SINGAPORE: India’s Jet Airways was finally grounded on Wednesday (Apr 17) after a long battle against losses and debt.
This came after the release of a stock exchange statement a day earlier, in which the carrier said it faced a “critical liquidity position” and that its operations “have been severely impacted”.
What was previously the country’s second largest airline by market share has seen lessors repossess its aircraft to the point that its original fleet of 115 aircraft has dwindled to a reported five.
With over US$1.2 billion (S$1.63 billion) in debt, Jet Airways’ failure to pay the salaries of pilots and staff over the past few months has also prompted calls for strikes from its various workers’ unions.
Jet Airways, however, is not the only airline in Asia today facing major challenges.
On Monday, South Korea’s second-largest carrier by fleet-size, Asiana Airlines, saw parent company Kumho Asiana Group say that it is willing to sell its entire one-third stake in the debt-ridden airline to keep it afloat.
Like Jet Airways, Asiana Airlines has also been making sustained losses. In March, Asiana also failed to win auditors’ sign-off on its 2018 financial results.
Analysts told CNA that while the direct causes of these airlines’ financial woes are not similar, the operating environment of the Asian market plays a part.
ASIA, A TOUGH OPERATING ENVIRONMENT FOR AIRLINES
Mr Brendan Sobie, chief analyst at CAPA Centre for Aviation singled out the South Asia and Southeast Asia sectors, saying that airlines in these areas are “lagging behind in average profitability” compared to markets such as Europe and North America.
He added that while the North Asia sector “is stable”, Asiana “is an exception”.
“There is intense competition, fierce competition not just between full-service carriers (FSCs) with low-cost carriers (LCCs), but with FSCs competing with each other,” said Mr Sobie. “There is growth in Asia, but the reality is that capacity and the number of competitors are growing faster.”
“Even factoring in that demand is growing, the equilibrium is not there. There’s a lack of capacity discipline,” he added.
Mr Ellis Taylor, Deputy Asia Editor at FlightGlobal said that these affected airlines “made strategic blunders” at some point in the past by failing to react to major changes in the market. One such major change to the industry is the advent of budget airlines.
“In all the major markets, we have seen LCCs take up a strong slice of the market, and few of them (FSCs) have responded to that change in the market, insisting that passengers will continue to pay a premium for the full-service experience, which not all are,” Mr Taylor added.
“In other markets, like Singapore, we’ve seen full-service carriers launch their own low-cost carriers to address the budget market, and while they are not all successful, they have helped to deal with the changes in the market. Asiana is playing catch-up, and Jet acquired JetLite to meet that market, but later moved to shut it down.”
Meanwhile closer to home, Malaysia Airlines continues to operate under a cloud of uncertainty.
The state-owned Oneworld carrier not only missed its target to return to profit in 2018, but warned that losses will continue. Furthermore, Malaysia’s Prime Minister Mahathir Mohamad revealed last month that government is exploring the possibility of selling Malaysia Airlines.
Mr Taylor said that airlines like Jet, Asiana and Malaysia Airlines have also failed to deliver “major cost reforms” that would have boosted their balance sheets in recent years.
“Arguably, all three have tried to cut costs and boost the cash flow from their operations, but often reverted back to how they were operating previously, while delivering little cash benefit at the time they need it most.”
Mr Sobie said that the operating environment was not all to blame for the difficulties faced by these airlines.
“Some of them were already in a weak position and have deep-rooted structural problems,” he added.
OPTIMISM AND TIPS FOR SURVIVAL
The International Air Transport Association (IATA) painted an optimistic picture for the region in the year ahead: Its forecast for 2019 said that Asia-Pacific carriers are expected to report a US$10.4 billion net profit over the 12 months, up from US$9.6 billion in 2018.
“This is a region of diverse markets, some of which are seeing strong growth from new LCC entrants while others are very dependent on outbound cargo from key manufacturing centres,” said the association in a press release.
“Lower fuel costs, low levels of fuel hedging and strong regional economic growth are supporting profitability in 2019 in this region.”
Mr Sobie suggested some ways for airlines to thrive in a difficult environment.
The first of which includes consolidation and mergers in their operations. One such example is that of Singapore Airlines and its regional arm, SilkAir, which will be merged after the latter completes a cabin revamp which will start in 2020. SilkAir’s brand will then be dropped.
The second, Mr Sobie, said, is that airlines need to have “a discipline in capacity”.
The region has seen overcapacity where supply outstrips demand. This causes price wars among airlines that were in a race to the bottom, outdoing each other with the lowest fares possible.
“These issues have been around for the last few years. It swings back and forth. Some years are better than others, but this is a continuing issue (for the Asia market),” added Mr Sobie.
Mr Taylor, on the other hand, suggested that governments can do more to help the aviation sector by implementing more open skies agreements with other countries.
This, he explained would no doubt hasten the failure of some carriers, but it would also allow other airlines to move into the markets of those airlines that fail.
“Over the long-term, that will benefit the stronger airlines and open up more space for new carriers to enter the market, and provide stability for the tourism industry in the region,” added Mr Taylor.
FULL-SERVICE CARRIERS NEED TO DO MORE
In light of Jet Airways’ imminent shutdown of operations, Mr Taylor called on full-service airlines not to “take for granted” that passengers will pay for high airfares for a premium experience.
He said that the world’s top airlines, which are usually FSCs, provide a premium experience to the passenger, whilst constantly cutting costs.
Citing the North American market, Mr Taylor said that large carriers have “started to act more like budget airlines” by charging for baggage, seat assignments and meals on domestic routes.
He also said that FSCs should look to distinguish their brand and product from low-cost carriers to pick up those passengers who are willing to pay a premium.
“In some cases, the launch of new routes, especially ultra-longhauls, can give them an advantage if there is a sufficient premium that can be gained and a lack of competition,” he added.
“Overall, avoiding a situation where there are multiple LCCs competing along with other FSCs, seeking out unique routes that are underpinned by a solid business case, is a good way to stay ahead in what is an increasingly competitive market.”