Aviation Strategy Issue No: 67 May 2003 The SARS effect CONTENTS Analysis irst, the good news. Traffic rebounded after the end of the, rel- Fatively short, Iraq war. AEA monitoring shows growth rates of 11% on the North The SARS effect 1-2 Atlantic in late April - tentative evidence for our contention (Aviation Widebody deliveries 2 Strategy, April 2003) that the fundamental links between economic activity and air travel have not been demolished by September 11. Asia’s emerging Now, the bad news, SARS is proving to be a biological (or psy- chological) weapon of mass destruction for the airline industry. low cost carriers 3-5 Asian airlines are regularly reporting annual falls in traffic of 30- 50%, while European and US carriers' traffic is down 20-30% on BA and the LCCs 6 Far East and transpacific routes. Narrowbody deliveries 6 Probably the most dramatic illustration of the SARS effect is the traffic reported by the Japanese airlines for Golden Week, the tra- ditional holiday at the end of April/beginning of May when it seems US Majors: “third major every single Japanese travels somewhere. JAL and ANA each shakeout since deregulation” faced a halving in international passengers, with their load factors 7-10 plummeting to 41%. Rumours have circulated that Cathay Pacific, losing HK$23m Briefing (US$3m) a day, was going to ground its entire fleet. These have subsequently been refuted by Cathay, but the projected losses for Austrian Airlines: Europe’s ideal AEA MEMBERS’ YEAR ON YEAR niche airline? 11-15 % RPK % CHANGE 2003/2002 20 Databases 16-19 10 N.Atlantic Airline traffic and financials 0 Total Aircraft available -10 International Europe -20 Regional trends -30 Orders Middle Far -40 East East/Aus PUBLISHER -50 Gulf War -60 Aviation Economics 2 James House, LG, 0 22/24 Corsham Street 0 London N1 6DR 3 Tel: +44 (0) 20 7490 5215 Jan 06 - 12 Jan 13 - 19 Jan 20 - 26 Dec 30 - Jan 05 Jan 27 - Feb 02 Feb 03 - 09 Feb 10 - 16 Feb 17 - 23 Apr 07 - 13 Apr 14 - 20 Apr 21 - 27 Feb 24 - Mar 02 Mar 31 - Apr 06 Source: AEA Mar 03 - 09 Mar 10 - 16 Mar 17 - 23 Mar 24 - 30 Fax: +44 (0) 20 7490 5218 e-mail: [email protected] www.aviationeconomics.com Aviation Strategy Analysis the year look dis- SCHEDULED WIDEBODY DELIVERIES turbing: according 2003-2004 Total to Deutsche Bank, 747 767 777 A300-600 A330 A340 Deliveries backlog Cathay may make ANA 8 15 23 29 a net loss of JAL 5 16 21 26 Lufthansa 10 10 20 35 betweenChina Airlines 12 6 1 19 26 HK$4.7bn and ILFC 2 8 7 2 19 83 HK$8.5bn this UPS 19 19 64 year compared to Air France 2 9 3 14 31 KLM 3 10 1 14 19 a pre-SARS pre- Qantas 3 11 14 26 diction of a profit of Singapore Airlines 6 7 13 31 Aviation Strategy HK$2.2bn. The EVA 2 10 12 17 is published 11 times a year Swiss 12 12 12 one mitigating fac- Asiana 2 6 3 11 14 by Aviation Economics tor is the ability of Northwest 11 11 32 at the beginning of some of the Asian American 6 2 8 17 the month GECAS 1 4 3 8 16 majors to react Cathay Pacific 3 3 1 7 7 Editor: flexibly to the cri- Air Hong Kong 6 6 6 Keith McMullan sis, quickly cutting Vietnam Airlines 6 6 6 Virgin Atlantic 1 5 6 13 [email protected] routes and laying Air Canada 5 5 5 off employees. China Eastern 5 5 5 Subscription enquiries: Singapore Airlines, Singapore Airlines Cargo 5 5 5 Julian Longin for instance, was Others 2 2 11 0 12 3 30 78 [email protected] Total 37 17 98 25 80 51 308 603 able to require Tel: +44 (0)20 7490 5215 6,000 of its Source: ACAS employees to take unpaid leave. to the manufacturers. Copyright: This means that the date of recovery for Asia/Pacific airlines dominate the order- Aviation Economics All rights reserved the global business has been postponed books for widebodies, which are most affect- once more. Just last month we were predict- ed by the SARs recession. They are to take Aviation Economics ing 3% increase in RPKs this year. Now we well over half the widebodies scheduled for Registered No: 2967706 are reducing that to zero, after factoring in delivery between now and the end of 2004. (England) three months of full SARS impact on Asian The manufacturers until recently were com- domestic and international routes, Europe- forting themselves with the thought that the Registered Office: James House, LG 22/24 Corsham St Far East/Australasia and US Pacific opera- Asian majors unlike their US counterparts London N1 6DR tions. were certain to accept the new aircraft on VAT No: 701780947 The global surplus will then rise to just time - now substantial deferrals or cancella- ISSN 1463-9254 over 16% of supply, which is bad news for tions, as signalled by Cathay and Korean, The opinions expressed in this