June 5, 2017 9:00 am JST

Asian flagship carriers sink as Chinese airlines expand

Rising fuel costs, international competition force restructuring

ATSUSHI TOMIYAMA, Nikkei staff writer

Cathay Pacific Airways looks to eliminate 190 management posts and another 400 workers. © Reuters

HANOI -- Major Asian airlines find themselves increasingly squeezed due to the advent of low-cost carriers, rising fuel prices and intense price competition stemming from a sharp expansion of international operations by Chinese air carriers.

Chinese airlines spread wings

With Hong Kong's Cathay Pacific Airways seeking a change from bleak business projections, CEO Rupert Hogg said May 22 that the airline will eliminate 190, or one-fourth, of the carrier's management positions and shed another 400 workers. But pilots and cabin crew will be spared in the company's first major restructuring since 1998.

The carrier's deteriorating performance results partly from a jump in international flights by Chinese airlines. Companies such as state-owned China Eastern Airlines flew 739 international routes in 2016, up 12% from the prior year and roughly double the 2012 figure.

As more flights link regional airports directly with Bangkok and other popular Asian tourist sites, Chinese visitors can reach their destinations without going through Hong Kong or Singapore. For instance, China Southern Airlines and others now offer direct flights from Guangzhou and the Sichuan Province city of Chengdu to the Vietnamese resort district of Nha Trang.

Chinese airlines previously focused on domestic routes, but they have faced a challenge as high-speed rail has proliferated. "Starting about three years ago, [Chinese airlines] changed their strategy to aggressively expand international flights," said Corrine Png, CEO of Asian transport market research company Crucial Perspective.

Air passenger demand in the Asia-Pacific region grew 8.9% in 2016, led by a 4% rise in foreign travelers from China, the International Air Transport Association said. Yet the expansion of international flights by Chinese state-owned airlines has put pressure on carriers' earnings throughout Asia. Passenger yield, a measure of profitability, fell about 10% in Asia for 2016, the association's data shows.

Flagship carriers in free fall

Singapore Airlines posted its first net loss in five years in the January-March quarter, with the company noting particular difficulty in routes where it competes with Chinese and Middle Eastern carriers. Thai Airways International's profits plunged by half in that quarter, while Taiwan's China Airlines fell 3.7 billion Taiwanese dollars ($122 million) into the red.

Malaysia Airlines launched a restructuring plan aimed at cutting 7,000 employees and brought in a German CEO to lead the turnaround. But results failed to improve, and he resigned after just a year.

In contrast, Vietnamese low-cost carrier VietJet Aviation is projected to surpass Vietnam Airlines in domestic market share this year, highlighting the headwinds facing each country's flagship carrier.

Major airlines benefited from declining fuel costs as crude oil prices began falling worldwide in mid-2015, and the pace of structural improvements slowed. These carriers have a high cost structure that often leads their performance to deteriorate faster than that of low-cost rivals when fuel prices climb.

Thai Airways has a restructuring initiative in place for 2015-17, but plans to slash 20% of its workforce have been delayed. The airline also revived its unprofitable Bangkok-Frankfurt route at the government's insistence. Singapore Airlines formed a joint venture with India's Tata Group in 2014 and began a pilot training program with Europe's Airbus, but these efforts have yet to bear fruit.

Asia, unlike Europe, offers little possibility of cross-border integration because many countries still have tight restrictions on foreign ownership. The question is whether self-help efforts alone will suffice.

Nikkei staff writers Yasuo Awai in Hong Kong, Wataru Kodaka in Shanghai and Mayuko Tani in Singapore contributed to this story.

Asia300

Cathay Pacific Airways Ltd.

Hong Kong

Market(Ticker): HKG(293)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 6,112.78M
Shares: 3,933.84M
Asia300

China Eastern Airlines Corp. Ltd.

China

Market(Ticker): HKG(670)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 12,732.58M
Shares: 14,467.58M
Asia300

China Southern Airlines Co. Ltd.

China

Market(Ticker): HKG(1055)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 11,722.93M
Shares: 9,817.56M
Asia300

Singapore Airlines Ltd.

Singapore

Market(Ticker): SES(C6L)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 8,619.51M
Shares: 1,199.85M
Asia300

Thai Airways International Public Co. Ltd.

Thailand

Market(Ticker): BKK(THAI)
Sector:
Industry:
Transportation
Airlines
Market cap(USD): 1,369.74M
Shares: 2,182.77M

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