Southeast Asian airlines: improved profitability in 3Q2015, 9M2015 but over half remain unprofitable

Overcapacity eases but market conditions remains relatively challenging

The Southeast Asian aviation market faced extremely challenging market conditions in 2014 due to overcapacity, a weaker economy and political instability in some of the region's largest countries. As CAPA previously highlighted, market conditions started to improve in 1H2015, aided by slower capacity growth, lower fuel prices and a more stable political environment in some countries.

See related reports:

• Southeast Asian airline sector returns to profitability in 1H2015 but long-term challenges remain
• Southeast Asia airline sector endures a rough and unprofitable 2014 but outlook for 2015 is brighter
• Southeast Asian airlines: 80% were unprofitable in 1H2014 but conditions are starting to improve

Market conditions in Southeast Asia have continued to improve in 2H2015 as fuel prices have remained low and the rate of capacity growth has remained relatively rational. Most of the main LCC groups have slowed the rate of expansion while some of the main flag carriers have been restructuring.

LCC seat capacity within Southeast Asia will end 2015 about 9% higher than 2014 levels compared to 14% growth in 2014 and a staggering 30% growth in 2013, according to OAG data. The Southeast Asian market place suffered overcapacity from 2H2013 and throughout 2014. While the situation has improved in 2015 overcapacity remains a concern in several markets and routes.

Nearly every airline in Southeast Asia have benefitted from the improved market conditions by posting year on year improvements to their bottom line for both the quarter and nine months ending 30-Sep-2015. But a majority of airlines remain in the red despite the low fuel prices, an indication that market conditions remain relatively challenging.

Five of the 11 unprofitable Southeast Asian airlines in 3Q2015 were from AirAsia

For the three months ending 30-Sep-2015, 11 Southeast Asian airlines in a sampling of 20 were unprofitable. But seven of these airlines saw their losses narrow - Malaysia AirAsia X, Philippines AirAsia, Nok Air, Scoot, Tigerair Singapore, Thai Airways and SIA Cargo. Two of the 11 are start-ups which launched services in early 2015 - NokScoot and Indonesia AirAsia X. One of the remaining carriers saw their losses widen, Thai AirAsia X, and the other swung from a profit to a loss, Indonesia AirAsia.

Indonesia AirAsia has been restructuring while Thai AirAsia X has struggled due to restrictions preventing Thai carriers from expanding in South Korea and Japan. Five of the seven AirAsia-branded carriers in Southeast Asia were in the red in 3Q2015. But unlike in 1H2015, the profits at Malaysia AirAsia and Thai AirAsia were greater in 3Q2015 than the combined losses at the five unprofitable subsidiaries or affiliates.

See related report: AirAsia 1H2015 results: the region's leading LCC regroups for the long run, reining in expansion

Malaysia AirAsia was among four carriers that saw their profits grow in 3Q2015 compared to 3Q2014, along with Bangkok Airways, Garuda Indonesia budget subsidiary Citilink and Singapore Airlines full service regional subsidiary SilkAir. Thai AirAsia was one of four airlines that swung from an operating loss to an operating profit in 3Q2015 along with Garuda, Cebu Pacific and Philippine Airlines. (The 3Q2014 losses at Cebu Pacific and Philippine Airlines were very small and the third quarter is typically the weakest quarter in the Philippine market.)

Southeast Asia airline profits total USD100 million in 3Q, led by SIA and Malaysia AirAsia

Singapore Airlines (SIA) was the only carrier which remained in the black while seeing a reduction in profits compared to 3Q2014. But SIA was still the second most profitable airline in Southeast Asia, only slightly behind Malaysia AirAsia.

SIA and Malaysia AirAsia both turned operating profits in 3Q2015 of between USD70 million and USD80 million. Excluding these two carriers, the Southeast Asian airline sector would have been in the red in 3Q2015. Overall the sampling of 20 Southeast Asian airlines generated an operating profit of about USD100 million compared to an operating loss of about USD100 million in 3Q2014.

