Aviation Outlook: State of the Industry

Transcript

Adrian Schofield:As Claudia mentioned, I'll be presenting a brief overview of the Asia-Pacific market. I'll be using data and charts from the CAPA database just to basically set the scene for some of the things that we're going to be talking about over the next few days. First, we'll take a big-picture look at system capacity in the Asia-Pacific region. This chart shows weekly seat capacity in each of the past 4 years. The yellow line shows how capacity dropped sharply in early 2020, then recovered to around 60% of 2019 levels later that year. However, this recovery was almost all due to domestic markets, so it essentially hit a ceiling due to the absence of most international services. This continued through 2021, represented by the red line, midway— and midway through 2022, shown by the green line. Then we see a noticeable bump from around mid-2022 as international services began to increase thanks to borders opening. This next slide shows just international capacity in Asia-Pacific. You can see there is very little growth through 2020, 2021, and early 2022. Then recovery starts to gain strength from around the second quarter of 2022 as more international markets reopened, and that's the lift that you can see on that green line. International capacity has now recovered to 47% of 2019 levels, and this improvement will continue as some more important markets have dropped their restrictions. While this international recovery has been welcome, Asia-Pacific countries have generally still been slower to reopen than those elsewhere. This chart, I think, is pretty interesting. It shows international capacity trends by region since the beginning of 2020, so through the pandemic period. The bottom purple line represents Asia-Pacific, which, as you can see, is far below the other regions. In comparison to the 47% international recovery in Asia-Pacific, North America has now reached 88% of pre-pandemic levels, and Europe is at 86%. Of course, Asia-Pacific is a very large and diverse region, so there are significant differences amongst its sub-regions. For example, here are 2 sub-regions where the recovery is at or above the Asia-Pacific average. Southeast Asia, you can see here on the left, is at 49% of 2019 levels. This sub-region includes markets such as Singapore that wanted to re-establish links because of the importance of their hubs, and others like Thailand where tourism flows are very important to the economy. Southwest Pacific, on the right, has recovered to 58%. When Australia and New Zealand opened their borders, there was a quick growth in capacity, although, as you can see, it has plateaued somewhat sort of through the 3rd quarter. On the other hand, we also have the Northeast Asia subregion, which, as you can see, is trailing behind. This includes markets where restrictions have remained in place longest, such as mainland China, Hong Kong, Japan, and Taiwan. Therefore, international capacity is at just 24%. Northeast Asia should catch up somewhat as Japan, Hong Kong, and Taiwan have recently removed restrictions, although a mainland China reopening remains uncertain. These ranking lists show the world's top 10 domestic routes, both before the pandemic and now. The 2019 list on the left shows that Asia-Pacific domestic routes comprised 9 of the world's top 10. The current list on the right is actually remarkably similar, which emphasises that the Asia-Pacific domestic markets have recovered well compared with those elsewhere. However, the picture is different for the top 10 international routes. Before the pandemic— that's on the left— 7 of the world's top 10 international routes were in Asia-Pacific, including the number 1 route, being Hong Kong-Taipei. But fast forward 3 years, shifting over to the right-hand list, and there are only 2 from Asia-Pacific in the top 10, both involving Singapore, as you'd expect. This chart shows the top Asia-Pacific markets ranked by international capacity to, from, and within the region. The pre-COVID list on the left is led by China and also features Japan, Hong Kong, and Taiwan. However, Japan is the only one of those 4 still in the current top 10 on the right-hand list. Now India and Singapore are at the top of the table, indicating their faster recoveries in international capacity. Now we're taking a closer look at the mainland China market, which is very important to a number of Asia-Pacific airlines. Because China has maintained strict COVID-19-related border rules, international capacity has not recovered to anywhere near the same extent. It remains at just 7.3% of 2019 levels. So this slide illustrates the importance of the mainland China market to some Asia-Pacific countries. I've picked out Thailand and Vietnam, but really the same could apply to any number of other markets. In both of these countries, China was the leading source of visitors before the pandemic, which again emphasises the importance of that source market. As I mentioned earlier, there were 3 other big Asia-Pacific