Airlines will quickly lose their pricing power should supply growth continue to exceed demand growth in the coming months, analysts observed in an aviation sector report. — Photo by Chimon Upon
KUCHING: Airlines will quickly lose their pricing power should supply growth continue to exceed demand growth in the coming months, analysts observed in an aviation sector report.
Maybank Investment Bank Bhd (Maybank IB Research) highlighted that in April 2018, supply growth of 6.3 per cent year on year (y-o-y) has exceeded the demand growth of 0.6 per cent y-o-y, in terms of Malaysia air passenger seat supply-demand.
“This is weaker than the first quarter of 2018 (1Q18) performance and should this persist in the coming months, airlines will quickly lose their pricing power, in our view.
“This will make it very challenging for airlines to fully pass on the rise of jet fuel cost to passengers and will reduce the profit margin,” the research firm said.
Maybank IB Research forecast that May performance should be strong due to extra demand from the 14th General Election (GE14).
“However, this impact is limited to one to two weeks before normalising. Furthermore, the Ramadan fasting month falls fully on 2Q18, whereas it was only partial back in 2Q17.
“These factors will make it rather impossible for 2Q18 to replicate the strong 1Q18’s strong performance.”
According to Maybank IB Research, during the beginning of the year, airline management stated that they plan to deploy a net addition of 8 to 13 aircraft in 2018.
“AirAsia Group Bhd (AirAsia) is committed to take nine new aircraft, AirAsia X Bhd (AirAsia X) with three aircraft, Malindo will take in five to 10 aircraft depending on market conditions.
“Malaysia Airlines Bhd (MAB) will maintain the same number of aircraft but will rejuvenate its fleet by removing ten older aircraft and replacing them with ten new ones.
“Firefly has removed nine aircraft from its operating fleet whereby two has been returned to the original owner and the remaining seven will either be sublease to third parties or removed from the fleet altogether.
“As of end of May 2018, the fleet size of operating aircraft was 250, which was a reduction of seven aircraft from the beginning of the year.”
Maybank IB Research highlighted that AirAsia and MAB have deployed one additional aircraft each, whilst Firefly has disposed two aircraft and stored seven aircraft from its fleet. The research firm further highlighted that at this juncture, it seemed that airlines have to rethink their capacity deployment plans and fleet deployment is much more modest than initially planned.
“We believe this is the right decision as it helps to balance out supply-demand and retain high load factors.”
As for the outcome of the GE14, Maybank IB Research said that it has no bearing to passenger demand for air travel. That said, the research firm noted that there are still outstanding policy related matters to be resolved by the new government.
“For example, AirAsia and AirAsia X are still charging the old passenger service charge (PSC) of RM50 per pax instead of the statutory rate of RM73 per pax for international flights outside the Asean region that took effect on January 1, 2018. The management said they have received a concession from the previous government.”
Based on Maybank IB Research’s channel checks, the other airlines have written an objection letter to the Malaysian Aviation Commission (MAVCOM) and Ministry of Transport (MOT) on this differential in PSC charge.
In the research firm’s view, the new government could be a potential positive for Malaysia Airports Holdings Bhd (MAHB).
“We envision that MAHB will be less compelled to provide hefty incentives to airlines going forward as this was an idea mooted by the government agencies.”