Southeast Asian airline sector operating profit/loss (in USD millions) by carrier: 3QCY2015 vs 3QCY2014

Rank	Airline	Country	3Q2015 result	3Q2014 result
1.	Malaysia AirAsia	Malaysia	$78m profit	$63m profit
2.	Singapore Airlines	Singapore	$71m profit	$110m profit
3.	Bangkok Airways	Thailand	$30m profit	$22m profit
4.	Cebu Pacific/Cebgo	Philippines	$22m profit	$2m loss
5.	Garuda Indonesia	Indonesia	$22m profit	$32m loss
6.	SilkAir	Singapore	$15m profit	$2m profit
7.	Thai AirAsia	Thailand	$14m profit	$13m loss
8.	Citilink	Indonesia	$8m profit	$6m profit
9.	Philippine Airlines	Philippines	$5m profit	$3m loss
10.	Scoot	Singapore	$1m loss	$15m loss
11.	SIA Cargo	Singapore	$2m loss	$13m loss
12.	Indonesia AirAsia	Indonesia	$4m loss	$7m profit
13.	Indonesia AirAsia X	Indonesia	$7m loss	N/A
14.	Tigerair Singapore	Singapore	$8m loss	$20m loss
15.	Malaysia AirAsia X	Malaysia	$8m loss	$42m loss
16.	NokScoot	Thailand	$9m loss	N/A
17.	Nok Air	Thailand	$10m loss	$11m loss
18.	Thai AirAsia X	Thailand	$11m loss	$5m loss
19.	Philippines AirAsia	Philippines	$19m loss	$30m loss
20.	Thai Airways/Thai Smile	Thailand	$79m loss	$119m loss
	TOTAL		$107m profit	$95m loss

Notes: Conversions to USD are based on average conversion rates for 3Q2015 and 3Q2014.
In a few cases net profit/loss figures are used as operating profit/loss figures are not available. But these are smaller affiliate carriers and the net profit/loss figures likely are the same or similar to the the operating profit/loss figures
Source: CAPA - Centre for Aviation

In the above chart profit/loss figures are provided for the individual airline, except with Thai Airways and Cebu Pacific as these groups do not provide a breakdown by carrier. The Thai Airways figures include full service regional subsidiary Thai Smile along with three small non-airline subsidiaries while the Cebu Pacific figures includes Cebgo.

The Philippine Airlines (PAL) figure also includes four small non-airline subsidiaries but does not include its regional full service sister carrier PAL Express. The others include only the airlines listed: for example the Garuda figures exclude Citilink and its non-airline subsidiaries while for Bangkok Airways the airline segment operating profit figures are used.

Singapore-based LCC Jetstar Asia is not included in this sampling as its public shareholder, Australia-based Qantas, does not report quarterly financial data. Vietnam Airlines and its LCC subsidiary Jetstar Pacific is not included because while the Vietnam Airlines Group completed an initial public offering in late 2014 it has not yet been formally listed on the Hanoi or Ho Chi Minh stock exchange and has not released any financial data for 3Q2015. But Jetstar Asia, Jetstar Pacific and Vietnam Airlines all reported profits for the six months ending 30-Jun-2015.

Southeast Asia airline profits total USD700 million through first nine months of 2015

For the nine months ending 30-Sep-2015, 10 airlines among a sampling of 19 Southeast Asian carriers were unprofitable. This is the same sample that is used for the 3Q2015 figures with the exception of Scoot as the Singapore Airlines long haul LCC subsidiary only began reporting financial figures in the quarter ending 30-Jun-2015.

These 19 airlines collectively turned an operating profit of about USD700 million in the first three quarters of the calendar year compared to a loss of over USD500 million in the first three quarters of 2014.

