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Asian airline cost rankings: AirAsia X, SIA & Thai are most efficient while ANA is highest cost

30-Jul-2013

Asian airline costs and efficiencies vary widely. Compared to Europe, the region is home to efficient LCCs like AirAsia, which on a stage length-adjusted basis is more efficient than Vueling or easyjet – but perhaps not Ryanair. Thai Airways is the most efficient of the major full-service Asian airlines, but it is not much more efficient than Finnair, one of Europe's leanest carriers. But Thai is certainly more efficient than many of Europe's full-service airlines, which have similar costs and stage lengths, unlike Asia's full-service carriers that occupy a wide spectrum. At the top end is Japan's All Nippon Airways, which rivals SAS' costs – Europe's most expensive major airline.

These are some of the findings from CAPA's examination of Asian airline costs. Geography and local labour costs only partially dictate total airline costs: three Japanese airlines are the most expensive in this sample. Yet Japan's independent LCC, Skymark is cheaper than any Chinese carrier while one of Asia's most efficient full-service airlines – Singapore Airlines – is from a country with a cost of living closer to the West than other parts of Asia. Many of Asia's full-service airlines need to shape up – and LCCs need to maintain cost discipline for when the cost gap is inevitably narrowed.

Select Asian airline CASK measured against average stage lengths: 2012*

This report calculates total operating cost per available seat kilometre; it does not rely on airline-supplied CASK figures. (Please see qualifications and methodology outline at the foot of this report.) Our findings are typically in line with an airline's reported figures, but not always. Garuda's CASK figure given at the end of 2012 is actually a measurement of cost per revenue passenger kilometre even though it is labelled as "CASK". Some airlines, including Cathay Pacific, do not release a CASK figure (they do give a cost per ATK). For airlines that do not release annual ASKs, we have used data supplied by OAG.

Asian cost bases are measured against average stage length

This report compares CASK with an airline's average stage length. Comparing CASKs alone is not meaningful as the efficient nature of long-haul operations means that the longer an airline's average flight, the lower the cost should be. This is due to costs like landing charges being distributed over a longer period, or the more efficient nature of flying widebody aircraft, be it from fuel consumption (subject to seat density), lower crewing costs, or even, at the most rudimentary level, a four hour flight offering one meal per passenger but a 14 hour flight only offering two.

AirAsia X and Tiger supply average stage lengths, making their results robust. For all other carriers we have used OAG scheduled data for a basis of average flying across scheduled and non-scheduled flights, the latter of which are prevalent around Japan, Korea and China.

To interpret the findings of the CASK vs stage length graph above, of two airlines with a similar CASK (Thai Airways/Singapore Airlines or Asiana/China Airlines), the one with a lower average stage length could be deemed to be more efficient based on best available information. So while Thai and SIA (mainline only) have a similar CASK (about USD8.2 cents), Thai's average stage length (2,700km) is significantly less than SIA's (4,700km).

Singapore Airlines (excluding SilkAir) system stage lengths: Jul-2013

If Thai's average flight were as long as SIA's, its average cost would theoretically drop significantly below SIA's, clearly showing its cost advantage. But again this is only on average: taking a route they both fly, like Bangkok-Singapore, does not necessarily mean Thai on that segment has a lower operating cost as matters like aircraft type, configuration and service levels become factors.

This is not a definitive analysis of airline financials, as it does not address revenue or operating margin. Japan Airlines for example has the third highest cost base in our sample but due to yield premiums delivers an astounding (for the airline industry) 16% operating margin whereas other carriers are in the low single digits at best.

Concerns are obviously with two airlines that have a similar stage length but very different operating costs, such as AirAsia Berhad (Malaysia) compared to Jin Air, although the two hardly compete against each other. A more practical concern is Korean Air having a higher cost base (based on available information) than Asiana despite Korean Air having a notably longer average stage length than Asiana.

The AirAsia Group excels – but which subsidiary is most efficient?

The airlines in our sample with the three lowest cost bases are all AirAsia affiliates: AirAsia X, Indonesia AirAsia and AirAsia Berhad (Malaysia). AirAsia X, in fact, has the lowest known cost base in the world, helped by its low-cost nature but also because it only flies widebodies on medium/long-haul routes. Grouping AirAsia X with short-haul AirAsia Berhad (Malaysia) would produce a result with a shorter average stage length but still low CASK.

