Asian budget carriers face challenges after Oasis collapse

Tags :Forecast & Strategy, Oasis Hong Kong


HONG KONG (Thomson Financial) - Soaring jet fuel prices, slowing economic growth and stiff competition could claim further casualties among Asian budget carriers following the collapse of Oasis Hong Kong Airlines last week, analysts said Monday.

The demise of Oasis just 18 months after it took to the skies shows that the shakeout in the industry is an international phenomenon and not a problem that's confined to the United States, where five airlines have recently shut down.

"We expect the negative and worsening macro environment for airlines to continue to take its toll in the form of forced capacity cuts (bankruptcies) and voluntary capacity cuts," said Morgan Stanley analyst William Greene.  

"Consolidation remains the best path to improving the industry's volatile financials," he said in a note.

Oasis, one of the first budget airlines to focus on long-haul flights, collapsed last week, unable to cope with escalating jet fuel prices.

The company had positioned itself as a less expensive alternative to rival Cathay Pacific Airways, operating two second-hand Boeing 747-400s between London and Hong Kong, and two more aircraft between Hong Kong and Vancouver, Canada.

"As oil prices sharply increased, the fuel costs took up the majority of our budget...We have found it next to impossible to obtain a credit facility from financial institutions to carry out fuel-hedging programmes," Oasis Chairman Raymond Lee said in an open letter published in local newspapers last week.

"On top of all this, we also faced relentless competitive response from every direction, aiming to crush us for good," he said.

The fuel factor

Rising jet fuel costs as oil prices set fresh records above $110 a barrel are a bugbear for all airlines.

Australian low-cost carrier Virgin Blue on Friday slashed its net income forecast to less than A$140 million for the 12 months to June, down from A$216 million a year earlier, citing fuel costs that have risen more than 70 percent in the past year.

Toll Holdings, Australia's biggest freight company and Virgin Blue's biggest shareholder, had to scrap plans to sell its 62 percent stake in the Australian airline after obtaining low offers for the stake.

In the U.S., five low cost airlines including Skybus, a start-up short-haul budget carrier, and Aloha Airlines have collapsed in recent weeks. MAXjet Airways Inc, a U.S. all-business class airline, filed for bankruptcy in December, while UK all-business class airline Silverjet failed to meet its break-even target in March.

Major carriers including British Airways have warned about lower profits this year, although it's the smaller operators that have been hit hardest

RHB Research Institute is forecasting "lower profits or wider losses" for airlines including AirAsia, another long-haul low-cost Asian airline based in Malaysia.

"We assume that the airlines will be able to recoup part of the increase via higher fuel surcharges," said RHB analyst Joshua Ng, who has assigned an "underperform" rating to Malaysia's airlines.

RHB is expecting jet fuel cost to rise 18 percent over the next three years to about $100 a barrel from its previous estimate of about $85.

Some analysts are expecting stronger airlines to emerge once the budget airline industry recovers from this low.

"The network and better capitalized low-cost carriers will benefit from the current shakeout where the weakest players are unable to obtain financing to operate through bankruptcy and are being forced to go directly into liquidation," said Michael Derchin, analyst at FTN Midwest.

One airline that appears to be surviving the current downturn is Qantas unit Jetstar Airways, which earlier announced plans to expand its operations.

The airline is in discussions with the government of Vietnam for increased air rights, and is upbeat about it prospects in the Asian nation where the economy expanded nearly 8.5 percent last year, the fastest rate in 11 years. A strong economy is creating wealthier individuals, spurring greater demand for business and leisure air travel.

Jetstar has entered into a strategic partnership with Vietnam's Pacific Airlines, which will eventually be named Jetstar Pacific. Jetstar holds an 18 percent stake in the Vietnamese airline which will increase to 30 percent by 2010 under the partnership.

The agreement includes plans to expand domestic services within Vietnam and other parts of Asia including Thailand, Singapore, Malaysia and Cambodia.

Another low cost airline with strong financial backing from a parent with deep pockets is Tiger Airways.
 

The airline, which is 49-percent owned by Singapore Airlines, plans to expand into East Malaysia to add to its current network.

Tiger Airways now flies more than 27 destinations across 9 countries in Asia Pacific on a fleet of brand new Airbus A320 aircraft.

(c) Centre for Asia Pacific Aviation. Date posted: 15-Apr-08.

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