For a region in which Boeing projects that narrowbodies will constitute 70 percent of all airplane deliveries over the next 20 years, 2018 might seem like something of an outlier. Dubbed the "year of the widebody" by Boeing senior vice president of sales for Asia-Pacific and India Dinesh Keskar, the coming 11 months will see the introduction of the first Boeing 787-10 with Singapore Airlines, the start of Qantas’s direct 17-hour Perth-to-London service aboard a 787-9, and likely confirmation of orders for twin-aisle jets from customers such as Vietnam Airlines.
The trend appears particularly pronounced in Southeast Asia, where so much narrowbody sales activity has centered recently, and widebody replacement needs remain largely unaddressed. “I would say that much of Southeast Asia will be looking for additional aircraft for widebody replacement,” said Keskar. “Malaysia has publicly announced they want to have 787s; they have not done the deal yet but they have announced an MOU, just like Vietnam. So I would say the theme will be widebodies more than narrowbodies, because people like LionAir, SilkAir, and Air Asia have all bought significant quantities of the 737s/A320s. So I have a feeling they’ll be more focused this year on the widebodies.”
Overall, any concerns about fuel prices and the prospect of tightening airline yields have not dampened Keskar’s outlook, for either the near term or over the next two decades, a period in which the industry’s big OEMs hold a virtually unanimous view that the region will lead the world in traffic and aircraft deliveries.
In Southeast Asia alone, Boeing projects 6.2 percent annual traffic growth over the next 20 years, creating a need for 4,210 new airplanes worth $645 billion. While the manufacturer concedes some of the region’s short-haul markets have begun approaching saturation, Southeast Asian carriers have pursued further growth opportunities in the regional market, as several LCC operators have showed interest in a low-cost, long-haul business model.
For now, apart from Singapore, several emerging economies such as Vietnam, Malaysia, and Indonesia constitute a block of countries that have become significant contributors to Southeast Asia’s growth, while the likes of Myanmar, Cambodia, and Laos stand to become factors as well, but only once they overcome fundamental structural deficits, explained Keskar. Myanmar, in fact, since 2015 has taken six new Boeing 737s and expects another four, marking what Keskar characterized as a positive step toward development into one of the region’s major economies. “It’s a good start for a country we think has rich resources and can outpace Thailand in the next decade or so,” explained the Boeing executive.
Keskar called Singapore the “center of attraction,” citing first delivery “within a couple of months” of the world’s first production 787-10. With low-fare long-haul carrier Scoot flying both 787-8s and 787-9s, the delivery also makes the Singapore group the first to fly all three versions of the Dreamliner. Meanwhile, SIA’s Silkair unit began flying its first 737 Max 8 on October 5 to Kuala Lumpur, followed by Penang and Phuket. Silkair then took the Max to a new destination in Singapore Airlines’s network—Hiroshima, Japan, on October 30.
“The run from Singapore to Hiroshima was quite an important one for two reasons,” said Keskar. “It is demonstrating the range of the Max because that airplane goes for about six-and-a-half hours now...Also it demonstrates the 14 percent fuel efficiency [improvement] of this airplane. And, finally, which has yet to be completely demonstrated, is the maintenance cost advantage of this airplane-engine combination.”
In Vietnam, Boeing stands poised to deliver the first of 100 Max 8-200s to A320neo operator VietJet next year, while Vietnam Airlines continues to weigh a firm order for A350-900s or 777Xs, some of which that airline would like to fly from Hanoi to Los Angeles and possibly New York. Keskar said negotiations toward a firm order have accelerated since mid-2017 and that he hopes to close a deal within the next six months. Boeing remains engaged with the airline and the Vietnamese CAA over efforts to comply with Federal Aviation Administration Category 1 requirements, which would allow Vietnamese airlines access to the U.S. “[The order] is linked to Category 1 approval so they can fly to the U.S.,” said Keskar. “I hope it is this year. I won’t speculate on what the U.S. government will do but we are working with them intensely to work out all the issues that the FAA has brought up.”
In Indonesia, Keskar called Lion Air Boeing’s “star performer.” That airline, whose Malindo Air unit flew the world’s first Max 8 service last May, expects to take its first Max 9 early in the second quarter. It now flies more than 200 Boeing 737NGs and Max jets. “It has been quite a positive development for a country which frankly nobody thought could absorb so many airplanes in the private sector,” said Keskar.
The Boeing v-p noted that low acquisition and lease costs resulting from low interest rates continue to boost demand worldwide. “I know the U.S. Fed said it is going to begin raising [rates] this year, and it remains to be seen what the impact will be. But the airline industry for that last 18 months has enjoyed significant benefits of low interest rates and low oil prices.”
Throughout Keskar’s territory, capacity and demand remain “pretty much” in equilibrium, he said, due largely to the success of what he called the two giants, Air Asia and Lion Air, and the huge populations of the regions they serve. “I think they are carefully managing [capacity]...I think [Indonesia’s] Garuda is not adding a lot of capacity, Sriwijara is doing very little and Lion is doing its planned capacity [management],” said Keskar. “Similarly, Air Asia is doing what I would call the disciplined growth that they have announced, and because of that, I feel we don’t have an imbalance of demand and capacity.”
Still, Keskar acknowledged that Boeing “watches carefully” oil prices, which have risen to above $60 a barrel, a fact that has somewhat darkened the outlook of some analysts. However, Keskar also pointed to strengthening currencies against the U.S. dollar among some Asian economies, particularly in places such as India and Singapore, as a positive counterweight. “At the end of the day, what matters for all these countries is...the exchange rate times the price of the oil in dollars, because that multiplier is what becomes the domestic price,” he explained.
Meanwhile, airlines have managed to maintain yields through increased aircraft utilization, while load factors remain buoyant—rising into the high 80-percent range and in some cases into the low 90s, noted Keskar. Finally, Asian airlines increasingly have emulated the U.S. model in which ancillary income has become a featured element of the revenue stream. “It’s going up in billions now,” he said. “It’s really an amazing contribution to the record profits that the U.S. carriers are doing. So these are the three things that are helping them not to raise the prices just on account of the oil. But it will get there if it starts to hit close to $70 [per barrel].”