22 Feb 2009
The Asian airline industry faces a risk of bankruptcies and an accelerated shift to the low-cost model after the global slowdown's savage arrival in the region.
Asian carriers that seemed largely sheltered from the Western economic storm for most of last year now find themselves battling a typhoon. A succession of statistics confirms that Asian air traffic is shrinking much faster than that of North America and Europe. And the contractions are becoming steadily more severe.
In the past week, Singapore Airlines, Qantas and Virgin Blue of Australia have announced service cutbacks, with the Southeast Asian carrier planning a remarkable 11% reduction in capacity.
Qantas is raising the possibility of canceling the first 15 of its order for 65 Boeing 787s.
"The 787s are now so delayed that we in our contract could walk away from each of those aircraft, the first 15, as they come up on a month-by-month basis over the next year or so, and that could reduce capital expenditure significantly," says Chief Executive Alan Joyce.
Qantas will cut services to China and India, and its mainline operation will quit the New Zealand domestic market entirely. Instead, low-cost offshoot Jetstar will take over New Zealand routes.
Singapore Airlines will ground 17 aircraft from its operational fleet in its coming financial year, up from an earlier plan to stop flying four. Most will be early 777s and 747-400s. The latter are already old by the standards of Singapore Airlines, a carrier that has long had a policy of keeping its fleet quite young and close to the leading edge of efficiency.
The reason for its drastic fleet reduction is evident from last month's traffic results: down 6.9% on a year earlier.
"The drop in air transportation has been sharp and swift," says Chief Executive Chew Choon Seng. "Given the falls of over 20% that we have seen recently in air cargo shipments, and the tradition of demand for air travel following closely behind trends on the cargo side of the business, we have to face the reality that 2009 is going to be a very difficult year."
The company is talking to its labor unions about how to minimize or even avoid retrenchments. It has already put more people into training, taking them out of front-line work.
Now it would like staff to clear leave entitlements, take leave without pay, retire early or work fewer hours. "If there are to be cuts in salary, the management will be the first to take them," it says.
Singapore Airlines was still making money in the last quarter of 2008, for which it reported a profit of S$337 million ($221 million), down 43% on a year before.
Asia's biggest carrier, Japan Airlines, says it may ask for a government loan - reportedly ¥200 billion ($2.1 billion) to refinance maturing debt. It expects to report a loss of ¥37 billion for the year ending Mar. 31, 2009, and plans to cut costs by ¥50 billion for the following year, although that would be the equivalent of only 2.5% of revenue.
Moody's Investors Service has put a negative outlook on the Baa3-rated long-term debt of Japan's second biggest airline, All Nippon Airways.
Virgin Blue, whose business model lies between no-frills and full service, will cut capacity by 8%, ground five aircraft and eliminate 400 jobs.
As the financial crisis and economic slowdown swept Western countries last year, Asian traffic in the first half kept showing healthy growth over 2007, which itself had been a strong year. But Asia's figures sagged in the third quarter and then collapsed in the fourth. In December, the latest period for which data is available, Asian airlines' international passenger traffic was 9.7% lower than a year earlier.
That was twice as bad as the fall recorded for North American airlines' international traffic, 4.3%, and almost four times the contraction suffered by European carriers, 2.7%.
It isn't clear why Asians have cut their flying so much more than have people in regions that have been harder hit by the economic crisis. One ominous possibility is that the fall in air travel demand indicates that Asian economies are in worse shape than previously thought.
Already, fourth-quarter gross domestic product data shows shocking weakness in Japan (where the economy contracted 3% from the third quarter), Singapore (a fall of 4%) and South Korea (down 5.6%). China's locomotive-like economic expansion probably ground to a stop in the fourth quarter: zero growth.
Asian full-service airlines are suffering from special disadvantages in this environment, says Andrew Herdman, director-general of the Assn. of Asia-Pacific Airlines.
One of them is their heavy dependence on cargo, which accounts for about 20% of their revenue. Their international freight traffic, falling even faster than passenger business, was 26% weaker in December than a year earlier.
"We had already seen significant cutbacks in freighter capacity, and in recent weeks we have seen even more aggressive cutbacks," says Herdman, noting that the cargo aircraft have been grounded with much less fanfare than passenger aircraft have been, because only the cargo industry needed to be informed.
A second point of vulnerability for Asian airlines is a result of their famously high service standards: they have traditionally enjoyed strong revenues from first and business-class passengers, the ones who are disappearing fastest.
The result of all this could be a fundamental realignment of the Asian industry. "We are poised on the brink of a watershed in aviation," says Peter Harbison, chairman of the Center for Asia-Pacific Aviation, a Sydney-based consultancy.
"When we hear of 20%-plus falls in premium traffic, that is more than just another statistic," he says. "It is ripping the guts out of the legacy model. If this persists another six months, airlines will be grounded.
The ones most likely to go bust are full-service carriers, says Harbison's colleague, Derek Sadubin. Asia's adoption of the low-cost model, already far exceeding the expectations of six or seven year ago, will accelerate, he says.
There are already signs of this happening in the current crisis. One is Qantas's substitution of Jetstar for full-service mainline operations in New Zealand. Another is the continued growth of Malaysia-based budget carrier AirAsia and its long-haul affiliate, AirAsia X.
As others are cutting back, AirAsia X is forging ahead with its expansion. It will launch a service from Kuala Lumpur to London next month and another to Tianjin, China, in April. The company is looking for five A340-300s to sustain its growth.
AirAsia will arrive in another five cities in China and Taiwan this year, along with destinations in India and South Korea. "We now have more flights to China than Singapore's Changi [airport] has," says Chief Executive Tony Fernandes, predicting a profit for this year.
The full-service carriers are hardly defenseless, however. Their business model, and especially its ability to attract big volumes of premium-fare passengers, will surely serve them well after the economic crisis is over, says Herdman.
Among full-service carriers, the smaller ones are the most vulnerable to bankruptcy, because they are less likely to get government help. Most of the big network carriers are highly eligible candidates for state support even in good times. With governments worldwide busily doling out cash to sustain supposedly strategic industries, it would hardly be difficult for a major Asian airline to get the funding needed to keep going.
Chinese carriers are already enjoying cash infusions. In the latest, China Eastern has secured 15 billion yuan ($2.2 billion) from Agricultural Bank of China. The money amounts to state support, since the bank belongs to the government and can hardly have been willing to lend to the almost-insolvent airline without Beijing's direction, guarantee or both.
The Chinese industry, hammered last year by pre-Olympic visa restrictions and the Sichuan earthquake, is showing faint growth again, with the two biggest carriers, China Southern and Air China, registering a 2-4% rise in traffic for December. China Eastern trailed with a 3.7% fall, but that was better than the industry's annual declines of around 10% ahead of the Olympic Games in August.
The revival of Chinese airlines' traffic is due entirely to domestic travel returning to annual growth of 10% or so. The carriers' international traffic remains deeply depressed, down 9-26% on a year earlier in December. January figures have been published but they are not meaningful, because of a shift in the timing of the lunar new year holiday.
No comments:
Post a Comment