Southeast Asian airline sector operating profit/loss (in USD millions) by carrier: 9M2015 vs 9M2014

Rank	Airline	Country	9Q2015 result	9Q2014 result
1.	Malaysia AirAsia	Malaysia	$220m profit	$186m profit
2.	Singapore Airlines	Singapore	$203m profit	$98m profit
3.	Cebu Pacific/Cebgo	Philippines	$156m profit	$65m profit
4.	Philippine Airlines	Philippines	$124m profit	$19 profit
5.	Bangkok Airways	Thailand	$99m profit	$68m profit
6.	Thai AirAsia	Thailand	$66m profit	$16m loss
7.	Garuda Indonesia	Indonesia	$61m profit	$266m loss
8.	SilkAir	Singapore	$32m profit	$9m profit
9.	Citilink	Indonesia	$13m profit	$11m loss
10.	Tigerair Singapore	Singapore	$8m loss	$49m loss
11.	Thai Airways/Thai Smile	Thailand	$10m loss	$367m loss
12.	Nok Air	Thailand	$10m loss	$15m loss
13.	Thai AirAsia X	Thailand	$11m loss	N/A
14.	SIA Cargo	Singapore	$16m loss	$51m loss
15.	Indonesia AirAsia X	Indonesia	$24m loss	N/A
16.	NokScoot	Thailand	$27m loss	N/A
17.	Malaysia AirAsia X	Malaysia	$34m loss	$88m loss
18.	Philippines AirAsia	Philippines	$43m loss	$94m loss
19.	Indonesia AirAsia	Indonesia	$62m loss	$45m loss
	TOTAL		$729m profit	$557m loss

Notes: For airlines with fiscal years that do not match the calendar year figures have been adjusted to include the nine months ending 30-Sep-2015 and 30-Sep-2014
Conversions to USD are based on average conversion rates for 9M2015 and 9M2014
In a few cases net profit/loss figures are used as operating profit/loss figures are not available. But these are smaller affiliates and the net profit/loss figures likely are the same or similar to the operating profit/loss figures
Source: CAPA - Centre for Aviation

The above figures for the nine months ending Sep-2014 exclude Thai AirAsia X as it launched in mid-2014. NokScoot and Indonesia AirAsia X are again not included in the 2014 figures as they both launched in early 2015.

Malaysia AirAsia and SIA have had the largest profits in Southeast Asia through the first nine months of the calendar year followed by two Philippine carriers, Cebu Pacific and PAL. Combined these four carriers had operating profits of about USD700 million, roughly equalling the total profit for the entire group.

Southeast Asia airline profitability lags other regions

Several airlines from Southeast Asia are only marginally profitable and overall the sector remains less profitable than most other regions. The overalll Asia Pacific airline sector is projected to turn an operating profit in 2015 of more than USD5 billion.

Southeast Asia's airline sector will likely account for less than one fifth of the total profit for Asia Pacific and only about 2% of the projected USD50 billion operating profit for airlines globally (based on the IATA forecast). Southeast Asia currently accounts for about 25% of seat capacity in Asia Pacific and about 5% of global capacity.

The outlook for Southeast Asia is relatively bright given the economic growth and the region's fast expanding middle class population. The situation is certainly a lot brighter than it was in 2014, when the Southeast Asian airline sector was in the red. But the current low rate of profitability remains a concern.

Southeast Asia's dynamic airline sector needs a higher overall profit margin and a larger portion of profitable airlines to be sustainable. Given the region's huge order book, overcapacity is a long term concern and could worsen again, making it difficult for the sector to improve profitability. Southeast Asian airlines collectively have almost as many orders as current aircraft and account for about 13% of the global order book.

Southeast Asia fleet summary: as of 1-Dec-2015

Source: CAPA Fleet Database

2016 should bring more profits - but margins will remain under pressure

The Southeast Asian market would benefit from some consolidation and further capacity adjustments. Low fuel prices may help drive improved profitability in the short term but could be a detriment as airlines are less likely to cut capacity or exit the market entirely.

The Southeast Asian airline sector is back in the black and should see more improvements in 2016.

But with the intense competition in the region and the huge order book, very few airlines are likely to achieve margins above normal return of investment over the next several years. This is a period of massive transition, bringing with it extensive "strategic" expansion - an often necessary phase, but rarely one that appeals to financial controllers.