Singapore Air Show

CAPA Warns Of Overcapacity Threat

 - February 12, 2012, 9:30 PM

Even as Asia Pacific airlines survived a testing 2011, overcapacity as a result of increased fleet orders is still concerning investors, who are already less willing to finance procurements in the current debt-laden environment. This was the message from Sydney-based thinktank, the Center for Asia Pacific Aviation (CAPA) at the Low Cost Airlines Asia summit here in Singapore last week.

Record aircraft delivery levels in 2012 are taking place with gusto despite the slow growth in traffic. Overall, Asia Pacific airlines have 520 aircraft on firm order for delivery over the next three years, 120 of which are widebodies, with many of the new deliveries additional rather than replacement aircraft. This equates to 15 aircraft deliveries per month, which could increase to a rate more than double this number, based on leased additions, cautioned the CAPA.

“The upshot of the combination of factors is lower load factors and reduced yields…, which in turn implies damage to airlines’ bottom lines in what is now an intensely competitive market, with low-cost airlines, Gulf carriers and Chinese airlines all vying for larger shares of markets that were historically the territory of the region’s flag carriers,” added the CAPA.

Five new airlines were launched in Asia last year. “What worries equity investors is overcapacity and rise in fuel prices. If fuel spikes, yields will fall. As a result of overcapacity, business will be down,” Anup Mysoor, managing director and Asia head of aviation with Citi’s Global Investment Banking division, said at last week’s conference.

Frequencies already are being added feverishly in the north and northeast Asia (China, Japan, Korea, Taiwan) sectors and discounted airfares are becoming the norm. Budget airlines with large orders seem to be aware of the challenges ahead. “Growth will happen here, north to Asia and south to Australia,” said Azran Osman Rani, CEO of budget AirAsia X. “We are reallocating. We need to bring scale. There is difficulty in spreading too thin. Concentration and scale will be key as we double our fleet. For us, it is driving the power of the network. That is why we chose Japan,” added Azran. ANA Group, Japan’s largest airline, and AirAsia have teamed up to form AirAsia Japan, a new budget carrier.

The words of Garry Kingshott, chief executive advisor, Cebu Pacific, might be a sign of things to come. When asked how he viewed competition in light of excessive entrants heading in the same direction, he said: “Who cares? We’re the lowest cost producer. We’ll win the war.”

According to OAG data as at January 27, the total Asia Pacific fleet stands at 5,436 aircraft (plus 75 in “storage”) with a further 3,202 on order.