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Asian airlines fly nervously into post-COVID future

Carriers brace for restructuring, but crisis also presents opportunities

Thai Airways aircraft lined up at Suvarnabhumi Airport in Thailand on May 21. (Photo by Akira Kodaka) 

TOKYO -- "Just another chapter in that never-ending story of AirAsia" was how Tony Fernandes, the Malaysian tycoon who heads Asia's largest budget carrier, described this year of struggle.

Dressed in his favorite Red Hot Chili Peppers T-shirt and speaking during an online event hosted by aviation research company CAPA -- Centre for Aviation on Dec. 9, Fernandes remained aggressive about his company's plans. "We feel we're going to come back stronger in 2021," he said.

But there was less optimism about his joint venture airline in India with the conglomerate Tata Group. "[India is a] competitive market, tough for outsiders to come in. ... Let's know where we're strong. If things don't feel right, then we look at other options," Fernandes said. "Obviously we've exited Japan because we were too small, and COVID put final nails in that coffin. ... Whether we should put money to continue in India or to expand in ASEAN, that's a discussion I'm having."

Indeed on Dec. 29 AirAsia Group said it would sell 32.67% of its stake in its Indian operations to Tata for $37.7 million. AirAsia previously decided to pull out of Japan, where its joint venture subsidiary filed for bankruptcy in November.

Such retreats by Fernandes, an industry innovator, are a barometer of how much turmoil Asia's airlines have faced as COVID-19 triggers a restructuring of the market -- spelling financial difficulties and even failure for some well-known brands.

AirAsia CEO Tony Fernandes speaks during an online event hosted by aviation research company CAPA -- Centre for Aviation on Dec. 9. (Screenshot from CAPA Live website)

Border restrictions, lockdowns and fear of coronavirus have deterred many from taking flights and left airlines in financial trouble. Globally some 2.6 billion fewer seats were provided this year than last year, according to aviation data company OAG Aviation Worldwide. Passenger traffic was down 67% this year from 2019 and was on a par with 1999 levels, according to aviation data company Cirium.

Airlines are set to finish 2020 with a net loss of $118 billion, predicted the International Air Transport Association in November, worse than the $84 billion forecast in June.

South Korea's Korean Air and Asiana Airlines are already moving to consolidate via a merger brokered with support from Seoul. Industry experts believe other Asian players will likely be forced to follow suit in a region that was suffering from surplus capacity even before the pandemic.

Yet the upheaval also provides a potentially rare market opening for nimble and confident rivals willing to expand in the teeth of a downturn and bet that the long-term trends still point to a region flying farther and more frequently.

"Because airline networks are disrupted, any carrier or supplier is basically restarting. ... They have to be prepared for very different market demand," said Joanna Lu, head of consultancy for Asia at Ascend by Cirium. "Before they might have been thinking to expand their company very quickly, but now they need to think about how to [stay] healthy."

The industry in the Asia-Pacific region is in an unprecedented slump. IATA revealed on Dec. 8 that international passenger demand, measured in revenue passenger kilometers, for the region in October was down 96% from the previous year -- a more severe reduction than Europe's 83% and North America's 88% declines.

Many countries in Asia remain in effect closed to all but a handful of travelers, unlike other regions that have partly reopened borders for international tourists, although borders worldwide are now disrupted again by the emergence of a variant of COVID-19. 

But the region's domestic flights are on the road to recovery, especially in China, where passenger demand in October was only down 1.4% from the same month a year earlier. China Southern Airlines and its peers have run campaigns that offer unlimited flights for specified periods to boost demand.

Before the pandemic, the Asia-Pacific region had become the industry's biggest market. Last year it accounted for 35% of passengers, compared with Europe's 27% and North America's 22%, according to IATA.

Despite the region's role as a global growth engine over the past decade, fueled by rising middle-class passengers in China, India and Southeast Asia, and the emergence of budget carriers for leisure travel, there were already signs of financial struggles even before the pandemic.

"Asia's profitability was lagging compared to other regions of the world because of its intense competition and overcapacity," said Brendan Sobie, founder of Singapore-based consultancy Sobie Aviation.

The region's load factor -- a measure of how many available seats are sold -- last year was only 81.9%, lower than the global average of 82.6% and far below Europe's 85.2% and North America's 84.9%. But the region's total seat capacity continued to increase to nearly 2.2 billion in 2019, up 28% from 2015, according to Cirium.

Carriers in the region sought to take advantage of the rising market by continuously launching new flights -- resulting in pressure on profitability.

"A lot of airlines use COVID as an excuse for needing to restructure or needing the government bailout, but 2020 was not going to be an easy year for airlines in Asia," argued Sobie. "2019 was challenging, and some airlines would have reached the breaking point in 2020 anyway, in terms of running out of cash or to potentially consider bankruptcy."

