Asia’s Air Transport Industry Collapses

When they come back, the devil will take the hindmost

By: Murray Hunter

As Asian governments ramp up movement restrictions to curb the spread of Covid-19 throughout their respective countries, one particular international industry looks to be on the brink of a catastrophic collapse. After 11 straight years of healthy profits, the whole air transport industry has gone into almost total shutdown.

Most airlines have mothballed the majority of their fleets, ordered staff on unpaid leave, with remaining staff taking drastic pay cuts. Airports, airport services, duty-free shops, catering services, airport transport services, and car rental companies have also wound-down or even closed their operations in response to the airline industry’s state of suspended animation. 

The carnage is astonishing. The International Air Transport Association expects 2020 global revenue losses for the passenger business of at least US$63 billion up to US$113 billion in a scenario where Covid-19) hits more countries than the 60 originally forecast. That was when airlines were still operating at around 75 percent capacity.

The virus has now spread to 200 countries or territories, an ominous sign that the worst-case scenario is more likely. No estimates are yet available for the impact on cargo operations. Lost revenues were predicted at only US$29.3 billion in February when the virus was largely confined to China.  

All the positive environmental factors driving the airline industry have disappeared almost overnight. City and country restrictions and in many cases total lockdowns have stopped just about all travel. Both international and provincial borders have been closed across the region. For those who can travel, heavy restrictions such as mandatory 14-day isolation have been enacted almost everywhere. Tourist destinations have faced hotel, shopping center, and tourist attraction shutdowns, leaving millions of people across the region at home without work.

This is a total disaster to the air transport industry that is heavily debt geared, running on fine margins due to market competitiveness, with high fixed and operating costs. Aircraft movements are down 95 percent on a couple of weeks ago, and those schedules still running are either operating as emergency services or flights well under full seating capacity. 

However, even with average international air travel growth of 7-8 percent over the past five years, and over 10 percent in the Asian region, driven by increasing consumer affluence, many regional airlines, including national flag carriers were in financial difficulty. Thai Airways, Malaysian Airline System, and Garuda Indonesia,were already either looking at financial bailouts, restructuring or selloff to survive even prior to the crisis. 

In addition, many regional budget airlines are not too far away from the precarious situation the Indian budget Kingfisher Airlines found itself in back in 2012, with high market share, but unable to make a profit. Kingfisher Airlines heads a long list of now-defunct regional airlines, including Rayani Air (2016), Siam Air (2017), Orient Thai Airlines (2018), and R Airlines (2018), among many other small companies. Tassapon Bijleveld, executive chairman of Asia Aviation, the majority shareholder of Thai Air Asia was reported as estimating that the company would only survive three months without a massive cash injection. 

Covid-19 has hit Malaysia hard with the government declaring an extended lockdown and ban on interstate travel until at least the middle of April. According to the IATA, the sector employed 450,000 people and contributed US$5.2 billion to Malaysian GDP in 2018. MAS has already cut its services by 80 percent, and expects to further cut services within the coming day, as it completes rescue missions retrieving citizens from overseas destinations. Around 5,000 employees have gone on three months of unpaid leave.

Air Asia has followed suit and grounded most of its domestic Malaysian services and suspended international flights. Air Asia India has suspended all flights, while Philippine and Thai Air Asia have suspended all international flights. Air Asia Indonesia has drastically cut back on its domestic flights. Air Asia is in a particularly difficult position as its aircraft are leased from a bank consortium. 

Malindo Air has suspended all domestic and international flights, and sent half its fleet to a sister company Batik Air, within the Lion Air Group. Staff have been requested to take initially two weeks unpaid leave which has been extended indefinitely. The small inter-city carrier Firefly is still running limited operations. 

Thai Airways has suspended all international flights except for ones to Cambodia. Thai Smile is continuing to fly a limited schedule on domestic routes. Thai Airways had been looking for ways to restructure and was contemplating leasing, rather than purchasing new aircraft, as old ones were decommissioned, and outsourcing cabin staff. The company received THB11 billion (US$335.7 million) from the government last year to keep it financially afloat. Interestingly, the company is not providing refunds of canceled flights to customers, but providing flight vouchers valid for one year.    

The money-losing Nok Air, owned by the Jurangkool family, who have been looking for a new investor as Thai Airways International has been diluting its investment, has cut back on international flights. Although, recently airline management said Nok Air is still flying domestic routes, its jet fleet appears on Flightradar24 to have ceased operations. Thai Lion Air has suspended all domestic operations. 

Singapore Airlines is down to operating at 4 percent capacity and being financially supported by Singapore’s sovereign fund, Tamasek Holdings Ltd., on behalf of the government. 

Vietjet is still maintaining domestic services and some international flights. The company is offering free “Sky Covid Care” insurance package to USD 8,500 if any passenger becomes infected as the result of a flight on Vietjet. 

Indonesian domestic routes are still being serviced by Garuda, Batik Air, Lion Air, Citilink, My Indo Airlines, Sriwijaya Air, Wings Air, and very limited Air Asia flights. Lion Air, Malindo Air, Batik Air, and Wings Air hold more than 55 percent of the Indonesian domestic air market, and are all underwritten by the Indonesian tycoons Rusdi and Kusnan Kirana. 

