KUALA LUMPUR: Airlines’ earnings in Southeast Asia will likely slip further next year, following deterioration in market conditions in the second-half of 2018.
CAPA Centre for Aviation chief analyst and Southeast Asia chief representative Brendan Sobie reckoned that airlines operating in the region would face a quite challenging turbulence in 2019.
He said airlines’ profit margins were diluted over the past few years, even though the region had been the market for rapid growth.
“Airlines have extended their losses in the third quarter this year. This is a discouraging sign as we go into 2019 because of some challenges in the last quarters,” he told NST Business.
Aviation economists and analysts expect the turbulences to continue hurting the industry with the ongoing intense competition from regional peers, high volatility in fuel prices and labour cost as well as stringent regulatory framework.
Of 20 publicly traded airlines based in Southeast Asia, Sobie said only six were profitable for the third-quarter of 2018, while 19 others recorded a decline compared to the same period a year ago.
“Intense competition and a generally price sensitive population made it difficult for airlines to pass on higher fuel costs,” he added.
Although fuel prices had been on a downturn in the fourth quarter this year, Sobie is uncertain whether fuel costs will cost more in 2019.
He certainly said competition would remain fierce, pressuring yields as airlines struggle to find profitable markets for deploying additional aircraft.
He cautioned that the outlook for the airline sector in 2019 was unwelcoming, particularly if fuel prices inched up again, and with intense competition among low-cost carriers (LCCs) in the region.
“There is limited room for further LCC market share gains, given that the region’s’s already high LCC penetration rate,” he said, adding that the region’s fleet boasted over 2,000 aircraft with on-going aircraft deliveries underway.
Sobie said seat capacity in the region had more than doubled over the past decade, from slightly over 200 million seats in 2008 to close about 530 million seats in 2018.
“LCCs have captured most of the attention due to their rapid expansion and massive aircraft orders. LCCs have added nearly 200 million seats this decade, resulting in regional LCC penetration rate increasing from less than 30 per cent in 2008 to nearly 50 per cent in 2018,” he said.
However, Sobie said full-service carriers (FSCs) hac also been expanding rapidly with addition of more than 120 million annual seats in the regional market the past decade.
He cautioned that the region suffered from overcapacity on most routes for both domestic and regional international market.
“Although there are opportunities to launch new secondary routes within the region, such routes are generally low yielding. As growth aircraft are delivered, it is becoming more difficult to find a profitable route.
“Southeast Asian airlines are generally making money on core trunk routes connecting slot-constrained airports but have no choice except to diversify and grow in unprofitable markets as they add aircraft,” he said.
Sobie said Southeast Asian carriers were slated to receive about 200 aircraft in 2019. Of the total, 120 units would be mainly for narrowbody aircraft deliveries and the remaining for the replacement of carriers’ aging fleet.
According to CAPA Fleet Database, the Southeast Asian airline sector crossed the 2,000 aircraft milestone in the second-quarter of 2018, and it is expected that there will be more than 2,050 aircraft in service by this year end.
The report revealed that close to 300 aircraft had been added over the past three years with LCCs accounting for more than half of the growth.
It said there will likely be net growth of 100 aircraft in 2019, a relatively five per cent modest but capacity growth will be much faster due to upgauging.
Sobie said price sensitivity would be the main factor that makes it hard for airlines to pass on any rise in fuel costs.
However he said, some airlines had been desperately passed on the cost to generate some cash.
“The recent decline in fuel prices has provided some relief but the aggressive competition is continuing. This leads to some unbelievably low fares for both short haul and long haul travel,” he said.