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Southeast Asian airlines: 80% were unprofitable in 1H2014 but conditions are starting to improve

Southeast Asian airlines have faced extremely challenging market conditions in 2014, resulting in an alarming amount of red ink. Of the 17 airlines in Southeast Asia that report earnings only four posted operating profits in 1H2014 compared to 12 in 1H2013.

Among the nearly 50 airlines based in Southeast Asia, excluding small regional and charter operators, approximately 80% were not profitable in 1H2014. Losses are likely to continue through at least 3Q2014 but there are indications market conditions will start to improve by 4Q2014 or 1H2015.

Several Southeast Asian airlines have responded to overcapacity by and cutting capacity or slowing their expansion. Markets that have seen political and economic instability are also starting to stabilise.

Southeast Asian market has suffered from overcapacity since 2H2013

The Southeast Asian airline sector has generally been profitable in recent years, particularly the larger airlines or groups which account for the majority of capacity. Rapid economic growth and an expanding middle class have provided an ideal foundation for passenger growth and – until this year – profitability.

The same favourable market fundamentals are still there but conditions started deteriorating in 2H2013, when already rapid capacity growth accelerated while demand in some countries started to slow. Most markets in Southeast Asia have since suffered from overcapacity. The overcapacity problems peaked in 1H2014 as new aircraft continued to be added at a rapid pace.

Meanwhile political instability in Thailand, which is Southeast Asia’s second largest market (based on system-wide capacity), impacted demand throughout 1H2014. The rapid depreciation of the Indonesian rupiah also has impacted demand and profitability in the region’s largest market, Indonesia since 2H2013. Meanwhile the MH370 incident has impacted inbound visitor traffic throughout Southeast Asia from the region’s largest and fastest growing source market, China, since late 1Q2014.

Southeast Asia’s publicly traded airlines incurred operating losses of over USD600 million in 1H2014

Only four of the 17 publicly traded airlines or subsidiaries in Southeast Asia were profitable on an operating basis in 1H2014 – Cebu Pacific, Malaysia AirAsia, Philippine Airlines (PAL) and SilkAir. One of the other 13 airlines was break even – Thai AirAsia – while 12 reported operating losses. Of these 13, nine had been profitable in 1H2013.

Combined this sampling of 17 airlines incurred operating losses of about USD660 million in 1H2014 compared to an operating profit of about USD370 million in 1H2013. As a result there was a year over year swing of over USD1 billion at the operating or EBIT level.

(This sample of 17 airlines includes subsidiaries or affiliates that report figures along with their parent company results. But it excludes subsidiaries of publicly traded groups that do not report results such as Scoot and Firefly. Jetstar Asia, which is part of Australia’s Qantas Group, is excluded because only full year data is provided.) 

Asian airline sector operating profit/loss (in USD millions) by carrier: 1H2014 vs 1H2013

Rank Airline  Country 

       1H2014

operating result 

      1H2013

operating result 

1. Malaysia AirAsia Malaysia   $122m profit $151m profit 
2. Cebu Pacific  Philippines   $67m profit $69m profit 
3. Philippine Airlines  Philippines   $13m profit $49m loss 
4. SilkAir  Singapore   $7m profit $31m profit 
5. Thai AirAsia  Thailand   Break Even $55m profit 
6. Nok Air  Thailand   $4m loss $24m profit 
7. Singapore Airlines  Singapore   $12m loss $16m profit 
8. Philippines AirAsia  Philippines   $12m loss $14m loss 
9. Citilink  Indonesia   $18m loss $41m loss 
10. SIA Cargo Singapore $38m loss $64m loss
11. Tigerair Singapore Singapore $39m loss $22m profit
12. Malaysia Airlines* Malaysia  $41m loss  $84m profit 
13. AirAsia X Malaysia $52m loss $15m profit
14. Indonesia AirAsia Indonesia $56m loss $14m profit
15. Tigerair Mandala# Indonesia $102m loss $37m loss
16. Garuda Indonesia Indonesia $234m loss $44m profit
17. Thai Airways* Thailand $265m loss $52m profit
  TOTAL   $664m loss $372m profit

Political instability impacts Thai carriers

It is not surprising Thailand has seen the biggest reversal of fortunes in the Southeast Asian airline sector. Thailand’s international market shrunk in 1H2014 as international visitor numbers were impacted by the prolonged political instability. The domestic market still had rapid growth but began suffering from overcapacity in 1H2014, driven by the launch of Thai Lion and an increased focus on domestic expansion due to the challenging conditions in the international short-haul market.

Thai Airways and its LCC affiliate Nok Air had operating losses in 1H2014, with the result at Thai Airways particularly dismal (the worse in the sampling of 17 airlines) as it is heavily dependent on the international market. Thai AirAsia had a break even operating result but on a net basis had a small loss.

