A glut of new capacity in will force Asian airlines to ply some less profitable routes

From Star Online: Business
23rd Jan 2013

SINGAPORE: Low-cost South-East Asian airlines risk jeopardising their margins by buying too many planes too quickly, an influential aviation banker said.

Across the region, discount carriers have placed orders over the past two years for at least US$50bil worth of aircraft, taking new Boeing and Airbus jets to serve dozens of fresh routes and replace their fleets. They are betting the region's expanding middle class will demand more and more frequent air travel for years to come.

Many of those carriers were making the wrong decisions by trying to grow market share without anticipating pressure on profit margins, DVB Bank SE's Bertrand Grabowski, who heads the German bank's aviation and land transport finance divisions, told Reuters in an interview.

“I think individually for most of these airlines, the peak is over and they need to be more frugal in terms of capacity growth, otherwise they are going to kill themselves in terms of profitability,” said Grabowski, who has worked in aviation banking for around three decades.

A glut of new capacity will force airlines to ply some less profitable routes, affecting their margins.

Budget carriers including Air Asia Bhd, privately-held Lion Air, Cebu Air Inc and Tiger Airways Holdings Ltd had 700-plus new planes on order, he said.

”Our opinion at DVB is that those book orders are far too big,” said London-based Grabowski, who leads the bank in deals such as financing several aircraft for Lion Air.

Airbus and Boeing Co have both issued brisk demand forecasts for the next 20 years, predicting US$4 trillion of aircraft deliveries, mainly on the back of emerging markets led by Asia. The bulk of that money will come from banks such as DVB, or leasing companies.

“Everybody thinks that not only the market will grow, which is a legitimate assumption, but my share will also grow,'” Grabowski said. “And by the way, if the guy next door grows, I need to make sure that I have the capacity to fight my market share,'” he said.

AirAsia and Cebu were unable to provide any immediate comment for this report, while Lion Air and Tiger could not be reached for comment.

Lion Air had an advantage over rivals because it already controlled about half of Indonesia's domestic market, which had much further to expand, Grabowski said.

Airlines and their suppliers alike have staked much on air travel in a region where passenger growth outpaces that of developed nations. The world's two largest planemakers believe that about two thirds of new aircraft will be sold in the Asia-Pacific region over the next two decades. - Reuters

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