The Indigo order announced this week for 250 Airbus A320neos raises once again questions of whether Indian airlines in particular and the greater Asian region in general are over-ordering airplanes.
We’ve written in the past that we believe Asia and India are dicey markets for which a shakeout is yet to come.
The USA entered deregulation in 1979/80. There was a proliferation of new airlines that started service–by some counts, more than 200. Nearly all failed through a combination of poor business plans, under-capitalization, mergers, economic and travel collapses due to Middle Eastern wars, fuel price hikes and other factors.
Even legacy airlines collapsed. Eastern Airlines, Pan Am, TWA and Braniff–all storied names in US commercial aviation–are gone. (The new Eastern Airlines hopes to start service this year, 23 years after the original one ceased operations.) Northwest Airlines and Western Airlines merged out of existence.
The US airline industry is down to American, Delta and United as the holdovers from a by-gone era. Southwest Airlines now carries more domestic passengers than any of these legacies. Alaska Airlines remains. jetBlue, Spirit Airlines and Frontier Airlines are a new breed of Ultra Low Cost Carriers (ULCC).
In Europe, a shakeout of airlines has occurred but arguably it has hardly gone far enough. During our trip last week to Brazil to visit Embraer, officials pointed out that there are 40 airlines in Europe serving a market similar in size to the USA, where essentially there are 10 carriers.
In Asia and India, the shakeout is only beginning.
Last spring we counted some 70 low cost carriers in Asia. Many of these are subsidiaries of what we call a “mother ship.” AirAsia, for example, created AirAsia-branded LCCs in a number of countries, a requirement of local regulations that demanded a locally owned and based airline. Among the subsidiaries is one in India.
LionAir is following a similar pattern and so are some of the other airlines, such as one in Vietnam.
The rationale, according to Tony Fernandes, CEO of the AirAsia Group, is that Southeast Asia alone has a population of more than 600m–larger than the US and Europe combined. Transportation, because of geography and topography, has to go mostly by airplane or ship, he told us in an interview two years ago. Thus, AirAsia ordered more than 300 A320s. LionAir did one better–more than 500 Boeing 737s and A320s. Garuda Indonesia Airlines announced an order this week for 50 737s, but our market intelligence tells us the carrier was considering an order for 200-300 to compete with LionAir and AirAsia. Common sense prevailed.
AirAsia and a LionAir subsidiary have already deferred airplanes. So has AirAsiaX, the LCC long-haul company which had Airbus A350-900s on order before becoming a launch customer in July for the A330neo. Tigerair and JetStar (Hong Kong) deferred deliveries.
India is a graveyard of airlines. While the country is one of the most populated in the world, residents don’t have a lot of discretionary income to travel. Fares have to be extremely low and profits at Indian carriers are notoriously elusive. Government aviation policies don’t help, nor does government ownership. Air India is a perennial basket case. The LCCs in India have struggled.
Indigo is one exception. But whether it can truly support the kind of orders it has is doubtful. We’ve had a number of airlines in Asia (of which India may be considered by some to be a part) on what we call our Storm Warning Flag list. Indigo, LionAir and AirAsia all are on our list.
Our visit to Embraer last week was before the latest Indigo order. EMB does its own market assessment of the so-called “mainline” carriers (the A320/321 and 737-800/900 operators) and specifically called out these three airlines, plus Norwegian Air, as having well over-ordered. (Norwegian is also on our Storm Warning Flag list.) Embraer also identified the the ASEAN region (Southeast Asia) as over-ordered, the only such region in the world in its analysis. Only 16% of its E-Jet customers are from this region.
Embraer has developed a formula of what it calls the LCC Evolution, in which “sustainable” LCC expansion is diminishing.
In Europe, there were 9.5 times new LCC markets vs canceled markets, with about 1,200 LCC markets. This reflect the beginning of the growth era of LCCs.As markets grew to last year to about 2,700, the ratio of growth to canceled markets shrunk to 1.5.
“Mid-density markets are not presenting demand stimulation to sustain high capacity narrow-body operation,” EMB told us.
In Asia, the LCC Evolution went from 13 in 2004 to two last year. There were just over 100 LCC markets in 2004 and just over 500 today. The data demonstrates, at least to us, the point we made earlier: the population is there, the potential is there but the money is not–yet.
Embraer argues that this slowing in LCC Evolution begs for right-sizing aircraft from today’s mainline jets to the E-Jet, a principal outlined is what it calls the CASM Paradigm. We’ll discuss this in a future column.
The Indigo order for Airbus brings the OEM up to parity, or nearly so, in the YTD battle with Boeing for bragging rights on overall annual orders. But we remain concerned about the quality of the Top 10 narrow-body customers of Airbus vs Boeing. Airbus has historically been willing to take more risks than Boeing in some of these campaigns, and the risk-reward has proved successful. That there have been more than 200 A320 cancellations this year illustrates the risk. But many orders for Airbus and Boeing are so far out, and the two companies so overbook their orders, that cancellations as often as not relieve pressure on the order book and ultimately the production line.