All three of Thailand’s publicly traded carriers had operating profits in 1H2013. Privately held Thai Lion almost certainly also has been unprofitable since it launched Dec-2013.

See related reports:

Malaysia suffers from overcapacity

Of the three publicly traded airlines in Malaysia, two also swung from small operating profits in 1H2013 to large losses in 1H2014 – Malaysia Airlines (MAS) and AirAsia X. Short-haul LCC Malaysia AirAsia remained in the black but recorded about a 20% drop in operating profits.

The Malaysian market had the fastest capacity and traffic growth in Southeast Asia in 2013, driven by ambitious expansion at MAS and AirAsia X as well as the entry of Lion Air Group affiliate Malindo Air. But the Malaysian growth came at the expense of yield and was clearly not sustainable, particularly the rapid expansion at MAS.

The MH370 incident, which led to a sudden drop in China traffic and also impacted MAS across other international routes, exacerbated already challenging market conditions. While MH370 (and subsequently MH17, which occurred in early 3Q2014) has impacted MAS, the flag carrier would have been highly unprofitable this year without the incidences.

See related reports:

Singapore also suffers from overcapacity

Passenger growth in the Singapore market started slowing in 2013. Unfortunately capacity was added at a much faster clip, particularly in the short-haul sector.

Singapore, which is a relatively mature market, simply could not absorb the capacity increases from 2H2013 which came primarily because of overambitious expansion at Tigerair Singapore and SilkAir. Tigerair Singapore swung from a profit in 1H2013 to a loss in 1H2014 while SilkAir’s profits dropped by almost 80% to only USD7 million.

SIA mainline also swung from a small operating profit to small loss. Among the SIA Group subsidiaries, only SIA Cargo recorded an improvement but remained in the red as conditions in the Asian cargo market are still challenging. The SIA Group does not provide any figures for Scoot but the long-haul low-cost carrier is not expected to be profitable until at least 2015 or 2016.

Singapore-based LCC Jetstar Asia also has been unprofitable over the last year due to the intense competition in Singapore’s short-haul market but a figure for 1H2014 is not available. Jetstar Asia (including Valuair) incurred a net loss of USD37 million in the year ending 30-Jun-2014 compared to a profit of USD2 million in the year ending-30-Jun-2013. (Jetstar Asia was almost certainly unprofitable in 1H2014 but it was not included in the sampling of 17 airlines as a 1H2014 figure could not be calculated.)

See related reports:

Indonesia struggles due to the Rupiah's depreciation

Growth in Indonesia slowed significantly in 1H2014 due to weaker economic conditions and the devaluation of the Rupiah. The Rupiah devaluation also impacted profitability as most airline costs are fixed in US dollars and Indonesian carriers have not been able to sufficiently raise fares given the intense competition and price sensitiveness of Indonesian consumers.

All four Indonesian airlines which are publicly traded or have parents which are publicly traded reported operating losses in 1H2014. Two, Garuda Indonesia and Indonesia AirAsia, had been profitable in 1H2013. One of these four carriers, Tigerair Mandala, has exited the market since the end of 1H2014.

Market leader Lion Air is privately held but is believed to still be profitable. But profitability at Lion Air and its two Indonesian subsidiaries, turboprop operator Wings Air and full-service carrier Batik Air, has also likely been impacted by the Rupiah depreciation because like other Indonesian carriers a large portion of Lion’s costs are fixed in US dollars while almost all its revenues are generated locally.

See related report: Garuda Indonesia will slow international expansion and defer aircraft following a dismal 1H2014

Philippines proves to be the exception

The fact two of the four publicly traded profitable airlines from Southeast Asia in 1H2014 hail from the Philippines would surprise most industry observers. But the Philippine market experienced significant capacity adjustments and consolidation in 2013 and 1Q2014, putting it in a much better position in 2Q2014 compared to the other Southeast Asian markets.

2Q2014 marked a turning point with Cebu Pacific recording a record profit and Philippine Airlines swinging back in the black. Both had operating and net profits which were enough to easily offset the net losses from 1Q2014.

Only Philippine AirAsia, which in 2013 merged with Zest Airways (now Zest AirAsia), remains unprofitable. But Philippine AirAsia was able to narrow its losses in 1H2014 and is confident it can turn the corner – and start to benefit from the favourable market conditions in the Philippines – in 2H2014.

See related report: Cebu Pacific Air turns record profit in 2Q2014 as domestic market rationalises and yields improve

Southeast Asia’s smaller airlines continue to struggle

There are no publicly traded airlines in Southeast Asia’s other five markets – Vietnam, Myanmar, Cambodia, Brunei and Laos. Of these markets only Vietnam is of a significant size.

Vietnam’s international market is only slightly smaller than the Philippine market but is about three times larger than the Cambodian international market and about four times larger than the Myanmar international market. (Vietnam also has the region’s fifth largest domestic market, following Indonesia, Malaysia, Thailand and the Philippines.)