Garuda’s management is scandal-ridden, with the former CEO, Ari Askhara charged by Indonesian Customs authorities for attempting to smuggle into Indonesia a Harley Davidson motorcycle after already being in jail over bribes paid by Rolls-Royce to supply the fleet. Garuda has long suffered insolvency problems and had been attempting to restructure company debts. This problem will be amplified, if and when the Covid-19 crisis affects Indonesian domestic traffic. Garuda has also been forced to eliminate the financially lucrative first class from most flights, and drastically scaled back international flights even before the Covid-19 crisis, leasing 16 wide-bodied long-range aircraft to Air India. 

The Ministry of Civil Aviation in India has ordered a halt to all domestic flights on the sub-continent, except for cargo flights. This is hurting already financially stressed budget airlines like GoAir and Spice Jet. The Indian government is assisting Air India refinance debt to keep it afloat. 

Philippine Airlines has canceled all international and domestic flights for a month in response to the lock-down over Metro Manila ordered by Philippine President Duterte. Cebu Pacific is also totally grounded.  

Cathay Pacific’s flights to and from China were already under strain due to Chinese authority’s disdain over some Cathay employees showing support for the pro-democracy movement in Hong Kong. With the advent of the Covid-19, crisis Cathay flights to China have ground to a halt. With the majority of Cathay’s other international flights canceled, most aircraft are now parked at Hong Kong airport. Seventy-five percent of Cathay’s employees are now on unpaid leave. Cathay Pacific and Hong Kong Air just received a HK$2.6 billion (US$335.3 million) rescue package, but are seeking more. 

Airlines in the crisis have been minimizing their fixed costs by seeking reduced airport rental charges and placing staff on unpaid leave. Cash flows are minimized with airlines withholding refunds over flight cancellations. However, the major fixed cost for Asian airlines is the leasing of aircraft fleets, which run up as high as 40-50 percent of total operating costs. 

Airline profitability has always been extremely marginal and susceptible to rising costs such as fuel, or downturns in revenue. Airlines with high debt to equity ratios, and often low cash to debt ratios can very quickly become financially insolvent with even small losses in revenue. The almost complete loss of all revenue in this crisis, if it continues just for a few more weeks, pull down a number of the financially weaker airlines. Another couple of months would wipe out the majority. 

Three basic scenarios can be applied to the situation today, depending on value judgments by respective governments. 

First, the Singapore government views Singapore Airlines as a strategic asset that links the nation with the rest of the world. Singapore Airlines is considered an important trade and logistics tool. As a consequence, the airline must be kept intact in the current form. Singapore will use its sovereign fund, Tamasek Holdings Ltd, which has an equity option.

The Malaysian government views Malaysian Airline System, which has suffered two horrific airplane losses in the past decade, as both a prestige asset and a necessity. The airline was once privatized and controlled by Tajuddin Ramli, a close associate of Daim Zainuddin, only making a profit by selling off assets. 

MAS was repurchased after the airline further deteriorated in private hands through poor management. Today, Malaysian sovereign fund Khazanah holds approximately 70 percent of the company. 

Thus, a second option in bailing out the ailing airline was merging MAS with Air Asia. There have been on-and-off negotiations on the assumption that Air Asia CEO Tony Fernandez and his team could manage the airline better. However, there are questions about any synergy between the two as both serve different market segments, and both airlines have based their operations on different equipment. There are also allegations of corruption against the CEO, in regard to taking kickbacks over the purchase of their aircraft from Airbus Industries. The bottom line on airlines mergers in this environment is the merger of two weak financial entities won’t make a strong financial entity.

The third bailout option is to let what happened in the Australian airline industry repeat itself throughout the region, with the market solving the problem. Australia’s Ansett Airlines was an icon founded in 1935, but went into bankruptcy in 2001. A hurried merger with Air New Zealand didn’t save the company. The Australian government allowed Ansett Australia to cease operations, which allowed new low-cost airline business models to fill the void. 

A free market approach would allow diversion of scarce money to sectors that will need reviving after the crisis. This will mean survival of the fittest, where a number of airlines will survive, while others collapse. For example, Emirates is cashed up and supported by the Dubai government Investment Corporation. Singapore Airlines is strongly backed, as are a number of Chinese airlines. This is not to mention the potential of a number of new start-ups with different business models. 

One of the ironies about the drastic downturn in air traffic is that air cargo flights are largely unaffected. This segment is almost certainly set to grow exponentially as world trade resumes after the crisis. Air Canada is aggressively refocusing on air cargo operations as a means to counter the downturn.

What is almost certain is that industry recovery will be slow as governments will be hesitant to reopen international borders until there is no risk of any further waves of infection. Tourism and business traveling recovery will be very subdued as people will be reluctant to visit public places like airports and sit for hours in confined places with strangers. 

For these reasons, airlines may reconfigure their fleets into combi aircraft that can take added cargo and passengers to make routes profitable.

Governments need to be concerned and even shrewd about bailing out the airlines. The industry by its very nature of being highly geared is fragile. The market is extremely competitive with budget airlines, keeping revenue low on many routes. There has been a long list of bankruptcies. The Covid-19 crisis has already claimed Air Italy in February and Flybe in March. More are almost certain to follow. It may just be better to let the market restructure the air transport industry based on its history. 

Murray Hunter is a development specialist and a longtime Asia Sentinel contributor. He is based in Southeast Asia.