AirAsia X system stage lengths: Jul-2013

So is AirAsia X more efficient than other AirAsia affiliates? Its cost base is 15% lower than Indonesia AirAsia, which has the second lowest cost base in our sample. AirAsia X's average stage length is about 5,300km compared to 1,200km at Indonesia AirAsia. Additionally, AirAsia X with its all-widebody fleet is afforded greater scale over Indonesia AirAsia's all-A320 narrowbody fleet. An AirAsia-affiliated Indonesian A330 operation would very likely have a lower cost base than Malaysia-based AirAsia X.

Even now Indonesia AirAsia could be considered more efficient than AirAsia X, although planned segmentation within the group sees that AirAsia X does not compete on the same routes as short-haul affiliates (AirAsia X generally serves routes over four hours). This differs from SIA, whose wholly-owned Scoot competes on Singapore-Bangkok and Singapore-Taipei alongside SIA's partially-owned LCC Tiger Airways.

See related reports: With Bangkok, Scoot breaks medium/long-haul focus; Thai/Nok could be next to establish long-haul LCC

An AirAsia X operation in Indonesia is not farfetched: AirAsia X has flagged that it could establish offshoots in other markets where there is a short-haul AirAsia unit. AirAsia X has already announced intentions to launch from Thailand. India may be logical too given long-haul traffic flows and scale, but Indonesia for now is a growth story very much focused on the domestic and short-haul international markets, which are not AirAsia X's focus.

See related report: AirAsia X selection of Bangkok as second base increases pressure on Thai Airways

This LCC strength has come as LCCs have captured one quarter of seats within Asia-Pacific, up from 2% a decade ago.

LCC Capacity Share (%) of Total Seats: 2001 - 2013*

AirAsia X's efficiency distorts the playing field – so let's look at the remainder

AirAsia X is a unique operation, flying all widebodies on long-haul routes. Even widebody-only Cathay Pacific and SIA (and, in another region, Emirates) have short-haul routes (and Cathay and SIA have subsidiaries with narrowbodies).

The only other comparison may be Virgin Atlantic, which until early-2013 only operated widebodies on long-haul routes. It now has a small short-haul network using wet-leased Aer Lingus A320 aircraft.

Just as Virgin Atlantic has a pronounced affect on European CASKs/stage lengths, so too does AirAsia X. For this reason, it is interesting to see the competitive outlay and trend line without AirAsia X. With AirAsia X included, Singapore Airlines and Thai Airways are above the CASK average, but without AirAsia X they are below the average, demonstrating relative efficiency.

In the short-haul spectrum, there is little change after excluding AirAsia X, reflecting the large number of carriers with low average stage lengths.

Select Asian airline (excluding AirAsia X) CASK measured against average stage lengths: 2012*

Of full-service airlines, Thai and SIA lead the pack

Singapore Airlines and Thai Airways are the clear efficient full-service producers. SIA's achievement is particularly notable when considering Singapore does not have a low-cost environment like Thailand or Indonesia. Singapore is typically in the top five ranking of GDP (PPP), with the only other Asian carriers in that sector being the tiny enclaves of Brunei and Macau. Thailand on GDP (PPP) scales is often ranked around 80th while Indonesia is below 110.

Despite its relatively low cost base, SIA is known for leading service and product innovation. In Jul-2013 it announced a relatively minor product improvement to eight forthcoming 777-300ERs that will cost USD150 million.

See related report: Singapore Airlines new cabin products represent baby steps but are important to premium strategy

But as noted earlier, CASK is only one part of the equation. While SIA and Thai may be delivering a premium service (at different levels) at an efficient cost level, their sub-2% operating margins not only leave their businesses vulnerable to market swings, but do little to raise the increasingly important metric of return on capital invested.

SIA and Thai may not be achieving sufficiently premium yields on their products or, looked at another way, their high cost base relies on unit returns that are diminishing (average yield reported for 1Q2013 declined to SGD8.8 cents, their lowest level since 2009).

Seat density demonstrates the dilemma: SIA's 1-2-1 (four seats per row) long-haul business class competes with Lufthansa's 2-2-2 (six seats per row) and even BA's 2-4-2 (eight seats per row) but without significant enough yield premiums to justify the lower density.

How efficient is Cathay Pacific? Lack of transparency stymies evaluation

Cathay Pacific does not report separate revenue or cost figures for its Cathay and Dragonair brands or separate costs figures between its passenger and cargo operations. Even traffic and capacity figures from Cathay and Dragonair are amalgamated. This does not facilitate a level comparison with the SIA Group, which provides separate revenue and costs figures for each of its passenger and cargo divisions (excluding Scoot).

