Analysis Reports

While only a handful of Asia-Pacific airlines have gone out of business due to COVID-19, there have been some significant consolidation moves via mergers – with more potentially on the horizon.

As the COVID-19 crisis bloomed, many airlines in this region came under severe financial strain. But few actually collapsed, as governments and investors proved willing to prop up struggling airlines that might have otherwise disappeared.

Mergers are likely to be more effective in reducing the number of players in some markets. However, capacity reduction is often minimised when an airline’s operations are absorbed by another airline. And in some cases, consolidation has presented opportunities for new start-ups to emerge.

Consolidation can take a number of forms. It can involve two unrelated or rival airlines, such as Korean Air and Asiana Airlines. It can also occur within airline groups, such as the Cathay Pacific and Singapore Airlines groups. The latter example allows the parent companies to streamline their operations, which will help set them up for the post-pandemic recovery phase.

Airport construction continued in China throughout a pandemic which itself continues there, and by the end of 2021 there were almost 250 operational commercial airports throughout the country.

However, at the vast majority of airports passenger numbers fell further from 2020 levels and those airports recorded financial losses.

Ten new airports opened during the year. The most significant is at Chengdu, the country’s fifth most populous city, and with an airport – Shuangliu – which was already one of the country’s busiest.

The new Tianfu airport could quickly overtake Shuangliu but it isn’t clear how differing business models will be distributed in a city that is earmarked as a ‘central hub’ for the entire country.

Questions are being asked as to how the government can continue to fund expenditure on new airports while it experiences a sharp contraction in revenue, with an infrastructure funding gap of almost USD1 trillion currently – much the same size as the US economic rescue package.

Berlin Airport has a history that it must wish could be cancelled and deleted from the records.

Opening a decade late and right in the middle of the COVID-19 pandemic, it had to mothball large parts of its infrastructure from Day 1.

Now finally seeing passengers return in decent numbers, it is still struggling financially and dependent on loans and state aid.

The question is: is this the right time to consider privatisation? It began life as (an abandoned) private sector project and voices are still heard championing that possibility.

Against it is lack of investor sentiment for the sector; but for it is the presence of a new CEO, for whom airport privatisation is in the DNA.

This regular CAPA report provides a summary of recent aviation sustainability and environment news. This latest issue features:

Southwest Airlines invests in SAFFiRE Renewables for SAF project

Iberia and Repsol complete first long haul flight using biofuel produced from waste in Spain

Embraer to acquire all electricity in Brazil from renewable sources from 2024

ZeroAvia and MHIRJ to provide hydrogen-electric retrofits for regional jets

SITA emphasises need to mitigate impacts of climate change

Turkey's currency seems to have been in decline for ever. The Turkish lira (TRY) has lost 89% of its value against the US dollar (USD) over the past 10 years and halved over the past year. However, Turkish aviation continues to fly in the face of its fall in fortune.

Both Turkish Airlines and Pegasus Airlines have significant revenue and costs in hard currencies. Moreover, the weaker TRY makes Turkey a more competitive tourist destination and inbound bookings to the country have doubled since Jan-2022.

Turkey's weekly seat capacity is now at 97% of 2019 seat capacity levels, which is well above the Europe average of 88% in the week of 30-May-2022. Turkish Airlines and Pegasus Airlines are both above 100% of 2019 capacity.

Although currency decline and inflation have dampened the domestic recovery in recent weeks, Turkey's large internal market has increased Turkish aviation's resilience in the COVID-19 crisis.

Early in the COVID-19 pandemic in 2020 CAPA reported how island and island groups around the world were at risk of a greater impact from it, along with their airports and the tourist visits they usually handle.

As it happens, the Seychelles, in the Indian Ocean and regarded as an upmarket vacation destination, haven’t fared too badly, and tourist numbers are rising again rapidly.

Now the government has dug up a 2009 master plan which had not been implemented, to give it a shake-up appropriate to the changed circumstances of the past two years.

A new international terminal building is the cornerstone of the development, and for the first time the private sector could play a part in financing it.

Europe's aviation capacity recovery from the COVID-19 crisis has reached another new high after three successive weeks of increases in seat numbers as a percentage of the equivalent week of 2019.

Europe's seat capacity has reached 87.5% of 2019 levels in the week commencing 30-May-2022, or in other terms – a shortfall of 12.5% compared with the equivalent week 2019. This is its best performance on this measure since before the crisis.

Europe has moved above Middle East into fourth in the regional ranking, also above Asia Pacific, where capacity is down by -35.7%. Middle East capacity is down by -15.6%, while North America capacity is down by -9.0%, Africa by -5.5%, and at the top of the ranking: Latin America by -4.7%.

There are signs that capacity projections for Europe are becoming more stable, but also that the capacity recovery may level out in 3Q2022 (as a percentage of 2019 levels). Moreover, the passenger traffic recovery is still behind the seat capacity recovery in Europe, but the gap appears to be closing.

To use a common phrase, the jury remains out on whether long haul LCCs have a long term future, and particularly so on trans Atlantic routes. The main representative there, Norwegian, was already in financial difficulties on account of those routes before the pandemic.

Another Norwegian airline, the start-up Norse Atlantic Airways, looked set to fill many of the gaps left by its predecessor and has acquired many aircraft. But they are parked up at Oslo airport while the management sits out the current set of global ‘reasons not to start an airline.’ They could be there for a long time.

One of the first targets for Norse Atlantic was the peripheral New York airport, Stewart International, one which for a short time benefitted Norwegian considerably – and vice versa – but it has decided to postpone operations there until cargo facilities are improved.

This prompts questions about what facilities such airlines will be seeking at secondary airports in the future and what a cost/benefit analysis says about the efficacy of providing those facilities.

Jet fuel prices alone present a formidable challenge to airline profitability in coming months.

But the industry faces more fundamental issues on the demand side, as regrowth stumbles on.

International market recovery is most challenged, and that is particularly so in Asia Pacific as the China powerhouse remains stagnant for most of the remainder of 2022. Full "recovery" to modest 2019 levels is unlikely to be achieved in that region until 2025.

Yet it is not just Asia Pacific where the going will be tough.

Stuttering market regrowth, hampered by fuel costs in the air and at home, means fares must rise significantly to compensate for reduced passenger numbers. That is not an equation that is easily balanced.

Asia Pacific continues to reel from the onslaught of COVID-19.

For months there are hardly any cases in some countries and then there’s an eruption. This makes future planning still very difficult.

Taiwan’s Taoyuan International Airport Corporation has carefully planned out its expansion over the past five years but it has been thrown into disarray by these events. Now the government has stepped in with an offer to support that development to the tune of USD2 billion.

Such largesse, which is almost equivalent to half the cost of the third runway project there, is justified – despite heavy financial losses recently – if only because the upheavals of the past two years, together with what might come in the future, suggest that any major airport in the region could gain far greater significance than it has presently.

All eventualities are on the table.