Following Virgin Australia, which went into administration in April and was bought by U.S. private equity firm Bain Capital, Thai Airways entered into a court-supervised business rehabilitation in September. Philippine Airlines is also seeking court protection for a debt restructuring, while Malaysia Airlines also announced in October negotiations over restructuring of 16 billion ringgit ($3.9 billion) of debt.

In a bid to save employment and air connectivity for their economic rebound, many governments around the world have tried to help their flag carriers navigate the coronavirus storm with massive funding.

However, in Asia -- and particularly in Southeast Asia, where financial damage to airlines has been greater because there are smaller domestic markets to rely on -- "there hasn't been much government support except for Singapore Airlines," commented Sobie, "even Thai Airways, which was always protected by the Thai government." The Thai airline's entering into a court-supervised rehabilitation process "caused a lot of surprise among the industry," he said.

Full-service carriers and budget rivals are reducing operational costs to remain lean. Japan's ANA Holdings will not only slash its fleet by around 10% and transfer some 400 employees to other companies, but also strengthen the ties between its main full-service carrier, All Nippon Airways, and its low-cost subsidiary Peach as a way to complement ANA's much-reduced flight schedule. AirAsia halved its fixed costs year-on-year in the quarter through September.

  © EPA/Jiji

Hopes for newly developed coronavirus vaccines as well as rapid testing are expected to lift air travel demand. But some players are bracing for a prolonged economic downturn, as seen from the deal by the two South Korean flag carriers. Korean Air plans to acquire a controlling stake in Asiana for 1.8 trillion won ($1.6 billion).

"Without restructuring in the aviation industry, it is unclear whether the flag carriers would survive even after the coronavirus pandemic ends," said state-run lender Korea Development Bank, which is involved in the acquisition.

The resulting merger of the two longtime rivals is "sensible," said Lu from Ascend by Cirium. "How could two major flag carriers sustain [themselves] only within the South Korean domestic market, which may be their focus for a couple of years?" she said.

Lu argues that similar deals may possibly occur in Asia, including China or other markets that appear to be performing relatively well. "Consolidation issues can emerge anytime unless the international market goes back to normal," she explained, saying there is even potential for cross-border mergers and acquisitions, despite current severe ownership restrictions in the region.

"Even though the airline industry is currently at the bottom of the market, some investors, including foreign ones, might be interested in getting hold of an air operator's certificate. Once the market goes back to normal, they will be quick to jump into the industry," Lu said.

South Korea's Korean Air and Asiana Airlines are already moving to consolidate via a merger brokered with support from Seoul.    © AP

Some players in the region have already taken advantage of the gloomy environment. Australian airline Regional Express Holdings (Rex), a small rural turboprop plane operator, is beefing up its expansion by building a network starting with Sydney and Melbourne in March 2021, leasing former Virgin Australia Boeing 737-800 NG jets and entering into direct competition with Qantas Airways and Virgin.

Virgin's new CEO, Jayne Hrdlicka, former boss of Jetstar Group, in which Qantas holds a stake, expects a fierce battle. "I think [Rex] should expect it's going to be supercompetitive because we're all rebuilding the market [after the coronavirus]," she told CAPA's online event on Dec. 9. "Prices will be very sharp for a long time to ensure that everyone resettles in the marketplace in the way they intend," she said.

Jetstar announced on Dec. 15 it expects to operate more domestic flights in February and March than in any previous year as demand for cheap travel rises.

In India, SpiceJet is set to become the first low-cost airline from the country to launch nonstop flights to the U.K., although a planned launch this month was postponed due to a lockdown announced by the U.K. government. India-U.K. routes were previously quasi-dominated by the two sides' full-service carriers, which offered direct flights, and Middle Eastern players, which drew passengers with low fares.

Hong Kong's Greater Bay Airlines, a startup that is still waiting to receive an air operator's certificate after its application in July, has also started bullish recruitment in October -- shortly before the city's flag carrier, Cathay Pacific Group, announced the retrenchment of nearly a quarter of its 30,000-plus workforce and the shutdown of its subsidiary Cathay Dragon.

And in a further sign of long-term potential, Ascend by Cirium predicts that Asia will lead the world in terms of aircraft deliveries in the next two decades. China appears set to be the biggest single destination for new commercial and passenger aircraft deliveries between 2020 and 2039 with a 22% share, while the rest of Asia combined is set to have a 21% share.

Backed by new entrants, fresh aircraft orders as well as the upcoming reemergence of leisure and middle-class growth, Asian aviation's prosperity may recover again. But "the problem is that there will be a setback for many years," warned Sobie. IATA expects global air travel demand will recover to 2019 levels only in 2024 at the earliest.

"We can see potential financial implications like bankruptcies and consolidations even in a 10-year window," he said. "We are in a difficult decade, not difficult two to three years."

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