New flight path
As Chinese and Indian aviation markets power ahead, Southeast Asia shows signs of slowing after rapid expansion in low-cost travel in recent years.
Southeast Asia's aviation industry has lost some momentum in the past two years but could revive soon, while more growth is shifting to secondary cities in China and India, which analysts say will brighten Asia-Pacific skies over the next decade.
"Liberalisation [in China and India] will continue and Asean open skies will help that process. That's why Asia Pacific is such an exciting place to be around this time," says Peter Harbison, executive chairman of Australia-based Capa - Centre for Aviation.
With spreading networks of low-cost carriers (LCCs) and a greater emphasis on regional routes, India and China represent abundant, untapped opportunities given their massive combined population 2.6 billion and large geographical areas conducive to air travel.
China is expected to overtake the United States as the world's largest passenger market by 2029. India could overtake Britain for third place by 2026, with Indonesia rising to fifth, according to an industry report from the International Air Transport Association (IATA).
China's aviation market grew by an estimated 12.5% last year and India by an even more impressive 16.5%. India has bounced back from a subdued 2014, and is seeing a strong increase in domestic flights. Although China's growth has moderated as economic growth slows, it is still on course to add 230 million passenger journeys between 2014 and 2019.
India, however, is suffering from overcapacity which has triggered fare wars, and few carriers are profitable. The sheer size of the domestic market is keeping the industry aloft, though, and the government hopes big investments in transport infrastructure, including civil aviation, will help make India another engine of growth in Asia.
"India will certainly become a large player in the international marketplace," Mr Harbison said. "India's ridiculous policy of the last few decades, which supposedly has been protecting Air India, actually has done exactly the reverse, harming Air India as a non-competitive carrier," he added, resulting in budget carriers and foreign players taking a larger piece of the pie.
Mr Harbison believes India is ideally positioned to serve as an air travel hub between the rest of Asia and Europe, if its policymakers choose that approach.
"But because it has its own home market which is already a massive opportunity", the country's aviation industry won't need long to catch up with the rest of Asia despite trailing the world by about two decades in terms of liberalisation.
He points to some success stories already, such as the budget carrier IndiGo, which is thriving and profitable in a "brutal" market.
In Southeast Asia, the slowdown appears to be the consequence of too rapid growth over the past decade. Analysts expect that some aircraft orders, placed when travel demand seemed to be rising exponentially, could be deferred or cancelled as a result.
"The LCC penetration rate stabilised in 2015 because of a lot of adjustments," said Brendan Sobie, chief analyst with Capa. "We have seen a slowdown in Southeast Asia, and North Asia continues to grow pretty much at the same rate.
"[Apart from China] the rest of North Asia is a bit more mature from a market standpoint. However, we will see more LCCs penetrating Japan, and a new wave of LCCs penetrating South Korea after the initial wave several years ago, which only scratched the surface and wasn't really a true LCC model."
Last year in Southeast Asia, Mr Sobie noted, was the first in which AirAsia experienced only single-digit growth. Indonesia's Lion Air, which was making headlines for record plane orders just a few years ago, has been slowing down but it has also created a new full-service affiliate, Batik Air, while Singapore-based Tiger Air has actually shrunk in size.
Another troubling issue for Southeast Asia, most notably Thailand and Indonesia, has been failure to meet safety standards and audit requirements, which is hampering further development.
Meanwhile, the Asean Open Sky Agreement, which was supposed to take effect on Jan 1, is off to a slow start. The pact is supposed to allow Asean-based airlines to operate freely from their home country to any city within the 10 member states. So far, though, Indonesia has opened up Jakarta only, the Philippines is keeping Manila off the list, and Laos has yet to open up Vientiane and Luang Prabang.
With intra-Asean air passenger numbers have tripled in the last decade, to an estimated 70 million in 2014, the number of routes has grown by almost 40% to more than 1,500 city pairs. But some analysts believe the region has reached a peak time and the slowdown is part of the natural cycle of growth following saturation.
Despite promising potential given the growing middle class and cheap fuel prices making air travel even more affordable, airlines in the region still find it hard to increase profitability and make less than $10 for each passenger carried.
"The profitability is not evenly distributed," said Tony Tyler, the director general and CEO of IATA. The majority of the industry's profits, $19.2 billion, are generated in North America, where the per-passenger figure is $21. Asia Pacific last year earned about $6.6 billion in profits, equivalent to just over $5 per passenger.
Preliminary results for 2015, he said, show average earnings before interest and tax (EBIT) margins for Southeast Asian carriers at 0.3% -- the lowest among all regions except Africa, where airlines were losing money. By comparison, the Middle East average was 10.8%, Europe 5.9% and North America 13.8%.
Apart from economic setbacks and political instability in some key markets in Southeast Asia, Mr Tyler said that even well-managed airlines have struggled.
First, although fuel prices have fallen, the US dollar has risen by 20% over the past 18 months. Exchange-rate volatility is a huge headache for airlines that have to pay for fuel in dollars.
Second, Asia Pacific accounts for 40% of global air cargo, but the business has never been so tough. Globally, air cargo revenues peaked at $67 billion a few years ago, while IATA forecasts revenues of $50 billion this year. Capacity growth has put huge pressure on yields, too.
Finally, competition in the region is intense with low-cost carriers having a 54% market share -- the highest in the world. At the same time, the "super-connectors" from the Gulf -- Emirates, Etihad and Qatar Airways -- have made huge gains on long-haul routes to Europe, Asia and Australia, threatening the position of traditional regional stalwarts such as Singapore Airlines and Thai Airways International.
Despite all the hurdles, other analysts foresee high growth rates for some Asian markets including Indonesia, the Philippines, Malaysia, Vietnam and Sri Lanka. Longer-term, jet manufacturers and their suppliers also see bright prospects for all of Asia Pacific in terms of aircraft orders.
According to IATA, 34% of global passenger traffic now occurs within Asia Pacific and the figure will grow to 42% by 2034. That works out to an extra 1.8 billion people a year travelling to, from and within the region. The annual average growth rate, 4.9%, will be the highest, tied with the Middle East.
Aviation in Asia Pacific helps sustain 33 million jobs and $700 billion in gross domestic product (GDP). In 20 years' time, the industry is expected to support 70 million jobs and $1.3 trillion in economic activity.
"If we can realise that growth potential, then jobs and economic activity will follow. But that's dependent on the industry having sufficient infrastructure," said IATA's Mr Tyler.
"Asia Pacific has traditionally done well in this area, but as the industry grows, ensuring that infrastructure keeps pace with demand will become a bigger challenge."
IHS World Industry Service forecasts Asia Pacific commercial air transport sales to grow at 9.2% annually in nominal US dollar terms between 2016 and 2020, significantly faster than the global rate of 7.5%. Over the same period, airlines are expected to increase their capital expenditure for fleet modernisation and expansion by an average of 8.1% a year.
Industry profits are forecast to grow at around 9% per year over the same period, bolstered by strong growth in passenger numbers, together with the significant fall in operating costs. Jet fuel accounts for around one-third of total airline input costs.
Rajiv Biswas, Asia Pacific chief economist for IHS, says oil price hedging strategies put in place during 2014 when global crude prices were above $100 per barrel, had delayed the full beneficial impact of lower oil prices for some airlines last year.
However, the impact of past hedging strategies has gradually faded, allowing the full benefit of lower oil prices to increasingly flow through to airline operating profits from 2016 onward, he added.