Asia Aviation Outlook: 2019 has clearly demonstrated that there is more to Asia than China
Although China's market dwarfs all others, it is showing signs of slowing and others, like Vietnam and Japan, are showing real form.
In North Asia in particular, the continuing story is of LCCs gaining market share and transforming market profiles. The rise and rise of millennials, bearing mobile devices, is a major contributor to this.
LCC expansion will continue to change the landscape in the 2020s, even as some of the lines are blurred as the low cost operators extend the reach of their services and reshape their product offerings accordingly. Despite their smaller overall size at present, LCCs have nearly twice as many narrowbody aircraft on order (nearly 2500 according to the CAPA Fleet Database) as their larger long-standing full service airline competition.
- LCCs and narrowbody aircraft will transform the Asian marketplace in the 2020s.
- Vietnam experiences remarkable growth in both domestic and international markets.
- Hong Kong's passenger capacity and traffic have been impacted by ongoing demonstrations, but transfer traffic remains strong.
- Japan's inbound tourism market continues to grow, fueled by the rapid expansion of LCCs.
- The Korea-Japan dispute has led to a decline in traffic growth between the two countries.
- LCC dominance is expected to continue in the high-growth markets of Asia, with Southeast Asia and South Asia leading the way.
Summary:
- LCCs and narrowbody aircraft will transform Asian marketplace in the 2020s.
- Vietnam experiences remarkable growth.
- Japan's inbound transformation continues, fuelled by LCC growth.
- Korea-Japan dispute has damaged traffic growth.
- A future with LCCs.
LCCs and narrowbody aircraft will transform the Asian marketplace in the 2020s
The implications of this promised LCC expansion will proliferate as the new long haul narrowbody aircraft progressively enter service. They form the majority of these LCC orders and will allow their airline operators to permeate not only Asia, but to penetrate right into Eastern Europe.
For airlines like India's IndiGo, the aircraft mean they can extend right into the heart of Europe too. The great virtue of the aircraft is thanks to their size - 200 seats or less - they can connect much smaller gateways.
Because most major airport hubs in Asia are congested, this will come at a very timely juncture in the evolution of the region's networks.
China's airlines "slow" to the lowest growth rate in over a decade
China's annual passenger traffic numbers topped 600 million for the first time in 2018, but a combination of economic slowdown and the trade war with the US has tempered the expansion in 2019 to a relatively modest 8.7% (according to the CAAC).
After a slowdown in international seats in 2017, when growth was only 5.3%, 2018 bounced back by double digits, but again has dropped to around 5% for 2019.
Much of China's international airline expansion has been aided by provincial subsidies, creating a very challenging market for foreign airlines in particular, but also for the bigger established airlines like the big three of Air China, China Eastern and China Southern. These subsidies are not sustainable long term, and the international market growth rate is likely to wane as a consequence.
At the same time, the established airlines have been courted by foreign airlines keen to find an avenue into what is a vital long term market but, from a viability position, is a near-impossible one in the short term.
This has led to some shifts in the alliance structures: China Southern withdrew from SkyTeam on 01-Jan-2019, once Delta and Air France/KLM had shifted their loyalty to China Eastern. Delta then acquired a 3.55% shareholding in the Shanghai-based airline in Sep-2019, cementing the partnership.
The result of China's complex market for international operators can be seen in the high market share owned by Chinese airlines: 54%, despite a quite liberal aviation policy which allows access to foreign airlines.
Vietnam experiences remarkable growth
Vietnam's international seat capacity has surged by more than 160% over the past seven years, while domestic growth has exceeded a remarkable 200%.
Over the same period, the leading LCC VietJet Air's domestic capacity has risen from just over one million seats in 2012 to more than 19 million in 2019, defying percentage descriptions and overtaking the flag carrier Vietnam Airlines, whose expansion has not been as dramatic.
Perhaps surprisingly, with such rapid growth, VietJet has achieved profitability. With a large order of some 250 A321 and 737 MAX aircraft, the LCC has announced plans to operate to Australia and Eastern Europe. It remains the largest domestic operator, set to carry more than 28 million domestic passengers in 2019.
As the country's economy rapidly matures, the international market benefits from a strong inbound as well as outbound tourism passenger flow.
Hong Kong suffers as demonstrations continue, but transfer traffic remains strong
The persistent demonstrations in Hong Kong have inexorably had an impact on passenger capacity and traffic. Cathay Pacific itself was finally forced to reduce capacity in 3Q2019, and dropped below 2018 levels. Other airlines moved faster to reduce capacity, if not always frequency, and in the latter part of 2019 capacity is tracking below even 2016 levels.
Hong Kong Airport announced that passenger numbers were down 13% y-o-y in Oct-2019, aircraft movements were down 6% and freight tonnes also by 6%. The good news however was that transfer traffic was up strongly, showing a 7% increase over Oct-2018; while partly due to fare reductions, this is encouraging news for what is essentially a major hub airport.
Cargo payload, always more significant in Hong Kong and for Cathay Pacific, has languished across the year - partly due to the slowdown in freight shipments, but also to the reduction in belly space as passenger services downgrade.
