28 December 2013
By Leong Hung Yee
The rapidly-expanding aviation sector is expected to remain challenging and competitive in 2014. Nevertheless, industry players and analysts are of the opinion that the outlook will be “positive” next year.
According to industry players, the opening of klia2, which has been delayed numerous times, promises an interesting development as it is expected to boost air traffic. At the same time, all eyes will also be on Malaysia Airlines (MAS) turnaround story.
AirAsia group chief executive officer Tan Sri Tony Fernandes says 2014 would be a big year for the AirAsia group and it would be introducing new duty-free business like a mall in the sky to boost its ancillary income.
He adds that the outlook seems positive for the industry while competition would be more rational next year.
He says there was rising demand for air travel as well as positive economic growth.
“I think if competition is rational, which I believe it will be, the industry’s outlook will be positive. I think 2014 has huge benefits for Malaysia because of AirAsia X’s growth,” he says.
Fernandes says the opening of klia2 will give the industry a massive boost.
“As long as we keep fares low, people will fly. There are 3 billion people in Asia,” he adds.
To reflect the optimism of the aviation industry, the International Air Transport Association (IATA) recently revised its industry outlook upwards for the coming year. It is now predicting that airlines will collectively post a global net profit of US$12.9bil in 2013, surging to US$19.7bil in 2014.
IATA’s projected profit of US$19.7bil for 2014 is a new record for airlines. The upward revision is due to lower jet fuel prices over the forecast period as well as improvements to the industry’s structure and efficiency already visible in quarterly results this year. Passenger markets continue to outperform the cargo business which remains stagnant both on volumes and revenues.
Industry net profit margins, however, remain weak at 1.1% of revenues in 2012, 1.8% in 2013 and 2.6% in 2014. Within this aggregate forecast for the entire industry, performance of individual airlines and regions will vary considerably.
Asia-Pacific airlines are expected to post a US$4.1bil profit in 2014, up from US$3.2bil in 2013.
“Overall, the industry’s fortunes are moving in the right direction. Jet fuel prices remain high, but below their 2012 peak. Passenger demand is expanding in the 5%-6% range – in line with historical trend. Efficiencies gained through mergers and joint ventures are delivering value to both passengers and shareholders. And product innovations are growing ancillary revenues,” according to IATA director-general and CEO Tony Tyler.
MAS group CEO Ahmad Jauhari Yahya says “2013 was an exciting year for us at MAS. New routes to Dubai, Kochi and Darwin were introduced as we look to improve our network reach. We also deployed our flagship A380 aircraft to the Paris and Hong Kong routes. We expect 2014 to also be a year of more exciting projects.”
He adds that “we are constantly monitoring markets and various destinations around the world and exploring their economic viability”.
Malindo Air CEO Chandran Rama Muthy says the airline’s performance the past 10 months has been good and he expects the trend to continue to 2014. Malindo Air will continue pursuing significant domestic and international expansion to capture a greater share of the regional market.”
He adds that the airline has 11 aircraft this year and will increase to 25 next year.
“We will continue pursuing international expansion, sticking to our long-term plans of turning the under-used KLIA into our main transit hub, thus easing the congested Singapore and Bangkok airports. With the launch of our Indian market in the beginning of the year, we are poised to capture a bigger market share. However, we will focus on a good foothold in the South-East Asian market. Domestically, we are now providing more than 60,000 weekly seats, and with more aircraft next year, we are projecting an increase of 60,000 seats,” Chandran adds.
Meanwhile, analysts expect competition in the industry to continue to be intense and not restricted to local airlines.
They note that full-service airlines and low cost carriers are expanding their fleet and seat capacity, making South-East Asia one of the fastest growing aviation markets in the world. Carriers across the region are aggressively expanding their network and capacity ahead of the full implementation of the Asean Open Sky policy in 2015.
AirAsia X Bhd, which was listed on Bursa Malaysia in July, has ordered 25 more A330-300s valued at US$6bil (RM19.55bil). Another notable order of aircraft for 2013 would be Emirates‘ purchase of an additional 50 Airbus A380 superjumbos valued at US$20bil, confirming the continued strong demand for air travel.
RHB Research says competition in 2014 will persist, but will be less severe as Malindo Air opts to take a more conservative expansion strategy, which bodes well for AirAsia and MAS.
“We see value in the former and AirAsia X as their valuations are relatively cheap compared to their regional and global peers,” it says.
RHB Research maintains its overweight call on the sector, citing the Visit Malaysia Year 2014 campaign and klia2 as the theme for higher passenger arrivals.
“The year 2014 is expected to remain competitive as Malindo continues to spread its wings. However, we think Malindo Air will be less aggressive due to its high cost structure.
Its airfare discounts have narrowed while there have been capacity cutbacks on some routes. Furthermore, fleet delivery so far (it currently has six narrow-bodied aircraft) has been below its initial target of 12 aircraft.”
RHB Research says “2013 has been a challenging year for Malaysian carriers” as they embarked on aggressive capacity expansion to boost topline and achieve economies of scale amid heightening competition driven by Malindo Air’s debut. This resulted in yields coming under pressure for MAS and AirAsia, dropping by 12.7% and 5.3% year-to-date respectively.
The entry of Lion Air group’s Malindo Air this year has proven to be impactful in the MAS-AirAsia duopoly domestic air travel market as both airlines have seen their yields affected by the new carrier.
AirAsia executive chairman Datuk Kamarudin Meranun says its yield has been slightly affected due to the intense competition and that it will be coming back with more promotions, cost reductions and new ancillary income streams to defend its turf.
RHB Research says AirAsia’s low-cost model has enabled it to stand strong despite intensifying competition amid a cost-conscious culture.
It says Malaysia Airports Holdings Bhd (MAHB) benefits the most from rising passenger demand as low air fares stimulate air travel. The airport operator reported a 17.3% jump in year-to-date passenger numbers in October, driven by strong growth in both the domestic and international segments.
There’s a new carrier, Flying Fox Airways, an Ipoh-based airline which aims to increase the accessibility of Ipoh.
Flying Fox was supposed to commence operation on Dec 13 but got grounded on the day itself as the Ipoh airport runway was not ready for their aircraft.
Flying Fox complained that it had to cancel all its Ipoh-Medan flights between Dec 13 and June next year because the airport was unable to accommodate the Boeing 737-400 and Airbus A320.
On the opening of klia2, there have been reports suggesting that the contractors may not meet the scheduled completion to commence operations in April 2014.
MAHB has also expressed concern over the slippage in the work schedule of the terminal building, which is being built by the UEMC-Binapuri joint venture.
Nevertheless, UEM Construction Sdn Bhd and Bina Puri Sdn Bhd, the main contractors of the new low-cost terminal, have reaffirmed their commitment to complete work on the project within the stipulated deadline of Jan 31, 2014.