Airlines Demand Supply Analysis in the Asia Pacific

1st March 2017, Asia Pacific - Our Airlines Demand Supply Analysis expects air travel demand and supply growth to be better matched going forward, from supply growth (+10% y/y in 2016) surpassing demand growth (+9% y/y in 2016) to nearly balanced demand-supply growth of 9% in 2017. As per capita income continues to rise in the region, the Asia Pacific airline sector’s air travel demand is expected to grow 8% per annum in 2018 and 2019 and 7% in 2020 and 2021 based on our forecasts. This will outpace the industry’s capacity growth from 2018 onwards which will help to alleviate significant fare pressure in the industry and improve the Asia Pacific airline sector’s profitability over time.

Stock implications: Our Airlines Demand Supply Analysis indicates that we be structurally more positive on Air China, China Eastern, China Southern Airlines and Thailand's Asia Aviation. We would be structurally less positive on Cathay Pacific and Singapore Airlines.

We believe the airlines based in China, India, Thailand, Pakistan, Bangladesh, Macau, Laos and Mongolia have under-ordered aircraft and air travel demand growth is expected to outpace airline capacity growth in the next 5 years. We do expect the airlines in these markets to order more aircraft going forward and we will continue to monitor these developments closely and provide updates going forward. However, the incremental new aircraft orders, unless of a significant scale, are unlikely to result in industry oversupply, particularly if they are scheduled to be delivered in the further out years.

Unless air travel demand growth picks up meaningfully, more aircraft are being retired and/or seat configuration per plane is reduced, the airlines based in Brunei, Nepal, New Zealand, Singapore, Hong Kong and Taiwan may find themselves with too many planes on their hands in our view. This is also the case in Malaysia but some of the aircraft ordered are likely to be deployed by joint venture airlines in India, Indonesia, Japan, Philippines and/or Thailand.

Our Airlines Demand Supply Analysis table below details whether travel demand growth is likely to outpace/balance/falls short of the industry’s supply growth based on our demand-supply model for the top 25 individual aviation markets in the next 5 years. These 25 markets account for 97% of the total capacity operated by the Asia Pacific aviation sector. The green cells represent a more bullish market outlook with higher chance of industry supply shortage. The yellow cells represent a stable market outlook with relatively balanced industry demand and supply growth. The red cells denote a more cautious market outlook with higher risk of industry oversupply.

Our Airlines Demand Supply Analysis also includes a breakdown of the airline capacity contributed by each major aviation market in the Asia Pacific region in the chart below:

Airlines Demand Supply Analysis Market Capacity Share (%) Chart - Asia Pacific region

Airlines Demand Supply Analysis Capacity Share (%) Chart for Asia Pacific

Here is a quick summary of our Airlines Demand Supply Analysis on the top 10 aviation markets that provide 85% of capacity in the Asia Pacific region:

+ China: China alone accounts for 36% of the Asia Pacific aviation sector’s total capacity and is therefore the single, most important driver of the industry’s overall demand-supply growth balance. Following its double-digit capacity growth in the past decade, 2017 will be the last year of double-digit capacity growth, with the Chinese aviation sector’s seat capacity growth decelerating to 10% in 2017 before moderating sharply to 3%-4% per annum from 2018 to 2021. The Chinese airlines are likely to continue to announce new aircraft orders going forward (and we learnt that Boeing has aircraft orders for unidentified customers that could be delivered to the Chinese) and/or lease aircraft from third party lessors outside of China and we will continue to monitor these developments closely. However, we are unlikely to be too concerned as China will need to double its existing aircraft orders in order to keep the industry oversupplied in the coming years. We are also not too concerned about the impact of China’s economic slowdown and rebalancing on air travel demand given its low travel penetration.

+ Japan: Japan is the second largest contributor of the Asia Pacific aviation sector’s total capacity at 9%. We expect the Japanese carriers to grow seat capacity by 4% per year in 2017 and 2018, rising to 6% in 2019 before moderating to 3% per year in 2020 and 2021. However, due to the expected weak demand growth on domestic routes which offsets the strong traffic growth on international routes, we are likely to see some degree of oversupply, unless travel demand growth picks up on its domestic routes or long-haul international routes, the Japanese carriers accelerate the retirement of their old aircraft and/or reduce their seat configuration.

