The Wild East: Airlines in South & Southeast Asia

Huge aircraft orders, booming traffic, dozens of upstarts with easy mega-funding, fierce competition, already a big collapse, and allegations of shady business.

By MC01, a frequent commenter, for WOLF STREET:

As of October 31, Airbus had 6,245 members of the A320neo family on order, of which around 250 had already been delivered. Even taking into account the large discounts which are the norm for large orders, the estimated value for this order book alone was in the region of about US$705 billion. Boeing had 4,783 members of the 737MAX family on order, with 241 already delivered, and an estimated order book value for this family of aircraft alone of US $526 billion.

These are enormous order numbers and enormous amounts of money – over $1 trillion combined – that are unprecedented in the history of aviation. Established airlines from the US, Europe, and Japan all have large orders in place: for example, Ryanair has 135 firm orders for the Boeing 737MAX, while Delta Air Lines has 100 Airbus A321neo on order.

However even these large orders pale compared to those of the true engines of growth behind these colossal order books: airlines from Asia (other than Japan). For example, AirAsia of Malaysia has 404 members of the Airbus A320neo on order while Lion Air of Indonesia has 201 Boeing 737MAX on order. VietJet Air of Vietnam has 200 Boeing 737MAX and 120 Airbus A320neo on order.

Leasing companies working with these customers have equally large orders: the aircraft leasing arm of the State-owned China Development Bank, active on South-East Asian markets such as Malaysia, presently has 78 Boeing 737MAX and 90 Airbus A320neo on order. These are huge capital outlays, and do not include the costs of hiring, training and qualifying crews for commercial operations, scheduled maintenance, insurance etc.

But how exactly do these companies finance their aggressive growth?

According to Boeing, sales to Asian customers are mostly financed through bank loans, which grow to well over 50% of the total when China alone is considered. Capital markets, the main financing instrument for US-based customers and large multinational leasing companies such as AerCap and GECAS, struggle to catch on in Asia and their absolute value has even been declining over the last couple of years.

The Export-Import Bank, which is often touted as the “main driver” of Boeing sales worldwide has been steadily declining in importance for years and now finances just 5% of delivery values worldwide: As a percentage of total sales, Ex-Im credit remains of any importance only in Latin America and Africa, where it helped among other things the recent modernization and expansion of Ethiopian Airlines which would have been impossible to pull off even in the present financial environment.

Air transport throughout Asia has been growing at a tumultuous pace for years now: the number of passengers carried in Indonesia grew from 27.4 million in 2009 to 110.3 million in 2017; over the same time frame, the number of passengers carried in India grew from 64.4 million to 139.8 million, and in Vietnam from 14.4 million to 42.6 million.

Passenger numbers throughout Asia have generally proven to be resilient to the various panics and mini-bursts which followed the 2008 Financial Crisis, leading to predictions such as those made by IATA earlier this year of 355 million domestic passengers in Indonesia alone by 2036, or over three times as many as in 2017.

Large profits are still possible: in Fiscal Year 2018 (the Indian fiscal year starts on April 1st and ends on March 31st), India’s largest domestic airline, IndiGo, reported that after-tax profits rose 35% from a year earlier to about US$317 million.

But like all quickly growing markets it also means that huge sums can be lost as easily: India’s Jet Airways, despite growing capacity and passenger numbers, operating in one of the fastest  growing markets in the world, and chiefly catering to business travelers, went from a profit of about US$7 million in Q3 2017 to a massive operating loss of about US$178 million in Q3 2018.

Even allowing for rising fuel prices, how is it possible to swing from a profit to such a large loss in just one year?

There are presently 61 air travel companies operating internal flights in Indonesia, with about a dozen more awaiting approval by the Directorate General for Civil Aviation to start commercial operations. Several of these companies operate all-freighter services or specialize in charter flights, but most operate scheduled flights between the hundreds of islands which make up Indonesia. This translates into what can only be called ferocious competition.

Apart from Hong Kong and Japan, all Asian countries have followed the same pattern: a steadily growing number of airlines, sometimes with seemingly endless access to credit, adding capacity at blistering pace, and ferociously competing among themselves for market share.

This has been great for air travelers, as fares have been savagely slashed: This Christmas, one can travel from Kuala Lumpur to Bali in business class for less than the equivalent of $100 per leg, all inclusive, and economy seats on internal routes in Indonesia and Malaysia can be bought for as little as $30 per leg, all inclusive.

These low prices are the prime reason why passenger numbers have been growing at such blistering pace. As competition increases the downward pressure on ticket prices increases. Part of the reason Jet Airways experienced such a large loss is because they could pass only a small part of increased fuel costs on to customers: they had to eat higher fuel costs to avoid customers going over to cheaper competitors.

And as it always happens in rapidly growing markets, where fortunes can be lost as quickly as they are made, scandals and gossip abound.

