News Backgrounder
Mixed messages emerge in the region’s capacity debate
At last month’s Singapore Air Show, manufacturers’ forecasts of more orders from the region’s airlines contrasted with industry analysts’ concerns about a looming capacity crunch in the Aisa-Pacific.
March 1st 2016
The big plane makers were more than happy at the Singapore Air Show and little wonder. They view the Asia-Pacific as a future cash cow. Read More » Some 12,800 new aircraft worth $2 trillion, or 40% of world demand in the next two decades, is Airbus’s forecast for the region. At Boeing, it is 12,820 jets at list prices of $1.89 trillion.
But their confidence was not shared by everyone. Expectations of rapid growth and world-leading increases in air travel demand are all well and good, but as the show progressed it became clear a new caution about the market is gaining traction.
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| Singapore minister for transport, Khaw Boon Wan: the Association of Southeast Asian Nations (ASEAN) and the European Union are exploring a long-term aviation agreement |
Governments, analysts and some airlines suggested the forecasts would be dented by economic conditions, both in the region and worldwide, as well as aviation’s perpetual spoiler, overcapacity.
Singapore minister for transport, Khaw Boon Wan, warned of a darkening economic outlook that could slow air transport growth when he spoke at the Aviation Leadership Summit in Singapore on the eve of the air show.
Even collapsing oil prices, which on the face of it seem to benefit the region’s airlines, reflected a highly volatile economic environment that could portend a slowdown in travel demand, he said.
International Air Transport Association (IATA) director general and CEO, Tony Tyler, also tempered the manufacturers’ optimism. Airlines in Southeast Asia, he said, may need to push back delivery of aircraft, after a decade of economic growth and optimism about air travel prompted them to order hundreds of jets.
Carriers in the region, that include Indonesia and Malaysia, are confronted with overcapacity and intense competition, he said. “It’s easy to place these orders when times are looking good. I wouldn’t be surprised if some of them are pushed back. I’m sure the planning departments of all the airlines are studying their orders in the context of what the market is telling them.”
Even a senior executive at Boeing hinted at a change in the pattern of airline orders. Dinesh Keskar, Boeing’s senior vice president for sales for the Asia-Pacific and India, said Asian airlines, famed until now for multi-billion-dollar orders, have become more cautious as the global economy slowed and profits became thinner.
“Nobody has come to us and asked for any deferral,” he said, but added the time for big-ticket orders may be over. They could be replaced by smaller buys with shorter replacement cycles.
“You have not seen any substantial orders from this part of the world (recently) and I think there was a time when a 100 plane order was considered the fashion. It is not the case right now,” Keskar said. “From the Boeing point of view, we are in a good spot.
“In terms of the low-cost carrier market, our big customer in Southeast Asia is Lion Air. We have delivered 165 airplanes for them and they continue to take deliveries on time. When we look at airlines like Virgin Australia, Jet Airways or SpiceJet in India all of them are doing fine. In fact, some of them want their airplanes early, but our backlog is over 5,000 airplanes so it is difficult to accelerate anybody’s airplanes.”
Airbus president and chief executive, Fabrice Brégier, who released the company’s regional forecasts at the Singapore show, said traditionally the region has been one of Airbus’ strongest markets.
“In recent years, we have consolidated our position with our modern and efficient products. We expect this trend to continue in the coming years, especially in the wide body market where the A350 XWB is setting new standards in the 300 - 400 seat category,” he said. Airbus expected the Asia-Pacific to continue to lead demand for new aircraft in the next 20 years.
John Leahy, chief operating officer, customers for Airbus, explained the company’s forecast. An annual increase in passenger traffic of 5.6% would contribute to a requirement for some 12,800 new aircraft valued at $2 trillion, he said.
“The Asia-Pacific will continue to experience stronger growth than any other region in the world as more people fly more often,” he said.
Concern about overcapacity, a frequent theme of commentaries in recent years, has accelerated as China’s economy slows down. Despite the Mainland downturn, said IATA’s Tyler, air travel remains robust in the country. “China is seeking to shift the economy away from capital investment and more towards consumer spending, which benefits airlines,” he said.
Across the region, with budget airlines holding 54% of the market - more than twice the global average - fares and profitability have declined and that does pose a threat to the industry, he said.
While its economy is slowing, economic growth in the region is boosting the number of middle class families and enabling them to spend more on air travel. Asia-Pacific traffic is expected to rise nearly 5% a year for the next two decades, and China is poised to become the world’s biggest travel market, said IATA.
Despite his short term concerns, transport minister Wan also predicted a good long-term outlook for aviation, but said that growth raises challenges for air navigation service providers (ANSPs).
“The number of passengers within ASEAN has tripled in the last decade and routes have grown by almost 40%, to more than 1,500 city pairs. The region’s reaction must involve air service liberalization,” he said.
“Airport capacity cannot increase overnight and the volume of airspace for aircraft to operate is finite. We also need to share this volume of airspace with unmanned aerial systems. Safety is an increasing challenge for Air Navigation Service Providers in such an environment.”
Another challenge was the increasing pace of aviation liberalization in the region, Wan said.
The minister confirmed ASEAN was working with partners such as China, the European Union (EU) and others to conclude liberal air service agreements. The EU and ASEAN are exploring a comprehensive air transport agreement, following the EU-ASEAN Aviation Summit at the last show in 2014.
He argued for greater harmonization, information sharing and collaborations between aviation regimes. “Increasingly, governments and industry need to work hand-in-glove. Industry has the technical expertise and governments set the rules of play,” he said.
