Asia Travel Re:Set #8 – "Some Asian Airlines Are Going Back 25 Years"
Asia Travel Re:Set #8 – "Some Asian Airlines Are Going Back 25 Years"
What are the immediate priorities for the region's under-pressure carriers?
Hello. Welcome to the midweek edition.
“Now everyone can fly” is not just a brand slogan. It is a mission.
AirAsia, and its CEO Tony Fernandes, have navigated waves of upbeat and downbeat sentiment over the past 19 years, but the South East Asian LCC always sought to uphold its own mantra. To fly more people more often to more places than they ever imagined possible.
AirAsia was founded in Malaysia in 2001 with two planes. Last year, the group’s six operating units flew 83.5 million passengers on 402 routes between 260 destinations.
Unquestionably, it has revolutionised air travel, not just in its South East Asian heartlands, but throughout Asia Pacific.
Today, AirAsia is fighting for survival.
So, too, is the democratisation of leisure travel, both within and beyond Asia.
The prospect of private, highly priced charter flights from selected markets to COVID-safe Bio Bubble destinations is not an appealing one. Tens of millions of people will be priced out of taking a vacation or short break.
Two decades of progress chewed up and spat out in less than a calendar year.
Airline CEOs do not disguise the reality that their fleets, route networks and flight frequencies will be diminished. A slimmer airline future is inevitable.
The primary objective, however, is survival.
Today’s edition is slightly abbreviated (it’s been a frenetic work week…) but don’t miss the Q&A with Mayur (Mac) Patel, OAG Regional Sales Director for JAPAC, who sheds light on how the region’s airlines are preparing to survive, regroup and restructure.
Apologies if you were expecting Part II of The 20 Events That Shaped Travel in 2020 preview – that’s coming up on Sunday!
Thanks for jumping onboard.
Gary
The Midweek ‘Aviation Special’ Itinerary:
Airline Snapshots:
1 Billion Global Seats Lost
IATA: Asia Pacific Losses
Australia
Qatar
AirAsia
Airline Dashboard: Air New Zealand
Interview: Mayur (Mac) Patel, OAG - The State of Play in Asia Pacific Aviation
“We can probably expect that some airlines will look towards a 30%, 40% or even 50% reduction in size.”
Airline Snapshots
Since 20 January, when the spread of the coronavirus began to impact air travel, one billion seats worldwide have now been removed from airline schedules, says OAG. This week, North East Asia is running at -18.2% capacity compared to the week of 20 January, with South East Asia at -59.3% and South Asia -51.2%.
Global air traffic will fall by two-thirds (66%) in 2020 compared to 2019, says IATA in its latest forecast. Asia Pacific, which accounts for 34.6% of global air travel, saw a 95.9% yearly decline in air traffic in August - the steepest contraction among all regions. Load factor was just 34.8%, down a staggering 48.0% versus August 2019.
Australia Doubles Domestic Passengers
Domestic passengers on scheduled flights in Australia increased by 92%, from 380,000 in June to 728,000 in July, despite ongoing state border closures. The figure represents an 86.7% decline from July 2019. However, with the border issues gradually being resolved, the outlook is looking a little brighter ahead of the domestic summer season.
Qatar Airways Gets USD2 Billion Government Aid
The Middle East’s second-largest airline airline will issue 730 million new shares to the Qatari government to help it mitigate soaring losses of around USD1.92 billion, which are being partly - though not wholly - blamed on the pandemic.
Rumours of a Further AirAsia Retrenchment
Malaysian state media reports that job losses are the on way for AirAsia, as the South East Asia-based low-cost carrier seeks to achieve “survivability”. CEO Tony Fernandes counter-punched by telling The Irish Times “AirAsia will survive.”
Airline Dashboard: Air New Zealand
On 29 September, New Zealand’s national carrier revealed its latest financial report, and announced it would not be paying a dividend this financial year. The board also stated it is “currently not able to provide specific 2021 earnings guidance,” but notes that under current modelling scenarios it “will make a lost in 2021.”
NZD900 million: The national carrier has secured a government standby facility that will “enable it to continue operating.”
NZD628 million: The pre-tax loss reported for the 2020 financial year (ending 30 June 2020).
NZD110 million: Portion of the NZD900 million standby facility already drawn down.
50%: The airline has reduced operating costs by one-half (excluding redundancy costs).
30%: Permanent reduction in staff (amounting to more than 4,000 employees) as a result of the pandemic.
All social distance requirements were removed from New Zealand’s domestic flights on 14 September.
An Air New Zealand board statement, said:
“Assuming no further material adverse developments, the Board will complete a capital structure review by early 2021, with a capital raise expected before June 2021.”
Meanwhile, Australian media reported this week that Trans-Tasman Travel Bubble negotiations are progressing:
“New Zealanders would begin travelling to Australia quarantine-free by November, with Sydney likely to be the first port to reopen to Kiwi travellers.”