In 2012 Lion Air of Indonesia was “officially sanctioned” by Indonesian authorities, after some of their pilots had been found to be in possession or under the effect of illegal stimulants. Coupled with general concerns about the safety of Indonesian carriers, this led to the EU placing a ban on Lion Air and its subsidiaries Batik Air and Wings Air, which was only lifted in 2016, apparently as the result of political pressure.

Lion Air alone has already been involved in three serious accidents this calendar year (including the tragic Flight 610), and beyond doubt they’ll come under close scrutiny again in the near future.

Kingfisher Airlines – once India’s largest airline and for a time one of the “wonder kids” in the worldwide air transport industry – combined high financial drama with juicy gossip. The brainchild of “Liquor Baron” (United Breweries Group) Vijay Mallya, it impressed everybody who flew with it for its quality and reasonable fares. This came at a cost. In 2013, after less than eight years of operations, Kingfisher folded leaving a consortium of Indian banks in the red for over US$1.35 billion. Vijay Mallya fled India to avoid being arrested for a laundry list of crimes, ranging from tax evasion to issuing dishonored cheques.

And where there’s a lot of money, the allegations of bribery and corruption start flying.

Earlier this year, Malaysian “godfather” – a term used throughout South and Southeast Asia to describe the billionaire entrepreneurs whose conglomerates come to dominate local economies – Tony Fernandes, the driving force behind the Tune Group and AirAsia, became involved in a probe by Indian regulators to determine whether he and his partners bribed government officials in India to obtain permits for AirAsia India, a joint venture between Fernandes’ flagship company and the Tata group.

Asia’s airline industry is a wild world, and will remain so until it “matures” and stabilizes. Opportunities abound, but so do dangers. Those able or lucky enough to weather these dangers will face a completely new world. By MC01, a frequent commenter, for WOLF STREET

Alarming signals are coming from an unlikely place, the market that the industry long touted as an engine of infinite growth. Read…  Aircraft Leasing Bubble in Trouble? 
 

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  45 comments for “The Wild East: Airlines in South & Southeast Asia

  1. Howard Fritz
    Dec 8, 2018 at 8:55 pm

    As any youngster in college can tell you the airline industry is home to fierce rivalry amongst its participants, apparently has a high threat of new entrants, a moderate threat of substitutes (how else can you get across the world), high buyer power because switching amongst the various carriers is easy and high supplier power (how else are you going to build these enormous vessels). As MC01 (who presumably once worked or works in the industry) more remains to be seen as Asia airline industry has not yet matured, but I wonder what that will be like as their situation is much different than ours.

    You see airline industry was once extremely regulated in the United States, it was pricey and glamorous and you would dress up to go. Luckily pops was a lawyer who liked to visit the folks in San Francisco. In fact, prices were all standardized so airlines competed on amenities, you could get a real chicken dinner back in those days! What changed was Carter (whom I still dislike for unrelated reasons) deregulated the industry which led to better prices and more flights but less comfort.

    • MC01
      Dec 9, 2018 at 3:12 am

      The Airline Deregulation Act of 1978 was a great thing, not so much because it made flights in the US cheap but because it removed one of the most corrupt and incompetent Federal agencies in history: the Civil Aeronautics Board (CAB), yet another rotten creation of the Roosevelt Administration.
      Around the end of the 60’s the US Congress became downright alarmed about the CAB and after the Penn Central Railroad collapsed in 1970, resulting in the largest bankruptcy and taxpayer-funded bailout up to date, that alarm turned into panic. But there was still a war being fought in Vietnam, and in 1973 the world stood on the edge of nuclear war and the Nixon Administration started falling to pieces under the weight of its own corruption. Under Ford the airlines most benefiting from the CAB put up a terrific rearguard action through their lobbyists but could only delay the inevitable.

      So many lament that traveling these days is a chore. It is, but not because of the lack of amenities: if you want those your friendly airline will be very happy to sell you a business class ticket. May I suggest Singapore Airlines or Cathay Pacific to be spoilt rotten? One can only wonder what goes on in first class.
      But business tickets are expensive, sometimes radidly so, and even when traveling for work the temptation to save money and buy an economy ticket is just too strong.
      Let’s just say the old saying “you get what you pay for” stands true, especially on aircraft outfitted with new so-called “slimline” seats. Luckily I haven’t traveled on them yet, but I suspect they were invented during the Cold War to torture dissidents and suspected spies. I honestly pity the poor soul who’ll fly Transatlantic flights on a narrowbody strapped for over eight hours to one of those things…

      • wkevinw
        Dec 9, 2018 at 3:14 pm

        Correct. What was regulated was the ticket price, not all the other stuff (maintenance, landing requirements, etc.- which must be highly regulated for obvious reasons). Airlines actually have a lot in common economically with public utilities. They don’t make much money in the aggregate over long periods.

        Having done a lot of long international flying, I now have a high tolerance for sitting for less than about 8 hours in a small seat- however I am not a big person.

