While 2020 has been a very challenging year for airlines around the globe, green shoots of recovery are appearing in the Asia-Pacific region

The Association of Asia Pacific Airlines’ (AAPA) assembly of presidents took place as a virtual meeting in Kuala Lumpur, Malaysia in November. The assembly focused on the survival and continuity of air travel in Asia Pacific and according to the information released following the event, some positive signs are appearing. Domestic travel in the Asia Pacific region seems to be recovering well, with traffic in September reaching 67 per cent of what it was a year ago. Domestic capacity has also benefited from the timely relaxation of internal travel restrictions in some countries and is at 80 per cent. Air cargo demand in the region is another positive market development and reached 83 per cent of its 2019 level in September, AAPA says.

However, according to the association, Asia Pacific airlines will account for more than a third of the losses globally – US$29 billion in 2020 – and among all regions, the fall in traffic has been the steepest in Asia Pacific. The region’s airlines are currently carrying less than two million international passengers per month compared to 39 million per month in 2019.

Harmonised measures

Most borders in Asia Pacific have been effectively closed for several months despite having achieved a relatively low infection rate, AAPA says, but developments such as the Singapore-Hong Kong travel bubble are positive steps in the right direction currently being taken by the countries in the region. It will take some time for a vaccine to be widely available and in the meanwhile, governments need to work together with the aviation industry to aid recovery. Highlighting this, Subhas Menon, director general of AAPA commented: ‘’The prolonged closure of borders has had deep and lasting effects on the public and the wider economy. It has now become critical to improve collaboration and cooperation across borders so as to mitigate further damage and jump start recovery efforts.

“Asia Pacific airlines are firmly committed to working with governments and other stakeholders to rebuild passenger confidence and pave the way for the meaningful recovery of travel and tourism as essential services supporting commerce and livelihoods within the region and across the world.’’ 

Regional operations

When it comes to regional aircraft market in Asia Pacific, the market is resilient, says Jean-Pierre Clercin, ATR’s managing director & head of region – Asia Pacific. “An important point to recognise is the context of how this pandemic has affected the global ATR fleet. Data shows that the decline in ATR operations arrived later and was shallower than other aircraft types, and recovery also started earlier in line with evidence that regional aviation is recovering more quickly. Today, nearly two thirds of the ATR fleet is flying.”

One of the reasons underpinning the strong recovery is that within domestic markets and government-built “travel corridors”, there is real requirement for essential connectivity which is supporting the regional segment and several ATR operators are also serving large domestic markets, providing essential links, he notes.

Clercin says that, obviously, there is not a consistent picture throughout Asia Pacific. Some markets faced temporary closures and are starting to come back or will come back soon. Many countries throughout the region have managed Covid well and their domestic operations are beginning to resemble something approaching normal. According to Clercin, in New Zealand, its entire ATR fleet has returned to service. In Korea, Hi Air signed for additional aircraft earlier this year and in Taiwan, Vietnam and Japan, activity has been nearly normal.

Interestingly, ATR has also become the aircraft of choice as operators downsize on certain routes to match demand and as domestic travel becomes even more popular. “Trip cost will become more important and the ATR has a clear advantage over comparable aircraft in this regard. As airlines face a challenging recovery, our operators will increasingly appreciate the economics, flexibility and therefore the resilience of our aircraft”, Clercin notes. “E-commerce continues to boom during the pandemic, so our offer of a purpose-built freighter is arriving at the right time for Asia Pacific market. Our converted freighters already represent a third of the regional cargo fleet and we have utilised our product knowledge to create the perfect regional freighter.”

Looking to the future, ATR remains confident. “Many governments worldwide are looking for a more sustainable aviation industry to emerge from the pandemic. ATR aircraft currently emit up to 40 per cent less CO2 than regional jets, so already represent an eco-responsible way of delivering connectivity.

“We are looking at every possibility to support our operators, but during this crisis we can also see very clearly how important aviation is for society. Governments understand that regional aviation drives economic recovery. Aviation allows people to see friends and families face-to-face. This desire to see our loved ones will not go away and while it remains strong, aviation will have a future”, Clercin concludes.

Asian low-cost carriers: paring back an aggressive approach

Adam Cowburn, managing director, Alton Aviation Consultancy Hong Kong, Bradley Dailey, director, Alton Aviation Consultancy Hong Kong and Joshua Ng, director, Alton Aviation Consultancy Singapore look into how low-cost carriers in Asia are managing their costs

The low-cost business model had seen breakneck growth in Asia during pre-Covid-19 times, with the likes of AirAsia, Scoot, VietJet, NokAir, Lion Air, Jetstar and others pursuing aggressive growth strategies over the course of the past decade. However, the typical approach – that of an ever-expanding order book, paired with regional expansion driven by joint-ventures – will be tempered in the post-Covid era. Despite the near-term shortfall in passenger demand, over the longer-term, aviation in Southeast Asia is expected to grow by seven per cent annually until 2039.”

Regional expansion for Asian low-cost carriers (LCCs) is highly dependent on international travel between countries in the region and has been severely hindered by Covid-19 related travel restrictions. In Asia Pacific, year-over-year international revenue passenger kilometres (RPKs) were down 96.2 per cent in August and 95.8 per cent in September 2020. However, domestic capacity has recovered significantly in comparison with international capacity in some Asian countries, with China down just 2.8 per cent in September versus 2019, and Japan’s year-over-year performance slowly moving up from -70 per cent in August to -60 per cent in September.

Travel bubbles, such as those between Australia and New Zealand and the potential Singapore-Hong Kong travel bubble, offer hope for the near-term development of quarantine-free travel corridors. At Alton Aviation Consultancy, our analysis suggests that the implementation of travel bubbles between the ASEAN Plus six countries would increase the addressable market by 28 per cent when compared to the seat capacity airlines in Asia could serve with these borders closed.

However, a full recovery of the international market is highly dependent on a vaccine in order to curb the impacts of the pandemic. It is expected that global manufacturing and distribution bottlenecks will push widespread access to a vaccine well into 2021, and potentially later in some Asian countries that have yet to purchase sufficient early doses.

Until then, aggressive growth has and will continue to give way to aggressive cost cutting. Asian LCCs have pivoted from rapid fleet growth and expansion to aggressive cutbacks, leveraging various strategies to increase liquidity while minimising cash burn. Sale leasebacks, delivery and lease renegotiations, fleet reductions, layoffs and compensation cutbacks, contract revisions and asset rationalisations are all levers airlines will pull to boost their liquidity and survive till demand recovers.

Expansive orderbooks and a regional network of joint ventures had been two of the key hallmarks of the LCC growth strategy in Asia, and both will now receive close scrutiny as part of that aggressive cost cutting. Asian LCCs alone account for a greater number of aircraft orders than those attributable to all North American airlines combined.

Notably, Airbus has nearly twice the exposure to Asian LCCs as Boeing, which accounted for nearly a quarter of its pre-Covid backlog. Airlines are now engaging in a high volume of sale-leaseback transactions to manage their cashflow, hoping to leverage regional joint ventures to absorb excess capacity. Both will become significantly more difficult post-Covid, as lessors grow more reluctant to pursue sale-leasebacks while joint ventures will continue to struggle in a volatile low-demand environment.