Cathay Pacific Airways (excluding Dragonair) system stage lengthsJul-2013

The fairest, although not entirely accurate, comparison is between "Cathay Pacific/Dragonair/Cargo" and "SIA/SilkAir/Cargo". Both of these figures take into account the main passenger and cargo operations. On this metric the SIA Group has a larger cost base than Cathay despite flying less cargo: SIA in the year to 31-Mar-2013 had capacity for 1,144,600 tonnes (and had a 63.4% load factor) while Cathay in the year to 31-Dec-2012 had capacity for 1,563,000 tonnes (and had a 64.2% load factor).

When cargo is included, a CASK figure becomes distorted as cargo capacity is not measured in seat kilometre units but tonnes. This becomes problematic for airline groups like SIA and Cathay that have substantial cargo operations. Calculating average stage lengths is difficult too as there is less data on cargo flight segments. Cathay and SIA, amongst other but not all, airlines in this sample disclose costs per available tonne kilometre. Cathay in the year to 31-Dec-2012 reported a USD46.9 cent figure while SIA in the year to 31-Mar-2013 reported a USD47.7 cent figure, indicating neck-and-neck costs although without insight on average stage length.

A more thorough disclosure of results from Cathay would increase transparency for analytical purposes, and shareholder benefit. This should not be a problem if Cathay is confident of its efficiency.

Mainland Chinese airlines have costs above average; time to trim the fat

Mainland Chinese airlines need to be put on a diet. Their costs are above average despite being based in a country with significantly lower costs. Xiamen Airlines straddles the average while the country's Big 3 – Air China, China Eastern and China Southern – are above average. China Southern is more efficient than China Eastern, and at first look Air China too. But as noted earlier Air China includes a number of subsidiaries that are small and without scale.

To further put their cost in perspective, Xiamen Airlines has about the same cost (USD8.8 cents) as Malaysia Airlines (which includes divisions like short-haul Firefly) and an average stage length only 160km shorter than MAS despite Malaysia being a more costly country than China.

China Eastern has a similar stage length to Korean Air's LCC Jin Air – but Jin Air is cheaper than USD3.2 cents. Jin Air's stated figure may not be exact as some functions could be carried out by and billed to its parent, but even a smaller gap is notable given Korea's higher costs. Even Skymark, from supposedly expensive Japan, has a lower cost than the Chinese carriers despite a shorter average stage length, which should send costs up.

The fat on these carriers is unsurprising. It is consistent with empirical reports about China's State Owned Enterprises in various industries. The airline SOEs are in need of significant reform if they are to be effective international airlines.

China Southern's international push has become especially well known. The carrier has sometimes offered extremely low fares in economy and business classes. In competing for sixth freedom traffic, the respective Air China, China Eastern or China Southern average cost bases rival that of Cathay Pacific and are not much more than Singapore Airlines – given Singapore Airlines' average stage length is about 4,000km longer. As the Chinese carriers increase their stage lengths, average cost should reduce.

But there is still a mountain to climb to leverage the Chinese carriers' cost base and become powerful sixth freedom players – or perhaps more powerful than they already are. International marketing at Chinese carriers is not strong, limiting the foreign high-yielding point-to-point traffic that sustains lower-yielding connecting traffic.

No doubt there is tremendous potential for these airlines to be a reckoning force that, one day, will be realised. For now, long-haul operations are typically loss-making for Chinese carriers – potentially a factor of low yields, as much as high costs.

Despite all the noise about their expansion, the proportion of long-haul traffic to short-haul has not drastically changed in recent years (a testament to domestic growth). Long-haul capacity remains a minority of their operations – as can be seen from Air China's system stage length profile drawn from Innovata schedules:

Air China (excluding subsidiaries) system stage lengthsJul-2013

And, for now at least, Air China's international services are predominantly within neighbouring North East Asia.

Air China international seat capacity by region: 15-Jul-2013 to 21-Jul-2013

The same is true for China Eastern.

China Eastern Airlines international seat capacity by region: 15-Jul-2013 to 21-Jul-2013

China Southern Airlines international seat capacity by region: 15-Jul-2013 to 21-Jul-2013

Asiana has lower costs than Korean Air

The relative shyness of Chinese carriers in international markets has created opportunities for the likes of Asiana and Korean Air.

The unfortunate Jul-2013 incident of Asiana in San Francisco has made some aware of Asiana's sixth freedom power out of China: there were just as many Chinese passengers on the flight as there were Korean and American combined. Asiana is the second largest international carrier in China, behind Dragonair.