        It seems like the airlines might be regulated to provide a larger seat; based on some kind of statistical range of sizes of passengers. The cost of a business class vs. economy seat is hundreds of percent, so there would seem to be room (pun intended) for a more intermediate size and price. It may have to be mandated by government, unfortunately.

      • EcuadorExpat
        Dec 10, 2018 at 11:28 am

        In a nutshell, Americans simply cannot afford quality any more. And this goes from toasters to vehicles to homes where door and bathroom hardware has been engineered to a 7 year life, the average time of home ownership.

      • char
        Dec 10, 2018 at 6:18 pm

        How does the price of business class now compare with economy class back than?

        • MC01
          Dec 11, 2018 at 3:00 am

          Relative to economy, business has got cheaper while first has become much more expensive.

        • char
          Dec 11, 2018 at 7:20 pm

          The price of an airline ticket has gone done so much so the question is more is a business class ticket now cheaper than an economy ticket back then.

  2. AV8R
    Dec 8, 2018 at 9:22 pm

    These are the outfits that want access to the US with 5th Freedom rights. Flagged in one country, sourced for pilots in another, sourced for labor in the country of operation by yet another, managed by the same wolves leading the sheep to slaughter.

    But you’ll get a really really really cheap ticket.

    • MC01
      Dec 9, 2018 at 3:25 am

      I think what you are referring to is the Ninth Freedom: the right to fly within a foreign country without continuing to one’s own country. It’s the basis of low-cost carriers inside the EU: see Ryanair, an airline registered in Ireland (with a growing subsidiary in Poland), flying between two locations in Spain.

      Fifth Freedom is the right to fly between two foreign countries on a flight originating or ending in one’s own country. This is a thorny issue at the moment to say the least because it’s extremely abused and I am very tempted to write a short piece about it in the future.

      • AV8R
        Dec 9, 2018 at 2:26 pm

        I meant 5th. Subsequent “Freedoms” are only combinations of the primary 5.

        “The fifth freedom allows an airline to carry revenue traffic between foreign countries as a part of services connecting the airline’s own country. It is the right to carry passengers from one’s own country to a second country, and from that country to a third country (and so on)”. – Wikipedia

  3. J.M.Keynes
    Dec 8, 2018 at 9:51 pm

    – And are the workers of those low cost airlines being paid the same low wages as in the US and Europe ?
    – I heard some of those airline workers say “I am a slave with a tie”.

  4. 2banana
    Dec 8, 2018 at 11:24 pm

    There is an old adage in aviation circles: if you want to make a small fortune in aviation, start with a big one.

  5. Paulo
    Dec 9, 2018 at 12:05 am

    MC01,

    With these orders, do you know how much earnest money is laid down to take a place in line? Or, is it all pie in the sky? (Sorry, couldn’t resist).

    These low-cost upstart airlines (thanks to dereg) pop up and fail quite often. A new one in Canada, Flair Air will have flight attendents walk out due to the company trying to impose a two tier wage system. The company syas they cannot afford to pay the same wage due to selling low cost tickets.

    Now, how safe does that make you feel about maintenance and training when a company cannot afford to pay attendents?

    Ticket prices will have to rise in order to defuse and survive, and if that happens then there is no reason for Lair Air’s existence as Westjet and Air Canada service Canada quite nicely. If they don’t fly they won’t need their leased jets.

    • Paulo
      Dec 9, 2018 at 12:06 am

      Excuse my typos…time for bed…long day.

    • MC01
      Dec 9, 2018 at 4:03 am

      Despite being flooded with orders, both Airbus and Boeing have empty delivery slots for every calendar year from 2019 to 2022.
      These delivery slots are usually offered to potential customers to sweeten a large deal: for example Airbus clinched the maxi-contract with Delta Airlines back in 2014 because Airbus guaranteed them (on pain of financial compensation) the delivery of at least 10 A350’s by the end of 2018, aircraft Delta needed desperately for Pacific routes. Boeing could not guarantee a similar number of 777’s over the same time frame and the 787-10 was still four years away from commercial operations.
      Airbus has also been known to give these early delivery slots to extra-EU customers who pay part or all of their orders in euro (Vietnam Airlines, Air China etc) and often airlines will trade delivery slots among themselves: this is a common way to raise quick cash.

      From what I know there’s no fixed going rate for a delivery slot and all aircraft manufacturers and most airlines are notoriously cagey when it comes to how the delivery schedule is actually determined: right now there are two Vietnam Airlines A350’s being fitted together at Toulouse (one in SkyTeam livery), a very unusual arrangement as far as widebodies are concerned and I’d love to learn what went on behind the scenes.

  6. Iamafan
    Dec 9, 2018 at 5:52 am

    Asia’s geography means air travel. There isn’t any other way to get around between key cities.
    It also boasts some of the most travelled pairs. Tokyo – Sapporo and Seoul – Jeju are just two of them.

    I fly to Asia quite often. I used to be a Cathay elite and moved to flying on Korean Air and Japanese carriers JAL and ANA. I believe they still know and practice good service while the others don’t. That’s only my opinion and my money goes to paying their fares.

