Saturday, Nov 01, 2014

Starry-eyed budget carriers in Southeast Asia stare at overcapacity

Reuters | Singapore | Posted: February 10, 2014 3:02 am

Low-cost carriers are flying high in Southeast Asia on the back of sharp growth in air travel, but as hundreds of new jets swarm into the region concerns are rising about its ability to absorb the record numbers of planes on order.

Southeast Asian carriers have been devouring as many new airplanes as planemakers can sell, gambling that low fares and rising disposable incomes will drive the region’s 600 million-strong population to keep flying to new destinations.

An aircraft buying binge fuelled by cheap interest rates and backed by Western export credits shows few signs of halting, with Vietnam’s VietJetAir and Thailand’s Nok Air both expected to place orders at the Singapore Airshow this week.

But after years of explosive growth, the region’s budget carriers are now facing fears of overcapacity as deliveries accelerate, airlines expand into each other’s markets and currency weakness threatens to puncture economic growth.

“This is the only region in the world where airlines have more orders than current fleet and there’s more to come,” said Brendan Sobie, chief analyst at industry consultancy CAPA. Airlines in Southeast Asia are estimated to have a fleet of 1,800 by the end of this year, he said, while their order book is set to surpass the 2,000 mark. Asia-Pacific planes on order make up 36 percent of the world total and the figure is rising, says Airbus.

Already last year, available capacity grew faster than passenger demand in countries such as Malaysia, the Philippines and Singapore, putting pressure on yields or the average revenue per passenger for every kilometre flown.

That could extend further in 2014 as carriers in Southeast Asia take delivery of about 230 aircraft worth over $20 billion this year, at a rate close to one new jet every working day.

One such aircraft is a short-haul Boeing 737 now making its way to the region and due to reach Singapore’s SilkAir in time to be shown off at the February 11-16 air show.

The arrival of the airline’s first Boeing symbolises a price war between planemakers generated by Asia’s order boom, after SilkAir ditched its previous supplier Airbus.

One reason many airlines have been ordering at once is that engine improvements now allow significant fuel savings. Ample liquidity provided by money-printing central banks has also made it easier to fund the relatively small upfront payments needed to place headline-grabbing plane orders. But bankers warn the race to buy efficient aircraft in anticipation of high demand could spell trouble for the sector.

“When you run an airline, for reasons which are both economic reasons and prestige, you want a new kit, so you order an aircraft. And if your neighbour orders aircraft, so you order aircraft,” said Bertrand Grabowski who heads German bank DVB’s aviation and land transport finance divisions.

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