1H17: Capacity expansion and cutbacks among airlines in Asia

1st March 2017, Asia - We analyse the Asian airlines’ near term flight schedules to determine which major route regions and airlines may face greater or lower load factor and yield pressure due to their near term capacity plans. Here are our key findings for the capacity expansion and cutbacks among airlines in Asia:

In Asia, which is the largest route region for the Asia Pacific aviation sector, IndiGo, Lion Air and Shandong Airlines have the most aggressive capacity growth plans in 1H17 while Xiamen Airlines, China Eastern Airlines and Cathay Pacific have the most significant planned capacity cutbacks among the major carriers.

On North American routes, which is the second largest route region for the Asia aviation sector, EVA Airways and China Eastern Airlines have the most aggressive planned capacity growth while we see Cathay Pacific, Korean Air and All Nippon Airways trimming their capacity slightly among the major Asia Pacific carriers.

On European routes, the major Asia Pacific carriers are growing capacity moderately (and Air China is even cutting capacity) but the capacity growth is being lifted by the aggressive expansion of other Chinese carriers (with the exception of Air China and China Southern Airlines).

+ ASIA ROUTE REGION

The airlines’ capacity growth appears to be moderating, with major airlines having conservative expansion plans compared to the more aggressive smaller carriers. We estimate that the Asia Pacific airlines’ capacity is growing at a benign pace of 4% y/y on most routes. Domestic India, ASEAN-India and China-Aus/NZ routes have the most aggressive capacity expansion while Taiwan-Japan & Korea, China-HK, Macau & Taiwan, Singapore-Japan & Korea routes are seeing the most significant scale-back in capacity.

The top 10 and top 20 largest carriers in the Asia Pacific-Asia route region, which have a combined market share of around 37% and 55% respectively, are growing capacity by 3% y/y in 1H17.

Among these carriers, IndiGo, Lion Air and Shandong Airlines have the most aggressive capacity growth plans of around 17% y/y on Asian routes in 1H17 while Xiamen Airlines, China Eastern Airlines and Cathay Pacific are trimming capacity by around 16%, 5% and 3% y/y on these routes.

Table: Planned capacity growth in the Asia Pacific - Asia route region

Capacity expansion and cutbacks among airlines in Asia Table: Planned capacity growth in the Asia Pacific - Asia route region

The Asian market (including domestic flights) is the largest route region for the Asia Pacific aviation sector, accounting for 67% of total capacity within Asia Pacific and from Asia Pacific to the rest of the world. We therefore analyse the planned capacity expansion of the major sub-markets in greater detail:

The Chinese domestic market is the largest sub-market, accounting for 31% of the total capacity deployed on Asian routes. The planned capacity growth of the domestic carriers in China remains moderate at 4% y/y in 1H17, implying that the industry demand-supply balance is likely to remain benign in China which is most positive for the largest domestic carrier China Southern Airlines. The next largest sub-market is the Intra-ASEAN route region which accounts for 14% of total capacity. Planned capacity growth within the ASEAN region is expected to be fairly moderate as well, rising 5% y/y in 1H17.

Elsewhere, most of the sub-markets are also growing capacity by 4% y/y in 1H17. We see significant capacity rationalization for the Taiwan-Japan & Korea (-9% y/y), China-HK, Macau & Taiwan (-8% y/y) and Singapore-Japan & Korea (-6%) routes in 1H17. Capacity expansion is most aggressive on China-Australia & New Zealand routes (+19% y/y), domestic routes in India (+15%) and ASEAN-India routes in 1H17. 

+ NORTH AMERICA ROUTE REGION

We expect the industry overcapacity to persist, putting continued pressure on fares. Among the Asian carriers, the capacity expansion of EVA Airways, Chinese carriers (except for Air China), Philippine Airlines and Air New Zealand look too aggressive.

The Transpacific route region is the second largest route region for the Asia Pacific aviation sector (accounting for around 8.7% of total capacity). The 10% capacity growth pace in 2016 on Asia-North America direct flights is expected to continue into 1H17.

The top 10 largest carriers in the Asia Pacific-North America route region, which have a combined market share of around 63%, are growing capacity by 7% y/y in 1H17. We are concerned about EVA Airways and China Eastern Airlines’ aggressive planned capacity growth of 27% and 13% y/y respectively on Asia Pacific-North America routes in 1H17.

This is partially mitigated by the planned capacity rationalization of the other Asian carriers that are dominant on these routes. Air China’s planned capacity on North American routes is expected to be reduced by 7% y/y while Cathay Pacific, Korean Air and All Nippon Airways are trimming their capacity by 1% y/y in 1H17 based on current flight schedules.

Table: Planned capacitiy growth in the Asia Pacific - North America route region

Capacity expansion and cutbacks among airlines in Asia Table: Planned capacitiy growth in the Asia Pacific - North America route region

Outside of the top 10 carriers, the Chinese airlines are growing capacity aggressively in the Asia Pacific-North America route region in 1H17. Notably, Hainan Airlines and China Southern Airlines’ planned capacity growth in the Asia Pacific-North America route region are 64% and 16% y/y respectively which is likely to assert more pressure on their long-haul yields. In addition, Hong Kong Airlines is a new entrant with planned flights from Hong Kong to Vancouver from June 2017.