    Full disclosure, I like Japan and enjoy visiting Hokkaido area. Very nice and peaceful serenity.
    Unfortunately, I hate Japanese style QQE. It’s economically insane.

  7. marc
    Dec 9, 2018 at 6:16 am

    Major airline this week: 24hrs in the air from Europe to Asia (R/T) for $2300. Business class.
    Cheap.
    Captain makes 300k/year, senior Flight attendant 70k.
    We certainly could get a better deal if they outsourced the personnel and/or used an asian pilot/flight attendants.
    Airplane, gas, food, insurance are obviously the same.
    Never understood why they keep the first world employees when clearly they are no longer necessary.

    • MC01
      Dec 9, 2018 at 7:21 am

      The issue of crew contracts is thorny to say the very least.
      Just to give an example Norwegian Long Haul, the long-range division of Norwegian Air Shuttle (aka the Netflix of the Skies due to their cash burn), is presently being probed by Norwegian regulators for using Thai nationals under Irish contracts as cabin crews.
      The recent influx of Turkish airlines into the already mature and cutthroat EU market has been partially fueled by their use of Turkish nationals as crews: as long as these airlines carried tourists from Amsterdam or Copenhagen to Izmir and Antalya, everything was fine, but now that they are using Ninth Freedom to enter routes to leisure destinations once the preserve of EU-based carriers such as Condor, Ryanair, TUI and Vueling the mumblings have finally started. Better late than never.

      Personally I believe that sooner than later the Chicago Convention will have to be fully rewritten because it was written for a completely different world, but we’ll talk about Freedoms of the Air in the future…

    • Paulo
      Dec 9, 2018 at 5:19 pm

      Never belonged to a Union? They exist for a reason, and up near the top on the list of reasons is job protection and succession rights for underhanded sales or contracting out. Close behind is seniority provisions so managers can’t play favourites and lay off out of turn during downturns. After that comes wages and working conditions including the right to work under safe conditions.

      I have family members making $200,000+ working as industrial electricians. Their supervisors make well in excess of that. A GP (in BC) grosses around 400K per year before clinic expenses. I think a senior captain on a wide body responsible for 300-400 souls is worth 300 K plus.

      As for Asian pilots and wages, they’re just fine if they stay on the clocks and let the auto-systems do the flying. They aren’t so hot at actually flying the machines, even on CAVU days. Maybe that’s why they are paid less. :-) When a pilot can’t break off an instrument approach and transition to visual on a clear and calm sunny day, Houston, we have a problem. It’s about as basic as it gets.

      ” There has been speculation however, that Korean pilots tend to be more comfortable with automated systems and less comfortable with visual approaches than their western counterparts. A recent Reuters story reported that a Korean government aviation official said manual flying was once common among Korean pilots, many of whom where former military pilots. But in an effort to improve safety after a 1997 Korean Air crash in Guam, pilots were encouraged to make more use of automated controls. Many Korean commercial pilots are former military, having gained much of their flying experience in highly automated aircraft. On the otherhand, commercial pilots who trained in the U.S. tend to have had an opportunity to hone their skills flying smaller, simpler planes with fewer automatic features.”

      https://www.kreindler.com/Possible-Causes-of-the-Asiana-Flight-214-Crash.shtml

      • proudeuro
        Dec 10, 2018 at 2:12 am

        Your comments on asian pilots are offensive to say the least. If not outright racist. And not supported by statistics.
        But that’s besides the point.
        Unions work fine at gauging customers in a closed market, let’s say electricians in Manhattan who have the work done by illegals from Mexico and charge “Manhattan union labor prices” just for signing the invoice.
        Yes, that works very well indeed.
        But Airlines should/could use the fact that they enter different markets with different price point to benefit the customers, and not the drivers.
        It is not my opinion that a pilot is worth 300k, not even 100k if you ask me.
        My great grandfather was driving an automobile and was thought of as a genius by the plebe. When we all know that literally anybody can do it.
        I also know many people driving their own planes: geniuses they must be (if european americans obviously, not asians). Or not.
        But that’s my opinion.

        • Juanfo
          Dec 11, 2018 at 5:29 pm

          Anyone can get a vehicle from a to b. The truly gifted can do it for 50 years without collisions.

  8. Iamafan
    Dec 9, 2018 at 6:40 am

    Don’t forget there’s 1.3 billion Chinese, 1.1 billion Indians and more than half a billion Indonesians. Their neighbors have a lot of people, too. They need cheap discounted carriers and fantastic airports.

    Actually a foodie might be surprised what s/he can find around the airports in Asia. CTS outside of Sapporo is an excellent example. There’s a fish market, shopping mall, theatre, and real food courts in the complex. Our airports here in the USA cannot compare. They are shameful and the carts costs 6 bucks while they are free overseas. The Japanese and Korean airports are so clean that you can walk barefoot. My international airport is JFK and it’s disgusting.

