Airlines facing a squeeze on margins, analyst says

BUDGET DEALS::Launching low-cost carriers could be a way for Taiwan to beat tough times in the airline sector, especially after the MOTC eased entry requirements

By Amy Su  /  Staff reporter

Mon, Jul 01, 2013 - Page 13

The airline industry may see increased margin risks on Asian routes over the next two years, after several Asian low-cost airlines ordered large numbers of aircraft too quickly, an analyst at UBS Investment Research said.

With tougher economy-class competition ahead, strengthening service quality in business class and attracting more premium customers would be an effective way for carriers to maintain competitiveness and profitability, UBS director of Asia Transport Research Eric Lin (連沛堃) told reporters on Friday.

“The risk of overcapacity on Asian routes has been gradually rising,” Lin added.

Asian airlines have ordered more than 400 aircraft so far this year, more than the total number of orders for the whole of last year, with budget airlines in Southeast Asia the biggest buyers.

That would lead to supply in Asia for next year and 2015 showing 11 percent and 8 percent growth respectively, Lin said.

However, customer demand from Southeast Asia has risen by an average of 8 percent annually over the past five years, while demand from Northeast Asia only exhibited average growth of 2.2 percent during the same period, Lin said.

Therefore, the difference in supply and demand growth could jeopardize margins on Asian routes over the next two years, after carriers take delivery of planes they ordered last year or this year, Lin said, adding that Taiwanese airlines could face additional risks.

Compared with other major airports in Northeast Asia, Taiwan Taoyuan International Airport is relatively far from its saturation point, which may make it an attractive destination of new routes launched by Southeast Asian budget airlines, impacting the revenue of Taiwanese airlines.

Therefore, focusing on the business-class sector — which has higher entry barriers — could be a positive strategy for full-service carriers in Taiwan, on the back of rising demand from passengers on long-haul routes, he said.

Launching a national low-cost carrier may be an additional way for Taiwan to avoid the negative impact from competition by foreign budget airlines, Lin said.

Last week, the Ministry of Transportation and Communications (MOTC) cut the revenue ceiling for establishing a new airline to NT$6 billion (US$199.2 million), from NT$10 billion, in an effort to attract investors interested in launching a budget airline in Taiwan.

China Airlines Ltd (CAL, 中華航空), the nation’s largest carrier, said it is evaluating the feasibility of launching a low-cost carrier.

However, EVA Airways Corp (EVA, 長榮航空), the nation’s second-largest carrier, has said it will focus on premium customers by upgrading its business class and strengthening service, to offset heavier pressure on economy-class sales.