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Southeast Asia's airlines feel fuel price pinch

Ticket sales are looking good, but overhead is making for thinner margins

Budget carriers AirAsia and Scoot at Bangkok’s Don Mueang airport (Photo by Shinya Sawai)

SINGAPORE Airlines in Southeast Asia will have to bear with "meager" profit in 2018 because of rising fuel prices and intense competition, the Sydney-based aviation think tank CAPA said.

On the positive front, passenger yield, an indicator of ticket prices, is set to stabilize in 2018, CAPA said in its 2018 outlook report issued on Jan. 28. Airlines in the region have been suffering from a continuous decline in passenger yield for the past few years, due to competition and overcapacity.

The less positive news, however, is that yield is not likely to increase significantly. Rounding out this negative picture is the rising price of fuel.

"The already razor-thin profit margin of the Southeast Asian airlines sector could become even thinner," CAPA said in the report.

In 2017, Southeast Asian airlines were profitable for the third year in a row, but profitability lagged behind their counterparts in North Asia and Australia, CAPA said. The think tank forecast that Southeast Asia may again underperform its peers in the rest of Asia-Pacific in 2018.

Lower profitability comes in spite of strong demand growth in Southeast Asia. Passenger traffic in the region grew approximately 10% in 2017, the report said. Six markets in the region -- Cambodia, Laos, Myanmar, Thailand, the Philippines and Vietnam -- have enjoyed at least three years of double-digit, or near double-digit, passenger growth, CAPA said. "Southeast Asia will continue to experience rapid traffic growth in 2018," the report added.

Vietnam recorded the fastest traffic growth in Southeast Asia in 2017. The country's growth driver shifted from the domestic sector, which slowed to a high single-digit increase, to the international sector, which recorded a 30% jump. Growth in Indonesia, the region's largest market, has slowed, mainly due to infrastructure constraints, CAPA said.

Passengers at Suvarnabhumi international airport in Thailand (Photo by Ken Kobayashi)

Capacity will remain at a high level, boosted by aggressive fleet expansion by low-cost carriers in the region. Southeast Asian airlines now have 1,600 airplanes on order, in addition to an active fleet of close to 2,000 airplanes.

More than 70% of new orders are from budget airlines. CAPA, in a separate report, said Malaysia's AirAsia is expected to overtake national flag carriers such as Garuda Indonesia and Singapore Airlines in terms of fleet size in 2018, with 13% growth in its Southeast Asian fleet. By the end of the year, two budget carriers -- Lion Air from Indonesia and AirAsia -- will be the top two Southeast Asian airlines by fleet size.

"Southeast Asia, along with the Middle East, are the only regions where there are nearly as many aircraft on order as in service," the 2018 outlook report said. The region saw 7% capacity growth in 2017 and a similar pace of growth is expected for this year, the report said. "Capacity growth in many markets will continue to lead demand."

Long-haul services among low-cost carriers is the emerging sector expected to show growth in 2018, the think tank noted. European budget carriers such as Norwegian Air Shuttle and Eurowings, part of Lufthansa Group, fly routes between Europe and Southeast Asia. Scoot, a subsidiary of Singapore Airlines, is increasing its presence. The airline launched its Singapore-Athens route in 2017 and plans to begin Singapore-Berlin service this June.

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