    So it’s not surprising that Asia will need a lot of Airbuses and Boeing’s. They will need airports, too. A great market for America so let’s be nice to them.

    • polecat
      Dec 9, 2018 at 11:01 am

      “so lets be nice to them.”

      Well now, we’re not off to a very good start … if our most recent state-sanctioned kidnaping/extortion plot … under the guise of combating fraud, are any indication !

    • J.M.Keynes
      Dec 9, 2018 at 7:54 pm

      – Agree. US airports do need “an upgrade”. But I never understood why our airports are so decrepit (in comparison to e.g. european and asian airports). Does this have to do with that we “don’t like” spending money on public transport ? Does MC01 have some thoughts/info on this ?
      – I am NOT convinced that countries in the Far East and SE Asia will have enough growth in the (near ??) future to justify ordering all those new airplanes and building new airports. Either for buying those airlines or for “Dry” or “Wet” Lease.
      – The big elephant in the room is China. When China falls (for what ever reason, e.g. trouble in Europe and/or here in the US) then the rest of the Far East & SE Asia will get hit (to put it friendly) as well. And chinese car sales falling (some) 5% doesn’t bode well. But we’ll have to wait and see.

    • MC01
      Dec 10, 2018 at 4:11 am

      You left out one thing, and that thing is financial viability.

      Everybody who flew with Kingfisher Airlines was highly impressed by the amazing quality of the service but few questioned how they were able to pay for it given ticket prices were suspiciously low. Most people I talked to just thought that since Vijay Mallya was involved the highly profitable United Breweries Group (UBG) would just keep on pouring money into Kingfisher as needed.
      When Kingfisher ceased operations it transpired a big pile of UBG equities had been pledged as collaterals (17% of total if I remember correctly), but even those were nowhere near enough to cover losses. It was probably the first big scandal involving Indian banks covered by international media.
      Just how many Kingfisher are out there?

      This extends to airports as well: in Indonesia most airports are run by two separate State-owned enterprises (SOE), named Angkasa Pura I and Angkasa Pura II. Neither is exactly a paragon of financial transparency.
      As long as the State (or local government, or SOE, or taxbayer-backed private firm) is able to pour money into the airport, all is fine, the airports are ultra-clean and super-modern. When money gets tight for a reason or another (for example loss of political patronage), things change overnight.

      • Escher
        Dec 11, 2018 at 8:37 am

        The service, food and upkeep of planes got noticeably worse on Kingfisher airlines 3-4 years after it started operations. They had realized by then that spending top rupee on passenger amenities was not the way to go.

        • MC01
          Dec 11, 2018 at 11:11 am

          You are too kind: Kingfisher was at its core a scam, and I very rarely use this term.
          At best it was a project with no path to profitability, like so many nowadays, at worst it was just a case of partying hard until the banks got their courage together and shut down the credit lines.
          Once banks started to get scared, they started to shut off the credit lines but they were already exposed to the tune of hundreds million dollars and as the saying goes, at that point the banks had a serious problem, not Mr Mallya.

          Since you seem to know India better than I do, you are probably aware the Reserve Bank of India (RBI) has been fighting a mostly losing battle against obvious scams such as Kingfisher by trying to get tough legislature against debtors who refuse servicing their debt despite the ability to do so and banking executives who approve large loans without having carried out through due diligence. Kingfisher would have never got off the ground had this legislature been in place and/or a whole lot of people would have been forced to look for a good attorney.

  9. Cafe Baghdad
    Dec 9, 2018 at 7:38 am

    Many of the so called “godfather” billionaires that control some of the airlines and much of Asian economies actually deserve their titles, because their families used to be involved in the lucrative Opium trade. The Tata’s and the Wadia’s(owners of India’s Go Air) of Bombay come to mind as well as the Iraqi orthodox Jews the Sassoon’s that founded HSBC.

    Airlines it seems might be a good way to launder that kind of money.

    http://greatgameindia.com/hsbc-bank-secret-origins-to-2611-mumbai-attacks/

    • Escher
      Dec 11, 2018 at 8:46 am

      Dude, the opium trade (sold to the British for them to sell to China by the way) was in the 1800s. If these guys are “godfathers” then the Kennedys are still bootleggers.

      Many fortunes of western and Asian blue blooded families have their roots in disreputable activities.

  10. MCH
    Dec 9, 2018 at 12:56 pm

    Another great article that is an amalgamation of my favorite subjects. There are two things that are interesting about the changing nature of air travel. One is the market size and growth over time. The second is the sustainment requirements and its response to those market shifts.

