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Business Insight

Boeing's Max troubles are an opportunity for Southeast Asian airlines

Extended grounding of 737 model gives carriers chance to revise excessive orders

737 Max planes built for Lion Air, SpiceJet and other airlines sit parked at a Boeing facility in the U.S. state of Washington in September 2019.   © Reuters

The grounding of Boeing's troubled 737 Max model has caused massive headaches for airlines around the world. But for the plane maker's customers in Southeast Asia, it may prove a blessing in disguise.

Their order books and delivery schedules for new jets remain overambitious and unrealistic. Now though, Southeast Asian carriers have an opportunity to reassess their growth plans.

Singapore Airlines' SilkAir unit, Garuda Indonesia and fellow Indonesian company Lion Air Group have not flown their combined 20 737 Max planes since the model was grounded last March and, like other Asian operators, have had to juggle their operating schedules to adjust.

Seven Southeast Asian airline groups have a combined 580 more Max planes on order from Boeing and cannot count on getting them on the schedules originally agreed. Even once Boeing persuades aviation regulators to let the 737 Max return to the skies, which could happen in the next few months, it could take years for the manufacturer to catch up on production.

Southeast Asian airline groups should take advantage of this opening to slow down their expansion plans, a move that would benefit their bottom lines.

Most of the 20 airlines in the region whose results are disclosed to public investors were unprofitable in 2018 and through the first three quarters of 2019.

Malaysia Airlines has blamed intense competition and overcapacity in missing targets in its financial turnaround plan as it incurred further losses in 2019 instead of returning to profit. None of Malaysia's six airlines were profitable last year nor, as of the third quarter, were any Thai carriers.

While the long-term growth prospects for Southeast Asia's aviation market still look good, on paper there are too many planes scheduled to join the region's fleet in the short term. The region's carriers have less than 1,200 narrow-body planes in their fleets now but have around 1,500 more aircraft of this size on order.

Although some Southeast Asian customers have threatened to cancel their 737 Max orders, such an outcome is unlikely given the contractual complications. The airlines could much more easily negotiate delivery deferrals or convert the orders to get other models.

Both types of order changes would have benefits for Boeing. Deferrals would allow it to prioritize deliveries to carriers from other regions that have a more pressing need for single-aisle aircraft. Conversions would help Boeing to expand orders for other models that have so far lagged the 737 Max.

Southeast Asian customers could switch to 787s and 777Xs or to a new narrow-body model Boeing plans to develop known as the NMA, a "new mid-size airplane." Or they could opt for the E195-E2, a small jet Boeing intends to start marketing this year if it gets regulatory approval for its purchase of a controlling stake in Embraer's commercial aircraft business.

Malaysia Airlines is already evaluating the E195-E2 along with the Airbus A220. It has deferred its first Max delivery from 2020 to at least 2023 and is now considering reducing or scrapping its Max order under a new business plan. Garuda is looking at the NMA as part of a review of its narrow-body fleet plan and could also consider the E195-E2.

Singapore Airlines will likely convert some of its Max orders to other Boeing types. It no longer needs all 37 Max 8s it has ordered after low-cost subsidiary Scoot moved to get more Airbus planes instead of taking 737-800 jets from SilkAir.

VietJet and Lion Air, which operated the first 737 Max that crashed in October 2018, have much larger outstanding orders weighing on them, with each group contracted to get more than 220 more of the troubled model.

Lion had already been slowing narrow-body aircraft deliveries from both Boeing and Airbus before the Max crisis due to weakening customer demand. While it has given up earlier public threats to cancel the rest of its Max order, further delivery deferrals are inevitable given market conditions.

All Indonesian carriers have slashed capacity to improve profitability, reducing the need for new aircraft. Lion also has stopped expanding in Malaysia and Thailand where it has joint ventures.

Likewise for VietJet, its 2016 Max order always looked overambitious given it already had contracted for a large number of A320s. The Max order was premised on the launch of overseas joint ventures which have largely not materialized.

With the Max grounded, VietJet can reset its fleet plan, potentially converting some of its order to other models while deferring the rest for several years.

Thailand's Nok and Myanmar National Airlines, the other two Max customers in Southeast Asia, have small commitments that were already deferred before the model's grounding. Neither airline needs the Max now and both are financially better off waiting at least a few more years for their planes.

The Max situation provides some hope the Southeast Asian market can be rebalanced, with a more rational distribution of capacity. To help ensure the sector's future viability, the region's airlines should fully embrace the opportunities the Max crisis is providing to reassess their fleet plans.

Brendan Sobie is the founder of independent aviation consulting and analysis company Sobie Aviation in Singapore. He was previously chief analyst for research and consulting company CAPA -- Centre for Aviation.

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