Southeast Asia international capacity (seats) by country: 8-Sep-2014 to 14-Sep-2014

Country Seats Available Seat Kilometres GDP (Billions) Population (Millions)
Singapore 1,355,735 4,513,321,060 304.1 5.5
Thailand 1,258,241 3,997,304,619 373.6 68.6
Malaysia 1,083,506 2,965,177,154 343 30.1
Indonesia 758,932 2,080,280,701 859.3 251.5
Philippines 476,244 1,623,472,877 291.8 99.4
Vietnam 406,627 981,657,270 187.8 90.6
Cambodia 136,937 172,583,272 16.9 15.6
Myanmar 88,954 128,887,144 60.3 66.2
Brunei Darussalam 42,101 101,162,715 16.8 0.4
Lao People's Democratic Republic 35,866 27,813,666 10.8 6.9

None of the main airlines in the four smaller markets of Myanmar, Cambodia, Brunei and Laos are believed to be profitable. Airlines from these markets have faced challenging conditions for some time as they lack the scale to effectively compete against larger Southeast Asian carriers in their small international markets. These four countries combined account for less than 5% of the total international capacity in Southeast Asia.

Conditions in these smaller markets have generally become even more difficult over the last year as competition has further intensified. Of these four countries only Myanmar has a sizeable domestic market but has been suffering from overcapacity as a result of an overly crowded playing field featuring eight carriers, several of which have been pursuing rapid expansion.

In Vietnam market conditions are generally more favourable. Demand for both domestic and international services continues to grow rapidly and the market has only three local airlines. One or two Vietnamese airlines were likely profitable on an operating level in 1H2014 – or at least close to break-even.

But CAPA estimates that of the approximately 30 airlines in Southeast Asia that do not report results (excluding small regional operators and charter carriers) only between four and six were profitable in 1H2014. This is an alarmingly small number – although it is only slightly worse than the 4/17 ratio among the publicly traded airlines and subsidiaries which report results.

Overall CAPA estimates about 20% of the 47 airlines based in Southeast Asia, excluding small regional operators and charter carriers, were unprofitable in 1H2014. This is clearly not sustainable.

Can other Southeast Asian markets follow the Philippines lead?

There is a potential silver lining. The Philippines example shows how consolidation and more rational behaviour can improve profitability. Some of the other markets in Southeast Asia also are now starting to see consolidation and more rational behaviour in the form of capacity cuts and slower expansion rates.

The AirAsia and Tigerair groups have both deferred new aircraft deliveries and have been trying in recent months to sell or sublease excess aircraft. SilkAir, Gaurda and Citilink have also slowed fleet expansion. The Lion Air Group has also slightly slowed down expansion by using its leasing subsidiary to start placing aircraft with airlines outside the group that are based in other regions. (However, the Lion Air Group is still adding an alarming two to three aircraft per month in the Southeast Asia market.)

The adjustments made in recent months are now giving the Southeast Asian market an opportunity to start catching up with the overzealous capacity influx from the last year.

The demand environment is also starting to show some signs of improvement, particularly in Thailand. The impending restructurings at two ailing flag carriers, MAS and Thai Airways, should also benefit several of the region’s carriers.

The Southeast Asia market should start seeing some improvement in 2H2014 - but outlook remains challenging

CAPA estimates that the bottom of the current profit/loss cycle in Southeast Asia came in 2Q2014. But the current quarter (3Q2014) will likely see only a very modest improvement. There could be more significant improvements in 4Q2014 and 2015 but a return to profitability is by no means a certainty.

More adjustments will likely be necessary for a full recovery in profitability to prior levels. Deferrals and aircraft sales have so far only been pursued by a few of the region’s airline groups. Consolidation has so far only taken place in the Philippines (with the AirAsia-Zest and Cebu Pacific-Tigerair Philippines deals) and in Indonesia, where there have been three smallish airline casualties so far this year (Tigerair Mandala, Merpati and Sky Aviation).

More consolidation is likely as airlines struggle to cope with the losses incurred so far this year. But the launch of new start-ups and the possible strategic response by some airlines to re-accelerate expansion could jeopardise the hoped for return to more rational capacity levels.

Southeast Asia remains fundamentally a favourable market for airlines, with healthy economic growth and a fast expanding middle class. But competition remains intense. While the steep losses of 1H2014 may not be repeated the overall profitability of the Southeast Asian airline sector will likely remain behind most other regions – including North Asia, Europe and North America – for the foreseeable future.

CAPA will deliver an Executive Briefing,  "Hotspots in the Asian aviation market", in Singapore on 16-Oct-2014, following the CAPA Asia Aviation Summit - CAPA Asia Aviation Summit
To sign up to attend, please go to: http://www.capaevents.com/ehome/78499/course/

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