    The Asian markets are growing, there is no doubt of that, but I wonder about how smooth that growth will be over time. There is probably data somewhere that shows how the number of passengers is varying over time. More specifically, how that mass market will change as a function of economic conditions. The two things that drive air travel to a large extent is the number of passengers available and the price of oil. Recall that when oil prices started shooting up in the early 2000, and the US economy started going under, the legacy US airlines took a nosedive, and all of them eventually entered bankruptcy. All of it because they were too busy chasing market share to the exclusion of everything else. Then the combination of too many planes, too few passengers, and rising oil prices killed all of the legacies. Basically I wonder if this is playing out in the Asia markets writ large, chasing market share with ever lower ticket prices. Eventually, that party is going to end, and then, the large airlines are going to get whacked. Perhaps some day air travel will be supplemented by ads on backseat screen. (if they had screens)

    The second part that you alluded to that is going to be challenging is the sustainment of all of this growth. The need to hire pilots, crew, maintenance and support personnel to help sustain the growth. Where are they going to find the thousand plus pilots for all of those Lion Air planes that are going to come on line? All this will do is to drive up the cost of labor, case in point, right now, Emirates is parking airplanes because it doesn’t have enough people to fly them.

    All this means when the macroeconomic condition turns, suddenly all of these LCC are going to get crushed. I wonder to what extent are Airbus and Boeing covered when all those orders start to go away. If I had to guess, the next time the economic cycle turns on the airlines (fewer pax, increased fuel prices and personnel costs), that will start to drive new entrants into the airplane market. The two majors are going to cut costs and personnel to reduce their manufacturing footprint, and of course the cost of their planes. But I bet the unit pricing of those planes won’t be enough to satisfy some of the new airlines on the peripheral parts of the market (whether its in Asia, Africa, or elsewhere). That will be the time when companies like Comacs and the Superjets will get a foothold in the 150+ seat size markets and start to eat the lunch on the A320 and 737 markets. It’ll be decades, but I wouldn’t be surprised if by 2050, we’ll have a third major passenger aircraft firm. Most likely based in China.

    • Rowen
      Dec 9, 2018 at 3:56 pm

      I think VietJet is chasing a lot of diaspora money from Australia and the US.
      Most of the members of the original generation that I know try to visit 1-2x a year. On the other hand, their kids don’t have the time or money to travel as frequently.

    • MC01
      Dec 10, 2018 at 4:33 am

      The Sukhoi SuperJet costs as much as an Embraer E190, so why bother? Especially considering the Sukhoi is nowhere near as well supported as its Brazilian rival, it would need to offer either superior fuel efficiency or much lower maintenance costs or an impossible combination of both.
      Comac is another story. Personally I believe China has given full priority to the military when it comes to aerospace research: commercial only gets the breadcrumbs falling from the table. No present or proposed Comac product can really compete with any product from the Big Four (Airbus, Boeing, Bombardier and Embraer) or even from Russia.
      The few units Comac exported were basically sold at a large loss (see the ARJ short range jets they sold to customers from Indonesia and Laos), again a business model that works until it doesn’t.

      • MCH
        Dec 10, 2018 at 7:06 pm

        I agree with the Superjet point. But the Russians are still trying. And Embraer (assuming a successful tie up with Boeing) will not go after the 737 sement of the market.

        Comac on the other hand. Yes, I do agree priority will be given to the military segment, but I would think indigenous airliner types will be a priority at some point especially as some of the materials could be dual use. Remember, Airbus succumbed early to put an A320 factory in Tianjin, Boeing is doing the same in an effort to capture a part of the Chinese market.

        Now, I’m not saying that this will be an exact replica of the situation between NA/European telecom equipment manufacturers and Huawei/ZTE in the late 90s/early 00s. But the situation will have a way to turning on itself if and when the market collapses, and those Airbus and Boeing factories in China cannot be profitably supported. Back then, as the non-Chinese telco mfgers bailed and died, Huawei took those people and the technology behind it. Fast forward to today, and the west is stuck playing geopolitical games to contain the Chinese telcos.

        What you say about Comac may be true for now, but twenty years from now, my guess is that things will change, and the duopoly will give away to something more.

        • MC01
          Dec 11, 2018 at 3:24 am

          Airbus and Boeing had to open another assembly line for their narrowbodies for the simple reason they could never keep up with orders with existing manufacturing capability and, all thing considered, China was the place that made the most sense. Taiwan was the first choice, but it’s a big no-go for political reasons, and India, Malaysia and Thailand while cheaper would have taken far too much time to start production.

          The first big problem the Chinese aerospace industry has are the engines. Even on military ones they still struggle with several components, chief among which are turbine blades, and have to import a whole lot of components from Russia.
          Solving these design and manufacturing issues is a matter of national security and especially pride for the Chinese leadership.
          The second big problem is the growing use of composites on commercial airliners. The market for these composites is dominated by three firms, all Japanese (Toray Industries, Mitsubishi Chemical and Toho Tenax) and the manufacture of components using these composites is again dominated by Japanese firms (chiefly Mitsubishi Heavy Industries, Subaru, formerly Fuji Heavy Industries, and IHI), with US and French firms distant second and third respectively.
          If China wants to manufacture airliners on the same level as those of the competition, she would need to master the use of composites and, presumably, develop a domestic composite industry comparable at very least with that of France.
          Manufacturing the large sections used in commercial airliners fast enough to fill orders is a completely different thing from the small scale slow production of composite assemblies for military aircraft, which also are little concerned with price.