+ India: India has the third largest share of the Asia Pacific aviation sector’s total capacity at 6%, closely followed by Indonesia (6%) and Australia (6%). We expect the Indian carriers to continue to expand aggressively at 12% per annum in the next five years. However, India’s low travel penetration and the lack of an alternative mode of medium/long-haul passenger transport on domestic routes (compared to countries with domestic high speed rail network like China, Japan, Korea) and large proportion of VFR (visiting friends and relatives) traffic, driven by the non-resident Indians will continue to support strong travel demand growth. We therefore expect the industry’s demand-supply growth to be broadly in balance in the next five years.

+ Indonesia: Indonesia is the fourth largest contributor to the Asia Pacific aviation sector’s total capacity at 6%. Following its aggressive double-digit capacity expansion in the past 10 years, we are finally seeing a deceleration of capacity growth to 9% in 2017 and subsequently 5%-6% per annum on average from 2018 to 2021. This is likely to be surpassed by our projected travel demand growth of 9% per annum in the next five years which should result in a more favourable industry demand-supply balance when the cumulative excess capacity is gradually absorbed

+ Australia: Australia has the fifth largest share of the Asia Pacific aviation sector’s total capacity at 6%. We expect the Australian carriers’ capacity growth to be fairly muted at 2% per annum in the next two years which implies a fairly favourable market outlook given our projected travel demand growth of 3% per year. However, supply growth is expected to accelerate to 5% per annum on average from 2019 which will result in some industry overcapacity unless more aircraft are retired or the seat configuration is reduced.

+ Korea: South Korea is the sixth largest contributor to the Asia Pacific aviation sector’s total capacity at 5%. We expect the Korean airline sector’s industry demand and supply growth to be broadly in balance in 2018 to 2019 but the risk of some industry oversupply remains in 2017, 2020 and 2021, unless travel demand growth picks up for its major long-haul markets US and Europe.

+ Thailand: Thailand has the seventh largest share of the Asia Pacific aviation sector’s total capacity at 4%, closely followed by Hong Kong, Singapore and Malaysia. The limited aircraft orders imply a fairly positive market outlook with relatively low overcapacity risk in the next five years, although this would also depend on capacity additions by AirAsia Thailand and NokScoot using aircraft ordered by Malaysia-based AirAsia or Singapore-based Scoot.

+ Hong Kong: Hong Kong is the eighth largest contributor to the Asia Pacific aviation sector’s total capacity at 4%. We believe the risk of industry overcapacity is high in 2017 and 2018 given the substantial capacity growth while travel demand growth has been fairly muted, unless more aircraft are being retired. One mitigating factor is the already high utilization of Hong Kong International Airport which could help cap the industry’s realized seat capacity growth until the new runway is commissioned in 2022 and the Three-Runway System is completed in 2024. 

+ Singapore: Singapore has the ninth largest share of the Asia Pacific aviation sector’s total capacity at 4%. The substantial aircraft orders are likely to imply a capacity growth of 7% in 2017, rising to 11% per annum on average from 2018 to 2021, resulting in continued industry overcapacity in the next five years unless travel demand growth accelerates markedly as Singapore Airlines, SilkAir and Scoot launch services to more new markets, including the reinstatement of non-stop ultra long-haul flights to North America. The impact will be mitigated if the industry accelerates the retirement of the older aircraft and continues to reduce seat configuration. 

+ Malaysia: Malaysia has the tenth largest share of the Asia Pacific aviation sector’s total capacity at 4%. We expect capacity growth to accelerate to 7% in 2017 and 14% per annum capacity growth on average from 2018 to 2021. However, part of this incremental capacity is expected to be deployed by AirAsia’s joint venture airlines in Thailand, Indonesia, Philippines, India, Japan and/or other third-party airlines which should help mitigate the risk of industry oversupply. 

Airlines Demand Supply Analysis Table (Growth Differential) - Asia Pacific regionAsia-Pacific Airlines Demand Supply Analysis Table (Growth Differential)

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