A recently published report by the Asian Development Bank (ADB) titled “Landscape Study on Southeast Asia’s Aviation Industry: COVID-19 Impact and Post-Pandemic Strategy” looks at the Southeast Asian aviation market before the coronavirus disease (COVID-19) pandemic and the impact of the first 2 years of the pandemic.
Before COVID-19, Southeast Asia had one of the world’s fastest-growing air transport markets, but the region lost over 80% of its passenger traffic during the pandemic. Examining operational, infrastructure, and financing issues within the Southeast Asian aviation network, this publication analyses case studies from select economies in the region and identifies optimal strategies for the aviation industry’s recovery.
Before the coronavirus disease (COVID-19) pandemic, global aviation had been through an extended period of growth in all regions. Following the global financial crisis in 2009, aviation passenger revenues increased from $445 billion in 2010 to $607 billion in 2019, representing an increase of 36%, according to International Civil Aviation Organization (ICAO) data. During the same period, scheduled passenger traffic increased by 66% from 2.708 billion in 2010 to 4.486 billion in 2019, and revenue passenger kilometers increased from 4.93 trillion to 8.69 trillion, an increase of 76%. As reported by ICAO, revenue per kilometer dropped from $0.089 to $0.069 from 2010 to 2019, a decrease of 22% over the period, as average yield and airfares dropped.
In Southeast Asia, passenger traffic during this period more than doubled, reaching 510 million in 2019 and accounting for 11% of global traffic. While the Southeast Asian market grew much faster than the global average, the average profit margin of Southeast Asian airlines significantly lagged behind the global average due to intense competition and overcapacity. In 2019, the average net profit margin of the top 10 leading airlines by revenue in Southeast Asia was only 1.5% while the global average profit margin was 3.8% (based on ICAO data). During this period, there were significant changes in commercial aviation. The A380—which first came into service in 2007—had its end of production announcement in 2019.
In 2020, Boeing announced the end of 747 production after several years of virtually no new orders, marking the end of the era of superjumbos. The production rates for the A380 and 747 were very slow for several years pre-pandemic due to a lack of demand with most of the 747s delivered as freighters rather than passenger aircraft. As the A380 and 747s became less popular, the smaller Boeing 787 (entered service in 2011) and the A350 (entered service in 2015) began dominating long-haul operations. Both these types offer composite fuselages, high fuel efficiency, and extremely long range. Most of the major Southeast Asian flag carriers began operating 787s and/or A350s, resulting in improved efficiencies in medium- and long-haul services. However, the introduction of new generation twin-engine widebody aircraft had a bigger impact on airlines from outside the region, enabling foreign competitors to expand in the Southeast Asian market.
Airlines developing very large connecting hubs grew rapidly. Dubai-based Emirates grew from 27.5 million passengers in the fiscal (FY) year ending March 2010 to 58.6 million in FY ending March 2019. Qatar Airways grew from 14 million passengers in FY ending March 2010 to 29.5 million in FY ending March 2019. And Turkish Airlines grew from 29.1 million passengers in 2010 to 74.3 million in 2019. These airlines built up significant connecting services to Southeast Asia, affecting particularly the route networks that Southeast Asian airlines had operated to Europe and, to a lesser extent, the east coast of North America. At the same time, the major carriers from the People’s Republic of China (PRC)—Air China, China Eastern, China Southern, and Hainan Airlines— started to develop significant trans-Pacific networks and looked to Southeast Asia to help to provide passengers to fill their aircraft on new trans-Pacific routes. Airlines from other North Asian markets (including Hong Kong, China and Taipei,China) also expanded their network in North America and relied heavily on connecting passengers from Southeast Asia to fill these new or additional flights.
