Tony Fernandes’s decision to ease growth plans at AirAsia Group is a rare display of caution following his expansion across the continent, as the region absorbs some of the largest aircraft orders of the past decade.
After taking 150 planes in 13 years for Malaysia, Thailand and Indonesia, with 350 more in the backlog, the chief executive officer of Asia’s No. 1 discount airline said he’s ready to take a “back seat,” deferring seven deliveries this year and 12 in 2015 to help adapt as rivals flood the market.
While the Asia-Pacific remains the most promising region for travel growth, with a third of Airbus Group NV (AIR) and Boeing Co. orders, a five-year jet-buying frenzy may give way to a more sober approach as carriers adjust to the challenges of intense competition and inadequate infrastructure.
“There’ll need to be some thinning of order books,” said Robert Martin, chief executive officer at BOC Aviation Pte., the fifth-biggest aircraft lessor. “The smart carriers will start doing that early. Airlines will still probably take the planes in the long term, but we won’t see the same annual volume.”
Australia’s Qantas Airways (QAN) Ltd. said yesterday that Singapore-based low-cost arm Jetstar Asia had “suspended” growth, adding that while “major opportunities” remain in the region, “current market circumstances” had forced a halt.
Qantas itself plans to cut 5,000 jobs and sell -- or defer delivery of -- about 50 planes. Shares of the company closed up 0.9 percent at A$1.16 in Sydney, while AirAsia rose 2.8 percent to 2.55 ringgit. in Kuala Lumpur.
Some Asian carriers are reconsidering orders placed with “a little bit of over-enthusiasm” in 2011, 2012 and 2013 as growth plans bump up against scarce landing slots in the major population centers of China, East and Southeast Asia, Steve Udvar-Hazy, chairman and CEO of Air Lease Corp. (AL), said yesterday.
“What some of these airlines are now finding is it’s difficult to sustain 30 to 40 percent growth when you can’t deploy those aircraft in high-density markets,” Udvar-Hazy said. The situation gives Los Angeles-based Air Lease -- which has about 44 percent of its portfolio deployed in Asia -- a chance to buy very young aircraft at bargain prices, he said.
The key trend is unfettered growth in the number of new low-cost entrants in the Asian market, according to Brendan Sobie, chief analyst at CAPA Centre for Aviation in Singapore.
Discount carriers account for 25 percent of total seats in the region, versus 2 percent a decade ago, according to Airbus. Some 10 new airlines may join the already 50 budget airlines operating across the Asia-Pacific now, Sobie said. Overcapacity is also likely to force consolidation as smaller carriers lacking sufficient cash struggle to make the grade.
“Airlines were bullish for good reason, but there were a lot of players putting in a lot of capacity,” Sobie said. “You’ll see smaller expansion this year.”
Another brake is being applied in the form of insufficient infrastructure -- including new terminals, runways and air traffic control systems -- to keep pace with demand.
Construction of a budget terminal at Kuala Lumpur airport has missed the initial March 2012 deadline by two years, with the facility now slated to open May 2. PT Garuda (GIAA) Indonesia last year delayed its first non-stop flight to London Gatwick because the runway in Jakarta wasn’t designed to take the weight of a fully-laden Boeing 777-300ER.
Liberalization of air markets is also likely to be slower than planned. Southeast Asian nations agreed to implement steps by 2015 removing operating restrictions for their airlines, while Indonesia -- the fourth-most populous country -- has expressed concerns that such a move would harm its carriers, and to indicate that it may free up only limited destinations.
For discount carriers in particular, the ability to access new routes via so-called open skies is a key element of their business models, according to Martin at Bank of China-owned BOC.
“My concern is open skies may not appear as quickly as they wished for when they placed the original orders,” he said.
Manufacturers that directed capacity at emerging markets as Western airlines stuttered after the 2008 financial crisis may even find themselves making an about-turn in a year or two, according to Martin. Europe’s emergence from recession and the benefits of consolidation in the U.S. make their old customers better able to absorb excess production, he said.
Some Asian airlines remain bent on growth, with Batik Air, the full-service unit of Indonesia’s Lion Group, still planning to take six Airbus A320s and four Boeing 737s in the second half, with 20 or 30 more aircraft due next year, CEO Achmad Luthfie said yesterday in Singapore.
Aircraft bankers accustomed to the warning signs say the trend will turn more clearly toward retrenchment as capacity increases weigh on yields, a measure of ticket prices, just as operating expenses are structurally increasing.
“The resulting effect is reduced profitability and deferral of deliveries,” said Bertrand Grabowski, managing director for transport at DVB Bank in Frankfurt. “There’s more to come.”