08-Feb-2013 12:50 AM

Asian carriers post solid traffic & load factor increases in 2012 but cargo remains a headache: AAPA

Analysis

Asian carriers continue to record healthy passenger growth as demand in the region increases rapidly enough to keep up with the additional capacity. But the cargo market, which Asian full-service airline groups rely on more than carriers from other regions, remains weak, impacting overall profitability. Asian low-cost carriers are in a better position relatively as they carry limited amounts of cargo and nearly all their capacity is allocated to the fast-expanding intra-Asia market.

Asian carriers of all types continue to benefit from rapid passenger growth in short-haul and medium-haul markets within Asia. The weaker economic conditions in Europe and North America impacted long-haul traffic in 2012 but overall there was still healthy growth.

Summary

Asian carriers experienced healthy passenger growth in 2012, driven by short-haul and medium-haul markets within Asia.
The average load factor for Asian carriers increased from 76.4% in 2011 to 77.9% in 2012, reversing the previous year's decline.
Low-cost carriers (LCCs) in Asia have contributed to the growth of the intra-Asia market, accounting for about 24% of seat capacity within the region.
Cargo traffic for Asian carriers has been weak, with declines in four out of the last five years, impacting overall profitability.
The growth of LCCs has been a major contributor to the relatively faster growth in the intra-Asia market, as lower fares stimulate demand.
Despite challenges in the cargo market, the outlook for the passenger sector in Asia remains positive, with continued growth predicted, particularly in the intra-Asia market.

The Association of Asia Pacific Airlines (AAPA) reported international passenger growth of 7% for 2012 and RPK growth of 6%. For both measures the growth was higher than 2011, when there was international passenger and RPK growth of less than 4%. But there was no return to the double-digit growth seen in 2009 and 2010.

AAPA annual passenger numbers and year-over-year growth: 2003 to 2012

No signs yet of over-capacity in Asia

Encouragingly, warnings from early 2012 of potential excess capacity and lower load factors for Asian carriers proved to be false. The average load factor reported by AAPA grew by 1.5ppt from 76.4% in 2011 to 77.9% in 2012 as the 6% RPK increase outstripped the 4% ASK increase. This essentially reversed the 2ppt load factor decline from 2011, when there was a 6% ASK increase but only a 4% RPK increase.

AAPA RPK and ASK year-over-year growth: 2003 to 2012

The 77.9% load factor represents the second highest mark of the decade, slightly behind the 78.4% figure from 2010. Over the last decade Asia-Pacific carriers have seen their passenger traffic more than double from 96 million in 2003 to 207 million in 2012. RPKs have increased by 84% over this period from 421 trillion in 2003 to 774 trillion in 2012.

The faster passenger growth compared to RPK growth illustrates the relative strength of the short-haul market. The faster growth of traffic within Asia compared with to/from Asia, a trend which continued in 2012, reflects in part the stronger economic conditions in the region compared to other parts of the world.

Growth of LCCs contribute to growth on intra-Asia routes

But the rapid growth of Asian LCCs over the last decade also has been a major contributor to the relatively faster growth in the intra-Asia market as lower fares have stimulated demand. In 2012, LCCs accounted for about 24% of seat capacity within Asia-Pacific, compared to only about 2% in 2003, according to OAG data.

Low-cost carrier share of total capacity (% of seats) within Asia-Pacific: 2001 to 2013

AAPA figures include 25 airline groups, including its full-service carrier members and LCCs which operate international services and publicly report their traffic figures, such as AirAsia. The AAPA figures also include major full-service airlines in China, Australasia and Vietnam, where the group currently does not have members. South Asia is not included as the AAPA representation area only includes East Asia and Australasia.

IATA traffic figures for Asia-Pacific carriers show 5% international RPK growth in 2012, matching the average 5% figure for global international RPK growth, on a 3% increase in ASKs. Unlike AAPA, IATA includes South Asian carriers and excludes all Asian LCCs as its traffic figures do not include non-members.

While LCCs now account for nearly one-quarter of total capacity within Asia-Pacific, most of this capacity is allocated to the domestic market. Several Asian countries - including Indonesia, Malaysia, the Philippines and Thailand - have large domestic markets with LCCs accounting for over half of total capacity. The continued growth of LCCs in these countries is expected to drive overall rapid growth in the dynamic Southeast Asian market in 2013.

But only about 20% of the approximately six million LCC weekly seats within Asia-Pacific are currently allocated to the international market, according to Innovata data. When excluding South Asian carriers, Asia's LCCs allocate about 23% of their seat capacity to the international market.

Therefore the LCC portion of AAPA's international passenger figures reported is rather small and the LCC portion of the association's RPK figure would be almost negligible. AAPA, which does not represent any LCCs, often points out that LCCs have only about a 10% market share globally when comparing revenues or RPKs.

Asian airline cargo traffic has seen declines in four out of the last five years

Only full-service carriers, however, are exposed to the current weaknesses in long-haul markets and in cargo. The continued weak cargo market is particularly a concern as it significantly impacted Asian carriers' performance in 2012 and will again in 2013. "This is a big headache for Asian carriers," AAPA director general Andrew Herdman said at an AAPA media briefing on 06-Feb-2013.

Mr Herdman pointed out that Asian carriers account for over 40% of global FTKs and in "good years" cargo accounts for 30% to 40% of revenues at some AAPA members. AAPA reported a 3% drop in FTKs for 2012, which followed a 5% drop in 2011. These declines wiped out a big increase in 2010, when a need to re-stock inventories created a nice rebound and provided what has proven to be false medium-term optimism. AAPA's FTKs also dropped in 2008 and 2009, meaning cargo traffic among Asian passenger carriers have now declined four out of the last five years.

AAPA FTK and FATK year-over-year growth: 2003 to 2012

Asian carrier cargo traffic in 2012 was only 5% higher than 2007. Mr Herdman pointed out that this five year period of essentially no growth is challenging to manage because Asian carriers five years ago had fleet plans which envisioned cargo growth of about 5% per annum. As a result, the industry is now faced with excess cargo capacity, even with carriers parking a large portion of their dedicated freighter fleet.

The situation is exacerbated by the gap between the cargo and passenger growth. Since 2007 AAPA RPK figures have grown by 29%. Asian carriers have added aircraft to accommodate this growth, including a large number of widebodies, resulting in more space for belly cargo. Asian carriers have had to lower cargo rates to fill up the capacity, leading to a steep reduction in cargo yields.

Mr Herdman warned that cargo yields are unlikely to recover in 2013 because even if demand improves, which is possible in the second half of the year, there will still be a demand-supply "mismatch". He said this has put Asian carriers which have large cargo businesses "in a very tough spot".

While there are indications the global economy is improving, the growth is not fast enough to create any surprises at the retail level. Mr Herdman explained that without such "surprises" supply chains will continue to be run at minimum levels, leading to continued weak demand for air cargo.

Outlook for Asia's passenger sector remains bright

Demand on the passenger side, however, continues to grow - even in the relatively weak European market. Global economic growth of about 3% may not be sufficient to lead to changes in the way supply chains are managed but are sufficient for people to not forego holidays or business trips. "I think continued growth in passenger traffic is reasonably predicable," Mr Herdman said.

But he added that intra-Asia growth will likely continue to be faster than long-haul growth. Some Asian carriers also have been increasing marketing activities, through sales and promotions, to stimulate enough demand to keep aircraft full, particularly on long-haul routes. While this could potentially impact yields, overall the outlook for the Asian passenger market remains relatively bright. As CAPA reported in Nov-2012, following the AAPA annual general meeting in Kuala Lumpur:

Asian airlines have continued to be more profitable than their counterparts in other regions and are again expected to account for about half of the global industry's profits in 2012 and 2013. "Asia Pacific generally is more profitable," Mr Herdman says.

Asian carriers are fortunate to be in the region with the most robust passenger growth. The 5% growth in passenger traffic for 3Q2012 may seem weak by Asian standards but is strong relative to other regions. Mr Herdman points out that half of the world's traffic growth over the next two decades is forecasted to be to, from or within Asia.

AAPA passenger growth slowed to 5% in 3Q2012 and 6% in 4Q2012 after growing 8% in 1Q2012 and 10% in 2Q2012. But AAPA is not concerned the lower figures from the second half of the year are an indication of possible slower growth in 2013.

AAPA monthly passenger growth numbers and load factors: Jan-2008 to Dec-2012

Mr Herdman said, "altogether it was a pretty good year" given the economic situation in Europe and the threats of the fiscal cliff in the US. The outlook for 2013 is still positive even as some Asian carriers continue to turn to promotions to maintain their relatively high load factors.

Singapore Airlines (SIA), for example, reported on 07-Feb-2013 a 6% drop in yields for the quarter ending 31-Dec-2012 as "promotional activities" were initiated to boost traffic levels. RPKs at SIA were up 7% for the quarter as the carrier's load factor improved 2.1ppt to 79.3%.

Asia's all-important premium market seems to be holding up

Some long-haul carriers in Asia, or serving the Asian market from other regions, have also been engaging in steep discounts for premium travel. But AAPA remains relatively upbeat about the premium market as local business demand remains strong, including in the intra-Asia market, and there is still a need for corporations in other parts of the world to come to Asia to do business.

Overall premium traffic in Asia seems to be holding up with IATA reporting 9% premium traffic growth on routes within the Far East for the first 11 months of 2012 and 6% premium traffic growth for Europe-Far East and mid/north Pacific routes. Premium traffic is hugely important to Asia's major carriers as they account for over 20% of revenues and generally produce the yields to more than offset the cost of the extra space and product investments, even with premium load factors almost always lower than economy load factors.

AAPA is also not too concerned about the potential prospect of over-capacity as a result of the large number of aircraft on order by Asian carriers, including LCCs. Mr Herdman pointed out that new aircraft tend to "trickle in" rather than arrive in one big batch and that "aircraft are movable" if market conditions change. "I really don't buy the argument of excess capacity," he said.

While Asia was somewhat surprisingly the second slowest growing region after North America in 2012 (based on IATA figures), over the medium and long term Asian carriers will almost certainly grow faster than carriers from most other regions. As a result Asian carriers will see their share of global RPKs increase significantly from their 31% share in 2012.

The outlook in Asia remains bright with more passenger growth and overall profitability for 2013. Cargo and certain long-haul markets may be challenging but local passenger demand remains strong.

Background information:

AAPA annual passenger and freight load factors: 2003 to 2012

AAPA RPK and ASK year-over-year growth: Jan-2008 to Dec-2012

AAPA FTK and FATK year-over-year growth: Jan-2008 to Dec-2012