Both Japanese carriers ANA and JAL are cutting capacity by 1% and 5% y/y in 1H17. Elsewhere in North Asia, Taiwanese carriers EVA Airways and China Airlines are planning to grow capacity by 27% and 7% respectively which looks excessive. Asiana plans to grow capacity by 10% y/y but this will be partially offset by Korean Air’s plans to cut capacity on North American routes by 1%.

For ASEAN, Philippine Airlines has an aggressive growth plan of expanding capacity by 32% y/y which is a concern. For the Indian Subcontinent, Air India plans to grow capacity by 6% y/y. For Southwest Pacific, Qantas plans to cut capacity on North American routes by 6% y/y which will more than offset Virgin Australia’s planned capacity growth of 8% while Air New Zealand plans to expand capacity significantly by 22% y/y in 1H17.

+ EUROPE ROUTE REGION

The top 10 carriers plan to grow their capacity only marginally. It is mainly the smaller Chinese carriers and new entrants including low-cost carrier Scoot that are lifting this route region’s capacity growth.

The Asia Pacific-Europe market is the third largest route region (accounting for 8.6% of total capacity) for the Asia Pacific aviation sector and planned capacity on direct flights is expected to grow 3% in 1H17, slightly ahead of the 2% growth in 2016.

The top 10 largest carriers in the Asia Pacific-Europe route region, which have a combined market share of around 59%, are growing capacity by only 1% y/y in 1H17. Cathay Pacific, Thai Airways and Singapore Airlines are growing capacity on Asia Pacific-Europe routes by 5%, 3% and 2% y/y respectively in 1H17 while Air China appears to be cutting capacity by 6% based on current flight schedules.

Table: Planned capacity growth in the Asia Pacific - Europe route region

Capacity expansion and cutbacks among airlines in Asia Table: Planned capacity growth in the Asia Pacific - Europe route region

Outside of the top 10 carriers, the other Chinese airlines are growing capacity aggressively in the Asia Pacific-Europe route region in 1H17 (with the exception of China Southern Airlines which is trimming capacity by 7% y/y). Notably, China Eastern Airlines and Hainan Airlines’ planned capacity growth in the Asia Pacific-Europe route region are 40% and 32% y/y respectively. This is likely to put further pressure on their long-haul yields.

Both Japanese carriers ANA and JAL are cutting capacity by 8% and 15% y/y in 1H17. Elsewhere in North Asia, Taiwanese carriers EVA Airways and China Airlines are planning to grow capacity by 9% and 4% respectively which looks excessive while Korean carriers Asiana and Korean Air’s planned capacity growth are more moderate at 4% and 1% respectively.

All the ASEAN carriers, except for Malaysia Airlines which plans to cut capacity by 9% y/y, plan to grow capacity in the Asia Pacific-Europe route region and Scoot is the new entrant with planned flights from Singapore to Athens from June 2017. Philippine Airlines has the most aggressive planned capacity growth (+34%), followed by Garuda Indonesia (+11%) and Vietnam Airlines (+10%). For the Indian Subcontinent, capacity plans are generally moderate, with Jet Airways keeping capacity stable y/y.

+ MIDDLE EAST ROUTE REGION

This route region’s capacity growth is moderating but remains at a rapid pace for the major carriers. The Asia Pacific-Middle East market is the fourth largest route region (accounting for 7.7% of total capacity) for the Asia Pacific aviation sector and planned capacity on direct flights is expected to grow 10% in 1H17, moderating from the 12% growth in 2016.

The top 10 largest carriers in the Asia Pacific-Middle East route region, which have a combined market share of around 75% (mainly dominated by Emirates, Qatar and Etihad), are growing capacity by 11% y/y in 1H17, well ahead of the remaining carriers’ 7% capacity growth. Air India + Air India Express, Jet Airways and Garuda Indonesia all have aggressive capacity growth plans of +17%, +15% and +17% y/y respectively on these routes in 1H17.

The attraction of competitive fares, along with young aircraft and cabin products could continue to provide a competitive alternative for long-haul traffic from Asia to/from Europe and North America with a stopover in the Middle East.

Table: Planned capacity growth on the Asia Pacific - Middle East route region

Capacity expansion and cutbacks among airlines in Asia Table: Planned capacity growth on the Asia Pacific - Middle East route region

+ SOUTHWEST PACIFIC

The planned capacity growth on the Southwest Pacific routes is expected to moderate to 5% in 1H17 from 7% growth in 2016. This is the fifth largest route region (accounting for 7.5% of total capacity) for the Asia Pacific aviation sector.

The top 10 largest carriers in the Asia Pacific-Southwest Pacific route region, which have a combined market share of around 83% (mainly dominated by Qantas and Virgin Australia), are growing capacity by 4% y/y in 1H17 but the remaining carriers are more aggressive in their capacity expansion (+8% y/y) on these routes in 1H17. Notably, Hainan Airlines, Hong Kong Airlines and EVA Airways have aggressive capacity growth plans of +920%, +422% and +120% y/y respectively on these routes in 1H17.

Table: Planned capacity growth in the Asia Pacific - Southwest Pacific route region

Capacity expansion and cutbacks among airlines in Asia Table: Planned capacity growth in the Asia Pacific - Southwest Pacific route region

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