has configured its other long-haul A350 planes with 253 seats.

Although SIA may struggle to fill its A350ULRs, the airline is likely to continue to make money. Its financial year runs from 1 April to 31 March. The company’s earnings for 1HFY18/19 will be out soon.

The same can’t be said of Qatar Airways. The Gulf carrier reported a loss of almost USD70 million for the last financial year (31 March) attributing it to the blockade imposed by Saudi Arabia and its allies more than a year ago

There have been several accounts of Qatar Airways’ long-haul flights departing from Doha with less than 100 passengers on its spanking new, widebody A350s and B787s.

We experienced it ourselves when we flew DOH-SIN on an A350 in early October with less than 100 passengers, according to the cabin crew on board.

Qatar’s A350s are configured with 36 business class and 247 economy class seats. Its B787-8s are fitted with 22 business class seats and 232 economy seats.

Elsewhere, the mood is becoming more downbeat. India’s Jet Airways is facing an uphill battle to stay solvent, Thai Airways announced an operating loss of THB3.7 billion (USD111.7 million) and even discount carriers are feeling the pain – with AirAsia X dropping flights to Auckland, Nok Air struggling with cashflow issues and Indonesia’s Lion Air feeling the brunt of the crash of a B737-MAX 8 a fortnight ago.

The airline business has dismal economics, with very high fixed costs. With crude prices rising, most legacy carriers in the region will likely post losses in 2019.

The exception is SIA. While its stock has been an under-performer for the longest time, the airline continues to be profitable. SIA benefits from having a large volume of premium passengers (particularly on long-haul flights to Europe and Oceania) and it has few (if any) competitors within the region that can quite match its products.

 

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: