CAPA Live: Southeast Asia’s air travel market stalls

Summary:

• Strong domestic recovery in Vietnam, resuming after COVID-19 second wave.
• Singapore is easing border restrictions, but travel bubbles are slow to emerge elsewhere.
• SIA, Cathay and other Southeast Asian airlines are in various stages of restructuring and strategy reviews.
• As AirAsia scrambles to shore up liquidity, some of its units are more at risk than others.

Asia-Pacific traffic has experienced gradual rebound

Taking a look at this first chart, we can see that traffic in the broader Asia-Pacific region was initially hit hard by the pandemic, probably more so than the other regions. But some of the key Asia-Pacific markets have also recovered more quickly than those in other parts of the world.

The chart shows how traffic bottomed out and began increasing from around Apr-2020. This is mainly driven by domestic travel, which is recovering far faster than international. Countries with large domestic markets tend to be in a better position than those such as Hong Kong and Singapore, which have no domestic air traffic.

Total year-on-year RPK growth (or decline) for Asia-Pacific region, 2017 to Aug-2020

Source: CAPA and IATA.

In Vietnam there has been strong recovery - as well as some setbacks

The chart below focuses on Vietnam, which provides a good case study of the recovery path for a market with both domestic and international networks. The chart uses CAPA capacity data and projections, with domestic in dark blue and international in light blue. Daily new COVID-19 cases are represented by the red line.

So we can see that international and domestic flights were almost completely shut down in Apr-2020.

However, Vietnam has proved to have a successful COVID-19 strategy, which has allowed domestic flights to be progressively added back - and actually reaching pre-COVID-19 levels by late Jun-2020.

Then came a second wave of infections in Jul-2020 and Aug-2020, with daily case numbers spiking, and particularly in Da Nang. Vietnam Airlines and Vietjet cut back flights to this important market, but again capacity is being restored as the outbreak has been controlled.

It should be noted that many other Southeast Asian nations have not been as successful as Vietnam in suppressing outbreaks. Also, despite the domestic success, Vietnam's international capacity is projected to resume only very gradually.

Vietnam weekly seat capacity (with projections) and daily new COVID-19 cases

Source: CAPA and OAG.

Singapore has been a leader in easing border restrictions

In the Asia-Pacific region borders generally remain closed, or are subject to quarantine restrictions that have a similar effect on travel. There have been some so-called green lanes established for essential travel, but in general the hoped-for travel bubbles have been slow to develop.

Singapore has been the most progressive in the Asia-Pacific region regarding the easing of border restrictions. As well as reaching several agreements covering essential travel, Singapore has unilaterally removed quarantine requirements for some countries, including for New Zealand, Vietnam, Brunei, and most of Australia. The effectiveness of most of these quarantine removals is limited as they are not yet reciprocal, but they are obviously a step in the right direction.

A travel bubble being planned between Singapore and Hong Kong will go much further, as it will be bilateral and reciprocal.

The two governments have revealed that they intend to allow quarantine-free travel between the two markets, although COVID-19 testing will still be required. Details of when and how the travel bubble will be implemented are still being worked out. Flight numbers on this route are likely to be restricted initially while the program becomes established.

Legacy airlines are conducting reviews and restructuring to survive

There have also been significant developments with the airlines.

Two of the region's major players - Singapore Airlines and Cathay Pacific - have been reviewing their operations to realign themselves with the new industry environment. Both have been relatively hard-hit thanks to their reliance on international connecting traffic, although they have also both benefited from extensive state support.

SIA said it is conducting a review of the shape and size of its network in the longer term, and has signalled that this could mean fleet plan changes. This process is expected to be completed by the end of its fiscal first half, so more will be known later this year.

Cathay, meanwhile, revealed major cost cutting elements of its restructuring plan on 21-Oct-2020. The group will reduce its workforce by 24%, or about 8,500 positions. This total includes 2,600 currently vacant positions that will not be filled. A further 5,300 workers in Hong Kong and 600 outside Hong Kong will be laid off. Another part of the plan is merging Cathay Dragon into the parent carrier.

Other carriers in Southeast Asia are also undertaking restructuring processes to varying degrees, including Thai Airways, Garuda, and Malaysia Airlines. As government owned - or majority government owned - airlines, they will likely receive further bailouts to survive. In the case of Thai Airways, the government sent the carrier to bankruptcy court to restructure its debt.

AirAsia and other LCCs face additional survival challenges

Things are a bit more difficult for the independent LCCs in Southeast Asia. They generally do not receive the same level of government support as the major flag carriers, so they have more challenges in obtaining funding. However, the short haul LCCs do have the benefit of fleets and networks that could be well suited to the post-COVID-19 world.

AirAsia is looking to a range of measures to raise the liquidity it needs to survive the COVID-19 crisis. It also appears to be focusing more on its core Southeast Asian operations. AirAsia's Japanese franchise shut down on 5-Oct-2020, and the group has also reportedly held discussions regarding the sale of its stake in the AirAsia India joint venture.

AirAsia X, the group's widebody long haul affiliate, faces major survival challenges. It has been forced to suspend all flights due to the pandemic, with no firm date to resume operations.

On 6-Oct-2020 AirAsia X said it was attempting to restructure its debt as a prerequisite to seeking new equity. The difficulties faced by long haul LCCs now were highlighted by the shutdown of Thailand's NokScoot in Jun-2020.