Top 10 Airlines in China ranked on international seats: 15-Jul-2013 to 21-Jul-2013

Rank Airline Total Seats
1 MU China Eastern Airlines 283,217
2 CZ China Southern Airlines 219,089
3 CA Air China 216,594
4 KA Dragonair* 163,680
5 OZ Asiana Airlines* 90,845
6 KE Korean Air* 89,400
7 NH All Nippon Airways* 63,142
8 HX Hong Kong Airlines* 50,430
9 SQ Singapore Airlines* 45,050
10 JL Japan Airlines* 38,780

As noted earlier, Korean Air's financial sheet is bogged down by some non-airline units, but that is not enough to explain a cost base USD2 cents higher than Asiana. Asiana has gained a reputation for being a low profile but inexpensive sixth freedom operator.

Korean Air (excluding Jin Air) system stage lengthsJul-2013

Amongst Asian carriers, Korean Air dominates the trans-Pacific market. Asiana is looking to improve its relative position but will for the medium term be behind Korean Air.

See related reports:

Top 10 Airlines from Asia-Pacific to North American ranked on seat capacity: 15-Jul-2013 to 21-Jul-2013

Rank Airline Total Seats
1 UA United Airlines 118,266
2 DL Delta Air Lines 92,106
3 KE Korean Air 67,518
4 JL Japan Airlines 58,744
5 CX Cathay Pacific 56,126
6 AC Air Canada 47,806
7 NH All Nippon Airways 40,208
8 AA American Airlines 32,256
9 HA Hawaiian Airlines 30,660
10 BR EVA Air 29,048

The costliest trio: Japan's airlines ANA, JAL & StarFlyer

Just as the carriers with the lowest cost base in our sample had the AirAsia brand in common, at the top of spectrum there is continuity: the costliest airlines are from Japan. The highest is All Nippon Airways, with a cost base by our evaluation USD1.5 cents higher than Japan Airlines, itself once infamously inefficient, pre-bankruptcy. JAL, through bankruptcy re-organisation and a deep restructuring, shed weight and its position is helped (somewhat) by a higher average stage length, a reflection of its stronger performance in international markets whereas ANA is more focused on the domestic market.

ANA system stage lengthsJul-2013

JAL reports air transportation and group figures. The air transportation business figures indicate a lower CASK of USD11.6 cents, which would make it on paper lower cost than Korean Air and rival EVA Air and Asiana. As noted earlier, Korean Air and others do not report airline segment information, so cannot be compared with JAL. If they did, they too would likely see a notable drop in CASK.

In its airline segment information, JAL excludes its 96 subsidiaries and 61 affiliated companies. Some of these are involved in genuine non-flying business, but others like ground handling and maintenance are difficult to separate out from the airline business since they are essential. As the possibility arises that JAL is moving costs from its "air transportation" segment to its "other" segment, we use group figures here.

Either way, ANA has its work cut out: its objective is to increase international flights, which will be challenging even with a modest cost-cutting programme. Already trans-Pacific JV partners have different outlooks.

See related report:  US-Japan airline alliances become lopsided as JAL, ANA expand while US to shift to other markets

Japan has LCCs that are increasing their presence and taking some passengers from ANA and JAL, which they acknowledge.

But also lurking is Skymark, with a cost base less than two-thirds of ANA despite a similar average stage length. Skymark has less scale but if it sets its horizons more broadly, and does some transformation work of its own, it could become a serious international player. For one, it has a significantly lower operating cost than Chinese carriers.

See related report: Skymark Airlines risks being caught in the middle of Japan's legacy heavyweights and new LCCs

StarFlyer, a boutique operation, is more efficient than ANA but still well above JAL in CASK, let alone Skymark. It is helped by yields that rival ANA and JAL and which are well above Skymark. But its position is precarious. An initiative for the medium term to lower its CASK to JPY11 (USD11.07 cents) from 2012's JPY13.85 (USD13.92) seems exceedingly ambitious.

Japanese carriers yield: three months to 31-Mar-2013

Passenger yield: JPY15.8 (USD 17.1 cents), -5.4%;

See related report: Japan's StarFlyer looks to expand its successful niche – but change is afoot

Coming soon: more long-haul figures – AirAsia X, Cebu Pacific

Recently floated AirAsia X is the only long-haul low-cost operator to have made its financials public. Jetstar's long-haul operations are amalgamated into its short-haul operations (and understandably so as the Australian AOC has both long and short-haul operations). In just over the year Scoot has been operating, parent SIA only released Scoot's first quarter results – a loss of SGD12.5 million (USD10 million) – but this included many start-up costs as well as a lack of scale on the operation that it does not expose a clear picture. But with time SIA should be expected to disclose Scoot's figures.