Japan's inbound transformation continues, fuelled by LCC growth
The much bigger market of Japan, once a predominantly outbound tourism market, has also turned around dramatically since the dark days of 2010, after JAL's bankruptcy.
The 20-20 strategy of attracting 20 million visitors by 2020 (there were only 6.2 million in 2011) at one time seemed pie in the sky, but a relentless and highly successful marketing campaign has meant that Japan welcomed more than 31 million tourists in 2018. The 2019 Rugby World Cup has proven a valuable run-up to the 2020 Olympic Games in Japan, so the run of tourism growth is likely to continue.
One of the most successful tourism marketing campaigns ever was greatly assisted by the rapid growth of LCCs in the international market.
In 2011 there were a little over one million international LCC seats; in 2019 there will be nearly 16 million. At the same time, full service airline seat numbers only increased by 24%, to 44.6 million in 2018.
Domestically, however, the same LCC growth story has not been replicated - not yet.
LCC domestic market share only increased from 10% to 17% over this period, despite the relatively successful operations of the ANA and JAL-aligned LCCs, Peach and Jetstar Japan respectively. JAL is to begin operations with its long-awaited low cost long haul subsidiary in 2020, using 787-8 aircraft.
Part of the problem is slot constraints in the aviation system, which is still Tokyo-centric. But as more airports are privatised and pro-active steps are taken to attract new airlines to their communities, this is beginning to change focus.
The Korea-Japan dispute has damaged traffic growth
Korean Air estimates that traffic and seat supply in the Japan-Korea market - for South Korean airlines collectively - fell by approximately 30% year-on-year in September. Korean airlines have been cutting Japanese routes, reducing frequency and downgauging aircraft in this market in response to the demand decline. Partly the result of this, and partly too the effect of a highly competitive LCC environment in Korea, with new entrants seemingly pouring in, Korea's airlines are mostly deep in red ink.
The longer term future should be strong, as Koreans have the highest propensity in the region to travel internationally.
The main shareholder of struggling Asiana Airlines, Kumho Asiana Group, has been seeking to sell its 31% share. The approved buyers, Hyundai Development Company and Mirae Asset Daewoo, plan to change the airline's branding and are considering changing its name in due course. This should bring some stability to an airline that has been laden with uncertainty for some years.
India's market has been true to form; international should expand
India's aviation market has been synonymous with turbulence, overcapacity, a lack of solid management, unpredictability and usually ill-advised government intervention, and difficult infrastructure constraints.
It did not help that the heavily loss making government-owned Air India still has the second largest market share (12%, after IndiGo's 36%), effectively without a bottom line to protect - although attempts are being made to restore it to a sufficiently economic base that it becomes saleable.
The year 2019 occasioned the (sadly, well overdue) demise of the venerable 24 year-old Jet Airways, the last survivor of India's original foray into market liberalisation, but not before frantic efforts by government banks and potential investors - including its 24% equity holder Etihad - to find a survival solution. The vacuum created by its withdrawal from operations allowed a brief return to higher domestic fares, but again the government intervened to insist that all vacated slots be taken up immediately, preventing a gradual uptake.
Indonesia domestic still grows strongly
Indonesia is projected by IATA to become the fourth largest world aviation market by the end of the coming decade.
Its recent trajectory points in that direction. According to the Republic of Indonesia Ministry of Transportation, domestic passenger traffic numbers reached 200 million in 2018 - still growing at a healthy double digit rate. International was not as strong, but was still increasing steadily.
As in India and the Philippines, LCC capacity, mostly in the form of Lion Air, dominates the domestic market, at 53% seat capacity share. In India the share is 77% (up since Jet's demise) and in the Philippines, 66%. Lion's full service subsidiary, Batik Air, has another 10% market share, whereas the flag carrier Garuda and its LCC subsidiary Citilink claim only 24% in total.
A future with LCCs
The trend towards LCC dominance in the high growth markets of Asia looks likely to continue well into the next decade. Since 2013 LCCs have operated more than 50% of total seats in Southeast Asia, accounting for 56% of seats in 2019.
North Asia, dominated by China's large domestic market, still ranks very low by world standards, with only 14% of LCC seats, suggesting an extensive upside during the coming decade.
In South Asia, where India occupies much of the capacity, the LCC market share is 69%.
To the extent that aircraft orders and projected delivery dates are an indicator of the future trends, the future for Southeast Asia and South Asia looks to be with LCCs. Together, the aircraft deliveries are projected to be around 300 new aircraft every year for the next five years - for LCCs alone. These are remarkable numbers, and presage substantial market changes.
For Northeast Asia, over that entire period, less than 150 aircraft in total are scheduled for delivery to LCCs.
The contrast is stark. Either Northeast Asia will lag, or, as China's market growth slows, it is possible that the proportions will shift, implying a further escalation in the rate of growth as LCCs penetrate further.
For the time being, however, China's full service airlines are extremely low cost, although the LCC market leader Spring Airlines is still able to flourish.
One thing is next to certain: as the shades fall on the 2020s, China will be the biggest market in the world and Asia will be the world's aviation powerhouse. If the 21st century is Asia's century, the coming decade promises to be the coming of age for its aviation system.