          In short China has a long long way to go, and the effect of her crazed monetary policies are seemingly catching up with them… perhaps another big round of stimulus is needed. ;-)

  11. james wordsworth
    Dec 9, 2018 at 4:25 pm

    If we are going to do anything about global warming … air travel is one business that will have to be cut back … a lot!

    • MCH
      Dec 9, 2018 at 4:47 pm

      Global warming, global swarming, it’s a lie I tell you… :p

      Honestly, if you want to tackle the root cause of that problem, you have to address this huge increase in population. Everything else, the solar panels, the Paris accords, all of it is just a side show meant to take a percent off here and there. Take 3 billion people out of the equation today, and global warming is suddenly a nonissue.

      It’s the need to support the lifestyle of the top 1% of the population and the need for the rest of the world to catch up to that lifestyle that is causing the problems.

      • james wordsworth
        Dec 10, 2018 at 7:27 am

        Except for Africa, most populations are “under control”. Getting rid of 3 billion people is correct, any volunteers? The main point is most people have no idea how destructive their lifestyle is, because they do not pay the true cost. Pay true costs and maybe we can stop this train wreck of consumptionism.

        • EcuadorExpat
          Dec 10, 2018 at 11:43 am

          Yes, start with the USA, 5% of the population consuming 60% of the resources.

          It’s not necessary to do anything, the third world is forming around you as you sit there. All it will take to put the USA over the edge is a 30% devaluation of the currency. And the really really big players are prepared for this. But not the peons who have no money to create/repair the infrastructure needed for another 100 million people in the next 10 years.

        • MCH
          Dec 10, 2018 at 7:17 pm

          No one in their right mind wants to pay true cost. That would actually mean that the cost of steaks will go up by 5x to 10x, driving costs will double or triple, and so on.

          Trying to address each of these individual issues is like putting fingers into a leaking dam, sooner or later, there won’t be enough fingers.

          The root cause is population, until that underlying issue is addressed, everything else is going to be a bandaid solution.

          The projected human population in 2050 is 10 billion, and in 2100 is 11 billion. I don’t know what the prior projections were like 30 or 40 years ago, but would be curious to find out if those were too high or too low. But imagine if even a third of those populations have western like lifestyles. We would strip the planet dry in no time flat.

    • fajensen
      Dec 10, 2018 at 2:10 am

      There’s lot of dubious business and a lot of wasteful, unsustainable, “growth” driven purely by ZIRP.

      If we wanted to do something about global warming, we would have to do something effective about global finance, especially in the areas interest policies and tax evasion.

      At the moment money is free and taxes doesn’t have to be paid if one knows the proper people. So “Business” can work along the same principles as an open-flow thermal power plant: A machine setting up a rapid flow of maybe 1 billion USD in order to somehow extract 50-100 million into a numbered account in a tax shelter. The rest of the flow is wasted, the problem being that this waste is also including the physical resources flowing through the business until it’s collapse. So there is an environmental cost also.

  12. Atu
    Dec 9, 2018 at 7:18 pm

    The puchase cost of the aircraft is by far not the largest component in flight cost, nor is fuel directly though I expect that high fuel prices would affect the wider purchasing power of certain customers…well at least the French but likely others also. Into the equation you could throw monetary inflation, why not as it reduces the cost on debt of purchase.

    So you presently have a worldwide fleet of twenty five thousand passenger aircraft of various stripes roughly, projected to increase by ten thousand through to ’25 (statista), the above and future orders minus aircraft decommissioned. Sort of makes sense if the world economy muddles along, Asia flight costs are going to be partly proportional to local wages.

    The Asian market is expanding so it is normal that that is the destination of the newer fleet, where there is overcapacity the newer aircraft will make their way to western airlines and older aircraft will be decommissioned or handed to freight instead.

    Exactly how the Asian carriers end up is a different story I guess.

    JFK is a dump? Then it hasn’t changed.

    LionAir 610 read avherald and comments on that – design error of improper failsafe (boeing), not uptodate manual (boeing), pilot error if auto cutout trim was not activated given problem known from previous flight, airline as possibly test flight etc. These events are almost always a combination.

    MC you will know of this but it’s an interesting additional read on the AMARG.

    https://www.flexport.com/blog/decommissioned-planes-salvage-value/

    • MC01
      Dec 10, 2018 at 7:23 am

      The average cost of flying a narrowbody (Boeing 737NG or Airbus A320ceo) on a 4-5 hours route is about $10,000 in fuel, $3,800 in maintenance and $6,500 in navigation, handling, landing etc. There can be individual differences (for example Ryanair is the undisputed master at obtaining big rebates on landing and handling fees), but these are baseline costs that can be used throughout the world.
      What varies, sometimes wildly are flight/cabin crew and capital costs.
      Even in the present ultra-repressed financial conditions the average capital cost on the aforementioned route is about $12,000 in Europe, or over 30% of total mission cost, by far the largest outlay, even more so than fuel. In most of Asia, where crew costs are considerably lower and interest rates higher, capital cost averages over 35% of total.
      Capital cost doesn’t cover merely the cost of financing the aircraft itself, but all financial obligations the airline has, which may include loans incurred to train and qualify the crews, bonds issued to raise capital in the past, servicing existing credit lines, paying dividends (if any) etc down to paying off the new luxurious company HQ.

