Starry-Eyed Budget Carriers in Southeast Asia Stare at Overcapacity

Starry-Eyed Budget Carriers in Southeast Asia Stare at Overcapacity

By Anshuman Daga on 2:08 pm February 10, 2014.
Singapore. Low-cost carriers are flying high in Southeast Asia on the back of sharp growth in air travel, but as hundreds of new jets swarm into the region concerns are rising about its ability to absorb the record numbers of planes on order.

Southeast Asian carriers have been devouring as many new airplanes as planemakers can sell, gambling that low fares and rising disposable incomes will drive the region’s 600 million-strong population to keep flying to new destinations.

An aircraft buying binge fuelled by cheap interest rates and backed by Western export credits shows few signs of halting, with Vietnam’s VietJetAir and Thailand’s Nok Air both expected to place orders at the Singapore Airshow this week.

But after years of explosive growth, the region’s budget carriers are now facing fears of overcapacity as deliveries accelerate, airlines expand into each other’s markets and currency weakness threatens to puncture economic growth.

“This is the only region in the world where airlines have more orders than current fleet and there’s more to come,” said Brendan Sobie, chief analyst at industry consultancy CAPA.

Airlines in Southeast Asia are estimated to have a fleet of 1,800 by the end of this year, he said, while their order book is set to surpass the 2,000 mark. Asia-Pacific planes on order make up 36 percent of the world total and the figure is rising, says Airbus.

Already last year, available capacity grew faster than passenger demand in countries such as Malaysia, the Philippines and Singapore, putting pressure on yields or the average revenue per passenger for every kilometre flown.

That could extend further in 2014 as carriers in Southeast Asia take delivery of about 230 aircraft worth over $20 billion this year, at a rate close to one new jet every working day.

One such aircraft is a short-haul Boeing 737 now making its way to the region and due to reach Singapore’s SilkAir in time to be shown off at the Feb. 11-16 air show.

The arrival of the airline’s first Boeing symbolises a price war between planemakers generated by Asia’s order boom, after SilkAir ditched its previous supplier Airbus.

Order now, pay later

One reason many airlines have been ordering at once is that engine improvements now allow significant fuel savings.

Ample liquidity provided by money-printing central banks has also made it easier to fund the relatively small upfront payments needed to place headline-grabbing plane orders.

But bankers warn the race to buy efficient aircraft in anticipation of high demand could spell trouble for the sector.

“When you run an airline, for reasons which are both economic reasons and prestige, you want a new kit, so you order an aircraft. And if your neighbour orders aircraft, so you order aircraft,” said Bertrand Grabowski who heads German bank DVB’s aviation and land transport finance divisions.

“I wouldn’t call it irrational exuberance but clearly everybody in Asia is ordering aircraft more than they really need,” Grabowski told Reuters in an interview.

Most of the aircraft orders come from the region’s two fastest growing airlines — Malaysia’s AirAsia, run by entrepreneur Tony Fernandes, and Lion Air, co-founded by Indonesian businessman turned politician Rusdi Kirana.

Both carriers have placed orders for hundreds of Boeing and Airbus aircraft valued at tens of billions of dollars as they race to get Asians flying in a region set to overtake the United States as the biggest aviation market.

Others ordering aircraft include Cebu Pacific, Tiger Airways, 40-percent owned by Singapore Airlines, Garuda Indonesia’s low-cost unit Citilink, and the Qantas Airways-owned Jetstar and its affiliates such as Singapore-based Jetstar Asia.

In the event that any airline cannot complete an order, there are others waiting in the wings to take their slot.

New deals 

While Fernandes has dismissed speculation of an aircraft order bubble in Asia, AirAsia’s profits have taken a knock due to a gruelling price war in its home market, stoked by Lion affiliate Malindo and competition from Malaysian Airlines.

AirAsia has termed competition in Malaysia and Thailand as “irrational.”

Kirana, the head of Lion Air which does not disclose profits, believes consolidation in the sector is “inevitable” given the large number of companies in the low-cost market.

Recently, Tiger Airways agreed to sell its Philippine operations to dominant carrier, Cebu Pacific, and AirAsia’s Philippine unit bought into smaller Zest Air.

Such concerns are unlikely to get much of a public airing at this week’s aerospace event, where deals may be signed for between 100 and 200 jets worth $10-20 billion – albeit far below the record $200 billion seen in Dubai in November.

Manufacturers are perennially upbeat and Boeing is expected to reiterate confidence in long-term Asian demand this week.

“Nobody is going to place a future order unless they know that whatever they are taking in today is being absorbed in the market at a reasonable yield and a reasonable load factor level,” said Dinesh Keskar, Boeing Commercial Airplanes’ vice president, Asia-Pacific and India sales.

“I wouldn’t say the party is ending in the near-term but the rate of growth will slow down.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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