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Outlook 2023: Asia-Pacific airlines return to growth: part one – Southeast Asia & China

Analysis

For airlines in the Asia-Pacific region, 2023 should be the year that international capacity returns almost to pre-pandemic levels.

But even though COVID-19 restrictions have eased, there are still some major hurdles on the path to recovery that the industry must overcome.

Asia-Pacific airlines have generally lagged those in other global regions in terms of international capacity recovery. While the post-pandemic rebound has been slower to start in Asia-Pacific, this also means there is greater scope for rapid improvement in this region than elsewhere.

Recovery challenges include volatile fuel prices, inflation, the possibility of global recession, uncertainty regarding the reopening of on the important mainland China market, and system bottlenecks caused partially by workforce shortages.

There is also uncertainty about what travel demand will look like as 2023 progresses.

Demand is strong now, due to a combination of pent-up appetite to travel after the pandemic and a shortage of capacity. But in 2023 both these factors will ease.

Part one of this analysis will examine some data points for the broader region, as well as identifying some themes to watch in the Southeast Asia subregion and in China.

Part two will focus on the outlook for the Northeast Asia, Australasia and India markets.

Summary:

  • Asia-Pacific airline recovery has lagged, although it is catching up quickly.
  • High yields will likely moderate, but will still boost financial rebounds.
  • Southeast Asian airlines will be in stronger condition following restructurings.
  • Some airlines are already turning their focus back to fleet modernisation.
  • China's airlines face continued uncertainty until reopening timeline becomes clearer.

Asia-Pacific airlines will continue to close the recovery gap versus other regions

As of 28-Nov-2022, international weekly seats in the Asia-Pacific region were at 54% of 2019 levels, according to data from CAPA and OAG. This was much less than the 98% in North America and 86.5% in Europe.

But since Mar-2022 the rate of increase has been highest for the Asia-Pacific region, and the gap should close significantly in 2023.

International capacity recovery by region, as measured in weekly seats, 2020-2022

Traffic data from IATA illustrates the steep improvement curve over the past year.

Asia-Pacific international RPKs were up by a remarkable 440% in Oct-2022 versus Oct-2021. This was easily the largest year-on-year increase of any region for that month, although IATA notes that it comes off a very low base.

IATA also reports that Asia-Pacific international passenger load factor was 77.7% in Oct-2022 - up 39.5 points year-on-year.

International yields have been inflated by an imbalance of demand and capacity. Average fares should still be higher than pre-pandemic levels in 2023, although they will likely moderate somewhat from current averages.

High yields will help airlines as they look for either a return to profitability in 2023, or at least significant progress towards that goal.

Rebuilding fleets and workforces are major priorities. Airlines are increasingly looking to place new orders to restart modernisation plans that were shelved during the pandemic years. Those that want more immediate results are turning to the leasing market.

There are still plenty of parked aircraft, but in many cases MRO bottlenecks are hindering their reactivation.

The CAPA fleet database shows that there are still around 1,000 widebody and narrowbody passenger aircraft classified as inactive in the Asia-Pacific region, as of 6-Dec-2022. Many of these will not be returned to service, however.

Workforce is proving more of a challenge for some airlines and aviation companies, as luring people back to such a cyclical industry is proving difficult in many markets.

Southeast Asian airlines will be seeking to regain momentum after restructuring

Many of the major legacy airlines in the Southeast Asia subregion - including Thai Airways, Garuda Indonesia, Philippine Airlines (PAL) and Malaysia Airlines - have been through court-led restructuring proceedings during the COVID-19 pandemic.

These airlines will be better positioned in 2023 as they have reduced their debt burdens and restructured many of their costs. They will now be looking for these efforts to pay off with improved financial performance.

Strategy revisions and restructuring have also meant significant fleet changes. Airlines have used the restructuring process to phase out some of their less efficient or older types, and some are now considering how to rebuild their fleets with newer aircraft.

Airlines such as Garuda Indonesia and PAL have deferred deliveries, but Malaysia Airlines is an example of an airline placing orders to continue its fleet renewal.

Thai Airways also has plans to begin gradually growing its widebody fleet from 2023, after disposing of several of its older aircraft.

In the short term at least, fleet cuts mean capacity will be lower in many international markets in Southeast Asia. This may also reduce competitive pressure for connecting traffic at the region's major hubs.

Singapore Airlines (SIA) stands out as an exception in Southeast Asia.

The airline was in much better financial condition before the pandemic and it has emerged more strongly, thanks in part to supportive government policies.

SIA has been able to reactivate more international capacity than most other Asia-Pacific airlines. It will be well placed to strengthen its market position further in 2023, using its dual-model approach.

Independent low cost carriers, such as AirAsia, Lion Air and VietJet, have also suffered setbacks to their growth plans due to the pandemic. However, they still have massive narrowbody order books and will be looking to resume their expansion.

Chinese airlines' recovery will depend on border reopening strategy

The biggest issue facing the mainland Chinese airlines is the heavy restriction of international routes due to the government's COVID-19 policies. The strict entry rules and flight limitations appear likely to persist well into 2023, and the timing of their relaxation will determine when Chinese airlines will see a meaningful recovery in their international traffic.

China's domestic capacity has recovered to 77.6% of 2019 levels for the week of 28-Nov-2022, according to data from CAPA and OAG. In contrast, international capacity was still at a paltry 8.6%.

Little detail has emerged as to when, or how, the cross-border travel restrictions will be eased.

There are political and logistical aspects to this issue. The Chinese government is expected to take a very cautious approach to reopening, and it will want to make sure vaccination and booster rates are high in all age groups and that its health system is completely prepared. A phased approach is likely.

While the entry restrictions are obviously of particular concern to mainland China's airlines, they are also a major challenge for other Asia-Pacific airlines and travel industries.

China was the leading source of visitors for several countries in the region, including Thailand, Vietnam and Australia. Many Asia-Pacific airlines were therefore heavily exposed to the mainland China market.

This is certainly true for Cathay Pacific, based in the Hong Kong Special Administrative Region.

The removal of quarantine requirements by Hong Kong authorities in Sep-2022 has improved the prospects of Cathay Pacific rebounding strongly in 2023. However, it will likely need its mainland network to resume in order to achieve full recovery.

Part 2 of this report will cover the Northeast Asia, Australasia and India markets.

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