      Remember these are very indicative and average costs.
      Airlines have to spread costs over the year, knowing fully well what months are the businest and hence when they can charge more (July and August in Europe, January and/or February in China and Vietnam etc) and which months during which they must deal with reduced traffic.

      Personally I believe that as interest rates tick higher and stimulus becomes ineffective we’ll see a steady stream of bankruptcies. Not some big catastrophic moment but more and more company dropping dead as they’ll find that cutthroat competition makes servicing those large capital costs prohibitive.
      Europe has so far seen the most bankruptcies, but I fully expect the contagion to spread because even in Asia the present model is only sustainable thanks to very low interest rates. As I said, most of that growth is artificial and comes from low fares which in turn are only possible as long as capital costs remain repressed. There’s a lot of bad calls and downright frauds that need to be purged from the system before it can start to grow organically again.

  13. Rooboy
    Dec 10, 2018 at 8:01 am

    Ever fly the Kangaroo?

    Yes, Qantas.

    They can sure pack them into cattle class and their business class seats aren’t much bigger than what old economy class was like 20 or 30 years ago. The pods are bigger though. The food – is that actually food they serve in cattle class? Yuck.

    Charges and fees?

    Wow.

    When oil prices shot up they added a fuel surcharge to the tickets. Oil prices went down and they kept the same surcharge and only recently reduced it, but then they fooled everybody by folding it into the ticket prices.

    One of the ways to find out how much they are is to convert your frequent flyer points into a ticket. Then you get hit with the full cost of the surcharges and taxes.

    For example, about five/six years ago the kid flew from Australia to Japan. To get a ticket one way economy ticket on Qantas using FF miles would have cost around IIRC about A$600 in fees and taxes.

    Business class on Singapore Air to Japan had a surcharge of only a little over A$100. The kid flew Singapore Air.

    The one really good point about Qantas is that their FF miles expire after 18 months, but they can be extended indefinitely if you have at least one transaction every 18 months. (That used to be once every three years.).

    No doubt the next move will be increase the amount FF miles needed for tickets again.

    The Business Class lounge at Narita ………….

    It is relatively empty compared to the JAL Sakura lounge. Why?

    The food they serve, well, it really isn’t good. It’s more like party snacks than anything. Really pathetic.

    While they do have a reasonable selection of booze, if that is what you like, but nothing really over the basic type level stuff. But only Pepsi and no Coca-cola.

    In over 30 years of flying with that mob of roos, I can’t recall one time that they have taken off or arrived on time.

    Our last flight with them out of Narita last month was 3 hours and 25 minutes late taking off and we just made the 11:00 pm airport curfew.

    Yeah, we spent all that time in the Business Class lounge too waiting for hours with few updates on the flight status. Really Poor.

    If you can get a similar fight with another airline with the same flight time, use them instead. You’ll be happier. If not, you are stuck with the Roo………………

    • MC01
      Dec 11, 2018 at 8:48 am

      I have one bit of advice for all you people using the term “cattle car” when talking about airlines.
      Ryanair has just taken delivery of their first Boeing 737 MAX-200. It will enter revenue-generating service in Q2 2019.
      What’s so special about it?
      This is the “single class high density” version of the standard MAX-8 developed specifically for the Irish carrier by Boeing: it will carry “up to” 210 passengers over the 162 maximum (12 business + 150 economy) of the standard MAX-8. To achieve that Boeing had to install an extra door (required by EASA and FAA regulations due to the extra number of passengers), the much dreaded slimline seats and reduce the number of galley trolleys from 8 to 5.
      Think about it for a moment because at least for me this is amazing.

      Ryanair has long honestly advertised itself as “you don’t want the best, you want cheap, and we got cheap”, but this is taking things to the next level. To be honest if my body weren’t so broken and Ryanair didn’t fly to airports in the middle of nowhere (Hahn, really?) I’d fly on one of these aircraft just to see for myself how they are pulling it off.

  14. kaj
    Dec 10, 2018 at 7:22 pm

    Meanwhile, Airline travel within the U.S. and from many gateways from U.S. to Europe is prohibitively expensive. A flight from Dulles Airport, 30 miles from Washington, DC to Germany or London Coach class iin most seasons costs between $1200 to $1600. Thank you Obama, and Reagan through Bush for increasing oligopolization of both within and from U.S. to Europe airline markets. Bastards never die; they leave their tracks on littered human and animal bodies.

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