Asian LCCs to take 20% share of Asia Pacific
The forecast is based on announced aircraft orders by existing LCCs. Given reasonably sound fundamentals over the rest of this decade, the number of new entrant LCCs will grow significantly.
“A key story in the Asia Pacific region for 2006 was the capacity restraint of the full service airlines, resulting in higher load factors. But there was a price. They lost market share, particularly to European and Middle East carriers, as well as the fast-growing Asia Pacific LCCs”, said Peter Harbison, Executive Chairman of the Centre for Asia Pacific Aviation.
According to the Outlook report, Asia is a two-speed market, with flag carriers growing much more slowly than other airlines, including carriers of India and China and the LCC sector. Association of Asia Pacific Airlines carriers increased aggregate capacity (ASKs) by just 0.9% in 2006, while Asia Pacific LCC capacity surged 55% year-on-year in 2006 to account for 8.9% of the regional total and close to 11% in the last quarter of 2006.
“Based on recent LCC growth rates and aircraft orders, their share could reach 20% by the end of this decade, with much higher levels of penetration in such markets as India, Thailand, Australia, Malaysia and Indonesia. The LCC share in Asia was less than 1% in 2001. Such an outcome would eclipse the pace of LCC development in every other geographic region, albeit a delayed development in this region”, said Mr Harbison.
In the current aviation environment of unprecedented order backlogs, aircraft production slots are an equally precious commodity. Many aircraft types essentially sold out for the next two-three years, after record aircraft orders in 2005/06.
“Thanks to the past two years, both manufacturers are sitting on enormous production backlogs. While good news for the manufacturers, this is not encouraging the airlines wishing to grow or would-be new entrants. But several carriers in emerging markets made big orders and now occupy valuable aircraft production slots. They may be able to capitalise them by mortgaging or selling them”, said Mr Harbison.
Global aircraft orders are predicted to remain fairly buoyant in 2007, according to the Outlook report, led by North American and European major carrier re-fleeting decisions and continued buoyancy in Asia and the Middle East, but the overall order levels will not reach the 2005/2006 peak.
“Asia Pacific carriers, as a group, are unlikely to be major buyers of new aircraft in 2007, although the Chinese government and major carriers in the Gulf region will add to their tallies. But even if we experience an elongated orders cycle, as appears likely, the real question marks hang over the market’s ability to cope with significant pending aircraft deliveries”, said Mr Harbison.
According to Outlook 2007, Asian airlines have planned deliveries over the next five years that represent almost 59% of the current fleet – well ahead of the global average of 31% and despite the fact that, in most cases, Asian airlines possess younger fleets than the global average.
“The expected surge in deliveries is potentially a concern, with overall profitability falling despite a generally benign business environment in 2006. But the Asian markets are by no means mature at this stage and, while the level of deliveries may suggest youthful exuberance, disproportionate growth is quite possible”, said Mr Harbison.
There are structural reasons why this region should have a higher proportion of new aircraft orders than elsewhere, notably the rapid liberalisation of markets which have been tightly held for decades, along with the correspondingly higher opportunities for short haul, intra-Asian services, which flow directly from local deregulation and increased bilateral trade. Aircraft deliveries over the next five years will also be focused on the fastest growing markets – in particular, China and India – where there is great potential for demand growth to absorb new capacity additions, according to the report.
“But one thing is clear: if the current log of orders is maintained, it will substantially shift the balance of market share away from the incumbent full service carriers” said Mr Harbison.
The high-level of growth will continue to drive substantial demand for airline employees and apply pressure to training and regulatory structures across the Asia Pacific and Middle East in 2007. The Centre estimates manpower requirements of 154,000 new employees across the Asia Pacific and the Middle East regions over the next five to seven years, including 10,200 pilots, 36,400 cabin crew, 26,800 maintenance engineers, and 38,500 ground handlers.
“Staff shortages and the likely consequent pressure on wage levels, will force some airlines to reassess their options for expansion. For example, it may be more feasible for airlines to develop alliances or to outsource certain functions rather than pursue acquisition-led fleet growth”, concluded Mr Harbison.
These findings from part of the Centre’s 181-page outlook report, available now at centreforaviation.com. This year’s report covers the Big Issues facing Asia Pacific aviation in 2007, including LCCs, liberalisation, restructuring, aircraft orders/deliveries, skills, funding, security, the environment and the economy.
The overall themes of ‘Outlook 2007: Dawn of a New Era’ include an impending “full frontal attack” on flag carriers commencing in 2007, and the continued unfolding of the influential LCC story in Asia.