markets that were slow to ease COVID restrictions. This slide illustrates one of the effects of that. The charts here show the top 10 international routes within the Asia-Pacific region. If you look at the chart on the left for 2019, you can see that 7 of the top 10 routes touched either Hong Kong, Tokyo, or Taipei. But then on the right, 3 years later, only one of these routes makes the list, that being Seoul-Tokyo. This will change as we move into next year with Japan, Taiwan, and Hong Kong finally relaxing most travel restrictions, so routes to their main hubs should start rising up the list again. There's been a lot of talk recently about how the Hong Kong hub in particular has been affected by the relatively cautious approach of its government. We can see here that capacity remained at skeleton levels in Hong Kong until fairly recently. There is a noticeable uptick at the right of the green line that you can see there, representing the increase in airline service following the lifting of quarantine requirements. This momentum should accelerate as more carriers add services. It's worth noting that Hong Kong still has some major underlying advantages as a hub. Which should reassert themselves eventually. And of course, it's got a carrier with a strong brand, good growth plans at the airport, and in a pretty advantageous position. Something else to note on this chart, you can see the dip in capacity in the second half of 2019, blue line at the top, caused by the demand drop that occurred during the wave of protests in Hong Kong. This slide looks at one traffic flow in particular between Hong Kong and Japan. While restrictions remained in place at both ends, capacity remained at basement levels. However, there was a slight uptick from mid-2022, followed by quite a sharp climb from around October, as both markets eased entry rules at roughly the same time. Cathay Pacific, All Nippon Airways, and Japan Airlines are all boosting services here, so the rise should continue. I'd like to quickly show you some charts derived from CAPA's fleet database. This one depicts the Asia-Pacific narrowbody fleet and how active and inactive totals have changed through the course of the pandemic. Of course, the blue line at the top is active and the corresponding line, the red line, is inactive. Narrowbodies returned to service most quickly as they were more useful than larger aircraft on domestic routes and short-haul international routes, which were obviously the fastest to recover. Yeah. After the initial waves of the pandemic. The narrowbody active total, net of deliveries, retirements, etc., has now essentially reached pre-pandemic levels. The widebody fleet, on the other hand, has recovered more slowly. Widebodies generally remained parked longer as international and long-haul markets were more restricted. Unlike narrowbodies, the active widebody total is still significantly short of pre-pandemic levels. And you can see the lines are a lot flatter, indicating a slower recovery rate than the narrowbodies. Just to conclude, I'd like to highlight a few of the longer-term questions and challenges facing the Asia-Pacific airline industry at the moment. First, mainland China, as we touched on earlier. The reopening of this international market will be key for the recovery of many of this region's airlines. And tourist industries. But the big question is when and how it will happen, and that remains an unknown. A major external risk is the possibility of a financial downturn, and the continuing Ukraine conflict adds uncertainty to the outlook and is also posing some pretty severe operational headaches for a lot of Asia-Pacific airlines. Particularly those in Japan and Korea, which rely on that— used to rely on that airspace to fly to Western Europe and now have to fly around it. Another issue is the service disruptions and workforce shortages that have already created bottlenecks in the ramp-up process in some parts of the world. I'm sure you're all familiar with some of the headlines, some of the horror stories of the disrupted airports in many places around the globe. This has affected airlines, airports, and related aviation sectors. It's a many-faceted problem, and I guess the hope would be that that doesn't further derail any of the recoveries in different parts of the world. Finally, what does longer-term international demand— the longer-term international demand picture look like? What happens when the initial wave of pent-up demand and so-called revenge travel subsides, and then more capacity enters the market at around the same time? And also, will business and premium travel fully return to pre-COVID levels, or has there been a structural shift in that area? It'll probably be well into next year before the answer to these questions becomes clearer. So I think I'll leave it there. I hope you found something interesting in that. If you have any Further questions, feel free to drop me an email or come see me during the conference.

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