publica- the lessors, good news for start-ups and are inevitable. tion do not necessarily reflect the opin- expansionist LCCs and another serious blow ions of the editors, publisher or contribu- tors. Every effort is made to ensure that the information contained in this publica- tion is accurate, but no legal reponsibility is accepted for any errors or omissions. The contents of this publication, either in whole or in part, may not be copied, stored or reproduced in any format, print- AVIATION STRATEGY ONLINE ed or electronic, without the written con- sent of the publisher. Subscribers can access Aviation Strategy (including all back numbers) through our website www.aviationeconomics.com. However, you need a personal password - to obtain it email [email protected] May 2003 2 Aviation Strategy Analysis Asia's emerging low cost carriers hree years ago, the suggestion that Low Cost others have largely skipped the domestic market TCarriers (LCCs) would become a meaningful stage and launched directly onto regional routes. force in Asia's aviation market was given little cre- dence. The perceived wisdom was that Asia was LCCs - meaningful players on so different from Europe and the US that the LCC model would struggle. Since then, LCCs have Asia's regional routes? made surprisingly fast gains in several of Asia's domestic markets. Some of those LCCs are now The leading LCCs in Asia are currently Virgin looking to expand onto international routes within Blue, Air Asia and Australian Airlines. How these, Asia. and other LCCs develop, will be influenced by This raises three broad questions: constraints that are peculiar to Asia, and which • If Asia is so different, how did LCCs succeed? mean that the style and pace of development of • Can LCCs transform their domestic market suc- LCCs will vary from one part of Asia to another. cess to become meaningful players on Asia's intra- In the short term, the main focus of the battle regional routes? between LCCs and the incumbent carriers looks to • If they can, what will it mean for incumbents such be in Australasia region. Virgin Blue is already talk- as Cathay Pacific, Qantas and Singapore Airlines? ing of expansion into the Pacific islands, trans- Tasman and New Zealand domestic markets. How have LCCs succeeded if Meanwhile, Qantas and Air New Zealand are seek- ing regulatory approval for their proposed strategic Asia is so different? alliance. In the medium term (3-5 years), Southeast Asia There were no notable LCCs in Asia until the (Singapore Airlines' backyard) appears more entrance of Virgin Blue in late 2000. (Carriers such exposed than Northeast Asia (Cathay Pacific's as Air New Zealand's low cost subsidiary, Freedom backyard). Virgin Blue is talking of Southeast Asian Air, existed three years ago, but were not mean- expansion possibly being 18 months away, ingful players in the broader market; also Freedom Malaysia-based Air Asia is already considering Air's role was probably mostly about dissuading some regional routes and several other small car- new entrants on the trans-Tasman routes.) It was thought that LCCs ASIAN LCC DEVELOPMENTS would be greatly hindered in their development by factors such as • Virgin Blue has won 30% of the Australian domestic market (along longer stage lengths, the need for the way contributing to the demise of Ansett Australia and forcing international aviation rights, flexibility Qantas to change its domestic operations) of the incumbent airlines and the lack • Virgin Blue has announced plans to fly to Pacific Islands such as of secondary airports. These charac- Fiji, with South East Asian destinations also being planned teristics have certainly played a role in • Air Asia has become an important player in the Malaysian domes- shaping the development of LCCs, but tic market, and is considering regional routes they have not stopped them. • Air New Zealand has adopted a low cost strategy for its entire By focusing primarily on domestic domestic operation and is reviewing its international operations markets, LCCs have avoided the • Air Paradise in Bali has begun operating flights between Bali and problems associated with longer stage Australia (and would have begun sooner but for the Bali bombing) lengths and avoided the need for • Other airline start-ups or revamps have emerged, e.g. Cambodia international aviation rights. Some based Mekong Airlines LCCs are now looking to use their • Qantas has established its own low-cost, international subsidiary, domestic market success as a foun- Australian Airlines dation for regional expansion, while May 2003 3 Aviation Strategy Analysis riers (e.g.