Southeast Asian legacy carriers were therefore faced with aggressive competition on both their European and trans-Pacific routes. At the same time, Southeast Asian legacy carriers faced intensifying competition at home from low-cost carriers (LCCs). Very large, very low-cost LCCs emerged—particularly subsidiaries or affiliates of Indonesia-based Lion Group and Malaysia-based AirAsia Group—but also LCCs outside these two groups from the Philippines, Thailand, and Viet Nam. This forced legacy carriers to reduce average airfares on intra-Southeast Asian and other routes within Asia, putting significant pressure on them, but also stimulating growth. The PRC was the main growth market during this period as outbound tourism from the PRC soared, resulting in massive growth in inbound travel to Southeast Asia. Much of this, however, was captured by PRC airlines rather than Southeast Asian carriers.
In air freight, the story was different. Following the global financial crisis, ICAO reported that global freight tonne-kilometers stagnated and only increased by around 20% from 2010 to 2019. Southeast Asian airlines were generally not major players in this market, and treated it as a side product, primarily to fill spare belly hold capacity on passenger flights.
Airline capacity restoration in Southeast Asia picked up significantly in Q2 2022 as the region started recovering from COVID-19 and reopened borders. In June 2022, domestic seat capacity in Southeast Asia reached about 90% of pre-COVID-19 levels, while international seat capacity was at about one-third of pre-COVID-19 levels (compared to June 2019). While most countries in the region quickly lifted their travel restrictions and requirements, airlines and airports only gradually picked up their international capacity. Domestic capacity was restored much quicker and in some Southeast Asian markets was above pre-COVID-19 levels by mid-2022.
The gradual return of international capacity is partly demand driven as it will take time for international travel demand to recover, particularly with restricted travel numbers from the PRC. While there has been strong demand in certain segments of the market (such as outbound leisure) and on certain routes, overall demand for international travel in Southeast Asia is still well below pre-COVID-19 levels. International passenger traffic in Southeast Asia overall may only reach 70% of 2019 levels in Q1 2023, although in certain markets—such as Singapore—traffic will have reached 70% by the end of 2022.
Singapore was initially the fastest recovering international market in Southeast Asia, with international passenger traffic reaching 50% of 2019 levels for the first time in June 2022, 60% in September 2022, and 70% in December 2022. Singapore traffic is expected to reach 80% of 2019 in March 2023. International passenger traffic in Singapore was at 77% of 2019 levels in January 2023 and 78% in February 2023 (based on Changi Airport data). In Thailand, international passenger traffic reached 57% of 2019 levels in January 2023 and 60% in February 2023 (based on Airports of Thailand data). Overall, Southeast Asia had an international recovery rate of nearly 70% in both January and February 2023. Singapore and Thailand are the two largest international markets in Southeast Asia with Singapore recovering faster than the Southeast Asia average and Thailand slower.
International traffic in Asia and the Pacific was at 52% of 2019 levels in January 2023 (based on passenger numbers from the Association of Asia Pacific Airlines incorporating 40 leading Asia and Pacific carriers). Asia overall has recovered much slower than other regions, due primarily to North Asia, where travel restrictions were in place much longer. Globally, international traffic was at 77% of 2019 levels in January 2023 and domestic traffic was at 97% of 2019 levels (based on revenue passenger kilometer data from the International Air Transport Association).
Domestically, Southeast Asia overall has been tracking below the global average. Of the five main domestic markets, Indonesia, Malaysia, and Thailand are below the global average while the Philippines and Viet Nam were above average. Viet Nam was the first domestic market in Southeast Asia to fully recover and is now well above pre-COVID-19 levels. Traffic levels are expected to continue improving in Q2 and the second half of 2023. Overall domestic traffic in Southeast Asia could reach 100% of 2019 levels by the end of 2023 while international traffic could reach 90%. In Q1 2023, scheduled domestic seat capacity for Southeast Asia overall was nearly 90% of 2019 levels while international was at 67% or two-thirds recovered. In Q2 2023, international seat capacity is slated to be about 76% or roughly three-quarters recovered, based on forward airline schedules as of late March 2023.
Read the full report here.