New Zealand Prime Minister Jacinda Ardern, who is currently campaigning for reelection, says she is “working hard” on a prospective deal, adding:
"What you can see is that we do want to make it work. We want it to be safe. We want everyone to be comfortable with it and know that we are safeguarding our own strategies as we do it.”
Interview: The State of Play in Asia Pacific Aviation
Mayur (Mac) Patel, OAG Regional Sales Director, JAPAC
Earlier this week, I had a long chat with Mac from his Singapore base about how national carriers, LCCs, airports and investors in Asia Pacific are preparing to confront the deepening cumulative impacts of COVID-19.
“Looking forward, what all airlines need to do is cut their cash burn as much as possible over the next six months.”
Are South East Asian airline markets becoming more fragmented?
If you look across Asia Pacific, or specifically in South East Asia, the approaches of governments are different. In Indonesia, Thailand, Malaysia and Singapore, they all have very different outlooks, as well as unique domestic challenges. This makes regional solutions difficult. So far, there’s been no coordinated approach from a specific body like ASEAN. With all the South East Asian carriers, it could have had a bubble of its own given the volumes of travel within the region.
“With all the South East Asian carriers, it could have had a bubble of its own given the volumes of travel within the region.”
Singapore is taking it very cautiously. It was a little bit late closing its borders, and it doesn’t want a repeat to occur. There is enthusiasm within society for travel to help restart the economy, but people have accepted the restrictions we have for now. I don’t see that the fourth quarter will deliver very much progress. Until there’s a vaccine, there will still be strict protocols regarding offices and public spaces like airports, train stations, for example. I think that we’ll still be living under those restrictions into Q1 or Q2 of next year.
Does it come down to a vaccine – is that what will reopen up the airways?
Yes, it is looking that way as faster testing would be a game changer. Throughout the summer, OAG surveyed more than 4,000 global travellers to discover how the pandemic was influencing their decisions to fly, and to identify what airlines, airports, online travel agents and other providers can do to rebuild confidence.
While many consumers remain wary of catching COVID-19 while travelling, the overall fear factor (as it relates to catching the virus while at the airport or flying) is not as prominent as most may think. Nearly a third of travellers have not adjusted their travel habits (and don’t plan to) as a result of the virus.
“There is a lot of talk at the moment of specific travel bubbles within Asia Pacific. For example, some investors are looking to develop a travel bubble between Singapore and the Maldives.”
When it comes to those that are adjusting their habits, there’s a segment of the population that’s still willing to fly, but taking a more conservative approach: 37% will fly if it’s critical, 25% will fly directly and avoid using connecting flights and airports and 10% will fly during off-peak times.
There is a lot of talk at the moment of specific travel bubbles within Asia Pacific, and some organisations are looking at ways to be creative with those. For example, some investors are looking to develop a travel bubble between Singapore and the Maldives. That would involve a single island with an all-inclusive resort and a private beach. That could happen. It would have to use private charter flights, probably through a selected travel agency distributor.
What are the immediate priorities for carriers, and how are they looking at 2021?
At the moment, there are two priorities. The first is survival. That’s basically bringing your cash spend down to a substantially reduced level. Second, is your future demand assumptions, and that will link to how airlines resize their business. We can probably expect that some airlines will look towards a 30%, 40% or even 50% reduction in size.
“Some airlines are probably going back 20 or 25 years in terms of growth, so they will have to readjust their network.”
Some airlines are probably going back 20 or 25 years in terms of growth, so they will have to readjust their network, some of the older and larger aircraft will be retired, and there may be a further reduction in staff numbers. Airlines usually operate though their cash flow, and when that isn’t being generated you have huge costs and need shareholder support. There’s no other way out.
Is cargo playing a more important role?
For some airlines, cargo has definitely been a bright spot. They are creatively looking at new revenue opportunities, and this includes making extra cargo space in addition to the belly of the plane, where cargo is usually transported.
With a lot of aircraft grounded, carriers like Singapore Airlines, Cathay Pacific, Korean Air, China Airlines, EVA Air and Asiana Airlines are working their freighters pretty hard, and in some cases are removing passenger seats in order to accommodate more cargo. This can help to improve revenue at a critical time.
Globally, China looks like the global market leader at the moment?
China is the real bright spot for domestic aviation. All the Chinese airlines are expecting to be profitable in Q3. The government has stimulated demand and is getting people comfortable with travelling again by driving a lot of incentives and fare cuts. From a regulatory perspective, China is ahead in using new technology to detect when people aren’t well, and that is identifiable through people’s phone health apps.
“All the Chinese airlines are expecting to be profitable in Q3.”
Image courtesy of China Southern Airlines]
Qantas is pushing hard to get Australian state borders reopened. How important is that for them?
Qantas is interesting. Going through the crisis, I saw with the share capital raising they did, and I read the prospectus, I was convinced that they could drive domestic business because the home market is a big part of their business. Then, some of the states started closing their borders, so that had a very big impact on Qantas’ outlook. They had to go back to the market to borrow more money. But I think that once the domestic market opens up fully again, Qantas will be in a much stronger position.
