The Wild East: Airlines in South & Southeast Asia

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by Wolf Richter, Wolf Street:

Huge aircraft orders, booming traffic, dozens of upstarts with easy mega-funding, fierce competition, already a big collapse, and allegations of shady business.

As of October 31, Airbus had 6,245 members of the A320neo family on order, of which around 250 had already been delivered. Even taking into account the large discounts which are the norm for large orders, the estimated value for this order book alone was in the region of about US$705 billion. Boeing had 4,783 members of the 737MAX family on order, with 241 already delivered, and an estimated order book value for this family of aircraft alone of US $526 billion.

These are enormous order numbers and enormous amounts of money – over $1 trillion combined – that are unprecedented in the history of aviation. Established airlines from the US, Europe, and Japan all have large orders in place: for example, Ryanair has 135 firm orders for the Boeing 737MAX, while Delta Air Lines has 100 Airbus A321neo on order.

However even these large orders pale compared to those of the true engines of growth behind these colossal order books: airlines from Asia (other than Japan). For example, AirAsia of Malaysia has 404 members of the Airbus A320neo on order while Lion Air of Indonesia has 201 Boeing 737MAX on order. VietJet Air of Vietnam has 200 Boeing 737MAX and 120 Airbus A320neo on order.

Leasing companies working with these customers have equally large orders: the aircraft leasing arm of the State-owned China Development Bank, active on South-East Asian markets such as Malaysia, presently has 78 Boeing 737MAX and 90 Airbus A320neo on order. These are huge capital outlays, and do not include the costs of hiring, training and qualifying crews for commercial operations, scheduled maintenance, insurance etc.

But how exactly do these companies finance their aggressive growth?

According to Boeing, sales to Asian customers are mostly financed through bank loans, which grow to well over 50% of the total when China alone is considered. Capital markets, the main financing instrument for US-based customers and large multinational leasing companies such as AerCap and GECAS, struggle to catch on in Asia and their absolute value has even been declining over the last couple of years.

The Export-Import Bank, which is often touted as the “main driver” of Boeing sales worldwide has been steadily declining in importance for years and now finances just 5% of delivery values worldwide: As a percentage of total sales, Ex-Im credit remains of any importance only in Latin America and Africa, where it helped among other things the recent modernization and expansion of Ethiopian Airlines which would have been impossible to pull off even in the present financial environment.

Air transport throughout Asia has been growing at a tumultuous pace for years now: the number of passengers carried in Indonesia grew from 27.4 million in 2009 to 110.3 million in 2017; over the same time frame, the number of passengers carried in India grew from 64.4 million to 139.8 million, and in Vietnam from 14.4 million to 42.6 million.

Passenger numbers throughout Asia have generally proven to be resilient to the various panics and mini-bursts which followed the 2008 Financial Crisis, leading to predictions such as those made by IATA earlier this year of 355 million domestic passengers in Indonesia alone by 2036, or over three times as many as in 2017.

Large profits are still possible: in Fiscal Year 2018 (the Indian fiscal year starts on April 1st and ends on March 31st), India’s largest domestic airline, IndiGo, reported that after-tax profits rose 35% from a year earlier to about US$317 million.

But like all quickly growing markets it also means that huge sums can be lost as easily: India’s Jet Airways, despite growing capacity and passenger numbers, operating in one of the fastest  growing markets in the world, and chiefly catering to business travelers, went from a profit of about US$7 million in Q3 2017 to a massive operating loss of about US$178 million in Q3 2018.

Even allowing for rising fuel prices, how is it possible to swing from a profit to such a large loss in just one year?

There are presently 61 air travel companies operating internal flights in Indonesia, with about a dozen more awaiting approval by the Directorate General for Civil Aviation to start commercial operations. Several of these companies operate all-freighter services or specialize in charter flights, but most operate scheduled flights between the hundreds of islands which make up Indonesia. This translates into what can only be called ferocious competition.

Apart from Hong Kong and Japan, all Asian countries have followed the same pattern: a steadily growing number of airlines, sometimes with seemingly endless access to credit, adding capacity at blistering pace, and ferociously competing among themselves for market share.

This has been great for air travelers, as fares have been savagely slashed: This Christmas, one can travel from Kuala Lumpur to Bali in business class for less than the equivalent of $100 per leg, all inclusive, and economy seats on internal routes in Indonesia and Malaysia can be bought for as little as $30 per leg, all inclusive.

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