See related report: SIA's Scoot needs feed from Tiger Airways and smaller aircraft to achieve profitable growth

Cebu Pacific's long-haul operation will commence later in 2013. It would help for analytical purposes if the long-haul operation was counted separately from its efficient short-haul operation. But that may become complex as its A330s are also performing short-haul regional flights, so entirely segregating the widebody operation would be difficult and perhaps not representational.

See related report: Cebu Pacific’s new low-cost long-haul operation to initially focus on Middle East & regional routes

Details of AirAsia X's Thailand operation with time could also become public depending on the transparency it wants. Norwegian is planning an Asian base for its 787 operation, and details of this could also be public. All together these would help portray a stronger image of the potential for low-cost long-haul operations.

Outlook: Some good, some bad and lots of room for improvement

Competitors should quiver if an Asian peer ever enlists a CEO with the cost focus of a Willie Walsh, Ben Baldanza or Michael O'Leary. Even at SIA and Cathay there is still considerable fat, to say nothing of Chinese carriers. Full-service carriers have so far looked to reduce costs without impacting the passenger experience, but with time this mine of excess costs will be too tempting to continue, especially with such low margins. When that happens, what next for the LCCs? LCCs have thrived as much on their low costs as their efficiency. This is especially the case in China where Spring is apparently very low cost, giving it a great advantage against its domestic competitors. It will have to remain vigilant as the others gradually get the picture.

In Asia where labour is cheaper, there may be an opportunity to create many hybrid LCCs that remain competitive with bare bones LCCs. Add in a loyalty programme, especially to a parent company with lots of global partners, and there could be considerable stickiness.

That means bare bones LCCs must amass scale (and some have the order books to suggest they will) or look for new segmentation. The AirAsia Group is aware new LCCs have the potential for much lower cost bases (Lion Air, whose figures are not public, surely has a very low CASK) and in 2012 launched its "BIG" rewards programme to ensure loyalty and also generate revenue: only MYR3 million (USD940,000) in 2012, but AirAsia expects a 500% increase in 2013. At least MYR85 million (USD26.7 million) was spent on branded credit cards in 2012, a sum not in the billions like at American Airlines or United, but still early days. 

In Asia, LCCs will continue to be efficient while full-service carriers will straddle the spectrum, with a wide difference between the likes of SIA/Thai and ANA. Inertia has been a problem in Asian aviation, and it is time for carriers to start thinking of the next leap in cost gains. Someone must take the first step. And when they do, the rest will follow.

See related reports:

Qualifications: Asian airlines are opaque with financials – this limits comparisons

This report will have lower data integrity than similar reports we released on European airline financial results and costs; financial and corporate reporting in Asia is not as robust as in Europe.

See related report: European airlines' financial results in 2012; net profit of biggest 13 down 72% for the year

There are many reasons. Some results, like Xiamen Airlines, are unaudited, where airlines are part of groups, the airline divisions are seldom segmented out. In Europe there is relatively higher transparency when it comes to groups: Lufthansa Group breaks out figures for its airline and equally important non-airline divisions. Air France-KLM and International Airlines Group, which are strongly comprised of flying units, also break out figures.

Singapore Airlines breaks down top-level figures only for its major units (including SIA and SilkAir) but Cathay Pacific does not, so Cathay and Dragonair's results are blended together. Without speculative analysis, Cathay/Dragonair can only be evaluated against the total SIA Group as well as individual SIA Group carriers. Like-for-like analysis is not possible, so Dragonair cannot be compared with SilkAir (both are the regional divisions of their respective group). Nor does Garuda breakdown revenue and cost figures for Garuda mainline and LCC Citilink. Air China bundles together Air China mainline as well as Air Macau, Dalian Airlines, Kunming Airlines and Shenzhen Airlines. Air China has substantial long-haul operations while the other carriers it bundles together do not fly long-haul at all. Additionally, the small nature of Dalian Airlines and Kunming Airlines means there is little scale and costs are high.

Chinese financials are difficult. Where carriers are listed on multiple exchanges (typically Shanghai and Hong Kong), results can vary significantly. For this report we use Hong Kong release figures, as these are under IFRS. Xiamen Airlines reports its own top-level financials, but these vary from the figures given by China Southern, Xiamen's part-owner. We use Xiamen's own figures, which are also more detailed. The results from the HNA Group encompass so many member airlines – in China and overseas – and are not under IFRS that a comparison carries little weight, so we have excluded them.

Korean Air is also a difficult carrier to analyse. Its financials include a low-cost airline, Jin Air (which releases top-level figures on its own), as well as non-flying units: an airframe/supplier, catering, hotels, and buses. Revenue for each division is broadly stated but costs are not. Flying units comprise about 88% of revenue.


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