When people talk about a domestic-led recovery, you have to put some perspective depending on the size of the country and the restrictions on travelling between parts of that country, as we have seen in Australia. India has a similar situation, if certain states close their borders, it has a big impact on the aviation sector. Whereas major regional aviation markets like Singapore and Hong Kong have no domestic markets, so they rely on passengers travelling from east to west and west to east.
Will the decisions that Singapore Airlines and Cathay Pacific make now influence other carriers?
I think it’s quite clear what these two airlines are doing in terms of reviewing their business, and others will be watching closely. There are two key parts. One is recapitalisation. You need a strong shareholder structure to do that, so for Singapore Airlines its Temasek and for Cathay Pacific you have Swire Pacific (major shareholder), Air China and Qatar Airways.
In both Singapore and Hong Kong, they want to protect the leading air hub status for the good of the overall economy. If you look at their balance sheets after the capital injections, and specifically the debt-equity ratio at end of June 2020, Singapore Airlines stands at 68.0% and Cathay Pacific at 77.0%. They are among the strongest in the Asia Pacific region, where some airlines have over-stretched balance sheet with net debt-equity ratios ranging from 300% to 500%.
That level of balance sheet strength from the likes of Singapore Airlines and Cathay Pacific removes a lot of debt acquisition from the equation.
“Looking forward, what all airlines need to do is cut their cash burn as much as possible over the next six months.”
The second part is operational review. Both airlines have announced they are doing this. Singapore Airlines has said it will shed 4,300 jobs. That’s the first part of the review, then you will see their approach to network resizing, reducing frequencies and future shape and size of the airline. Singapore Airlines will announce their review at the end of December, and Cathay Pacific in early Q4 of this year.
Looking forward, what all airlines need to do is cut their cash burn as much as possible over the next six months, until hopefully a vaccine comes into play. So their business adjustments may be phased, as they won’t want to get caught out if a vaccine delivers positive results for aviation demand.
What about less capitalised airlines?
Well, the low-cost carriers would fall into that category. If we look at AirAsia, for example, they are franchised around the region. Malaysia and Thailand are strong operations, but Philippines, Japan, Indonesia and India will probably struggle. It seems Japan may be suspended indefinitely. All LCCs will be slimmed down as a result of the crisis. The future shape and size will look very, very different.
The weakness for AirAsia Group is that it doesn’t have a major shareholder to step in and deliver the necessary funding. Also, if you look at its operations in Thailand, it relied heavily on foreign tourists who would arrive on other carriers and then buy low fare local flights on AirAsia’s website. Since the borders were shut down, that business has disappeared, and domestic traffic can only deliver so much.
“All LCCs will be slimmed down as a result of the crisis. The future shape and size will look very, very different.”
What about flag carriers that have LCC subsidiaries?
Again, Singapore Airlines and Cathay Pacific provide good examples. Singapore Airlines currently has three airlines, but even before the crisis, SilkAir was due to be integrated into the main carrier. That will leave Singapore Airlines and Scoot. Cathay Pacific is having a similar debate regarding Cathay Dragon and HK Express. How do those airline groups transfer some of the business to low-cost operations in the absence of premium passenger demand?
Already we are seeing businesses across the region being hit hard, budgets have been cut and people have lost their jobs, so there won’t have the same level of discretionary income for air travel.
“All airlines will have to consider very carefully their strategy for intra-regional markets, and how to grow the supply for low-cost carriers.”
The airlines recognise that some of this volume, particularly for intra-regional travel, could transfer to low-cost. Decisions in this regard could form part of a restructure, because the unit cost for LCCs is lower but competition could be keen in future. All the airlines will have to consider very carefully their strategy for intra-regional markets, and how to grow the supply for low-cost carriers.
If big airlines are looking at their LCC models, what will that mean for the airports sector?
It’s an interesting question, because cost reduction progammes have started to kick in. For example, some of the airports have reported a 35-40% reduction in operating costs, lower capex by deferring non-essential projects, improving liquidity and continuing to prepare for a recovery. This is also a good downtime to renovate passenger terminals.
“The next two or three months will provide clearer answers about how large airports, and also cities that have two airports, will set their strategies.”
Having solid liquidity is vital in the current environment, so some airports are borrowing from the banks to prepare for a recovery.
They will also need to upgrade their technology and safety and security protocols for what will be a different airport travel experience in future. The next two or three months will provide clearer answers about how large airports, and also cities that have two airports, will set their strategies.
[Images courtesy of OAG, Qatar Airways 7 Gary Bowerman]
And, that’s a wrap for Issue 8.
Asia Travel Re:Set will return on Sunday.
Until then, you can catch me on Twitter, LinkedIn and The South East Asia Travel Show. Please send ideas, thoughts and feedback to gary@check-in.asia.
Speak soon
Gary