Airline capacity growth to moderate from 4Q18, benefitting Asia Pacific airline yields but hurting airport growth

11 Sep 2018, Asia Pacific – The double whammy of jet fuel price spike and weaker local currency are significantly impacting most of the Asia Pacific airlines’ earnings. Only a handful have managed to lift their passenger yields meaningfully to pass on the higher fuel costs to their customers.

Airlines to scale back capacity growth in most Asia Pacific aviation markets from 4Q18

What’s positive going forward is that we expect to see airline capacity growth moderate on both the domestic and international routes in most of the Asia Pacific aviation markets from 4Q18.

This will be positive for the Asia Pacific airlines, enabling them to gain pricing power if travel demand stays firm, mitigating the year-on-year profit margin decline in their upcoming financial results.

The decelerating airline capacity growth will, however, imply slower growth for most of the major airports in the Asia Pacific region, including the listed Chinese airports, Airports of Thailand and MAHB.

Only Philippines, New Zealand and Singapore aviation markets will still see accelerating airline capacity growth 

The key exceptions are the Philippines, New Zealand and Singapore aviation markets where we expect airline capacity growth to accelerate in 4Q18, even higher than the growth pace in Jan-Sep 2018, which could assert more pressure on yields for the airlines based in these countries.

This will be negative for Cebu Air, AirAsia Philippines (part of AirAsia Group), PAL Holdings, Air New Zealand and Singapore Airlines Group. It will, however, be positive for Auckland International Airport, Singapore-based SATS and SIA Engineering, Sydney Airport where we expect the growth in aircraft movements to accelerate in 4Q18.

Capacity expansion still firm on domestic routes in Japan, Malaysia and Vietnam  

The domestic aviation markets in Japan, Malaysia and Vietnam could face pricing pressure as well, given the increased capacity expansion in 4Q18, in our view, negatively impacting AirAsia, ANA Holdings, Japan Airlines, VietJet and Vietnam Airlines’ domestic operations.

Chart: Airline Capacity Growth on Domestic & International Routes to/from Asia Pacific Markets with Publicly Listed Carriers (4Q18 versus 9M18)

Airline Capacity Growth on Domestic & International Routes to:from Asia Pacific Markets with Publicly Listed Carriers (4Q18 versus 9M18)

Overall, we expect the airline capacity growth on routes linked to Asia to moderate from 9% in 9M18 to 8% in 4Q18.The scale-back in airline capacity growth expansion applies to all route regions, with the Asia-Middle East route region likely to see the sharpest deceleration, mainly driven by Etihad’s capacity cuts. Asia-Europe and Asia-North America routes’ capacity growth will also moderate which could ease competitive pressure on long-haul flights operated by the Asian carriers.

Chart: Airline Capacity Growth in Each Route Region Linked to Asia (4Q18 versus 9M18)

Airline Capacity Growth in Each Route Region Linked to Asia (4Q18 versus 9M18)

 

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Independent Research Declaration: Crucial Perspective does not own any position in the equities featured in this report nor have we received any compensation for writing this report.

 

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