Commentary: Can Southeast Asia’s low-cost carriers weather the oil crisis?
Skyrocketing fuel prices are starting to impact air travel in Southeast Asia with low-cost carriers particularly vulnerable, writes aviation analyst Brendan Sobie.
by Brendan Sobie · CNA · JoinRead a summary of this article on FAST.
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SINGAPORE: Jet fuel prices have doubled since the start of the Iran war, leaving low-cost carriers particularly vulnerable.
Domestic and regional air travel in Southeast Asia has boomed in the last two and a half decades, driven primarily by fast-expanding budget airlines and declining airfares. However, the low fares fueling this boom are no longer sustainable.
Unlike full-service airlines, low-cost carriers do not have premium or long-haul traffic that is typically more immune to airfare increases. Short-haul budget travel in Southeast Asia is extremely price sensitive, making it impossible for airlines to pass on the full increase in fuel prices to consumers.
Even a modest increase in airfares and fuel surcharges can dent demand. While all the region’s low-cost carriers have raised fares since March, the increases are insufficient to cover rising costs. In some cases, they have also led to lower load factors, leading airlines to cut flights.
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Southeast Asian low-cost carriers have cut roughly 20 per cent of flights compared to pre-crisis levels, which equates to around 4 million fewer passengers per month. The impact on Southeast Asia’s economy, including the tourism sector, is undeniable as low-cost carriers play a crucial role in domestic and regional connectivity.
STRAPPED FOR CASH
Last year, low-cost carriers accounted for over 60 per cent of all domestic capacity in Southeast Asia and over 50 per cent of all capacity between Southeast Asian countries, according to OAG data. The six main players are AirAsia Group, Lion Group, VietJet Group, Cebu Pacific, Scoot and Citilink.
AirAsia and VietJet both have now cut capacity by about 30 per cent while Lion and Citilink have cut about 20 per cent. Cebu Pacific and Scoot have not yet made significant adjustments, but Cebu Pacific will likely reduce flights in the third quarter.
Scoot is an exception as it is the only Southeast Asian budget carrier that had fuel hedges in place when the crisis hit, resulting in temporarily lower fuel costs. It also follows more of a hybrid rather than pure low-cost model. Transit accounts for a large portion of its passengers, including connections with its full-service parent Singapore Airlines (SIA).
Though it is virtually impossible for any low-cost carrier to be profitable in the current environment, Scoot has the financial backing and strategic position to stay the course. Cebu Pacific is also in a relatively strong financial position, giving it a cushion to help weather the storm.
Meanwhile, most of the other Southeast Asian low-cost carriers have never recovered financially from the pandemic, resulting in relatively high debt and low cash levels. Some are not currently able to pay their suppliers and have fallen behind in payments.
Slashing capacity is a sensible move to save cash, but less flying means a reduction in efficiency and higher unit costs in other areas. Low-cost carriers are essentially stuck between a rock and a hard place with no way to avoid stiff losses.
However, it is unlikely any of the main low-cost carriers will fail given their size and importance to the economy. Suppliers in the aviation ecosystem typically work with bigger airlines to avoid collapse and government bailouts are also a possible last-resort option.
LONG-TERM IMPLICATIONS IF CRISIS DRAGS
For investors and suppliers, the unpredictability in oil prices is concerning. No one knows how long the Strait of Hormuz will remain blocked, making it impossible for airlines to effectively plan capacity or airfares.
While some of the region’s low-cost carriers are hoping for a return to normal fuel prices by September, this is not a realistic expectation. There could be long-term implications if the crisis drags on for several months or if recovery is slow.
Tourism in Southeast Asia could be hit as residents travel to neighbouring countries less frequently. Some Southeast Asian residents are holidaying closer to home after foregoing long-haul trips to the Middle East or Europe. But they are few compared to the large volume of middle-class consumers who, squeezed by the energy crisis, no longer have the discretionary income.
Passenger traffic could dip in Southeast Asian countries over the next few months. Indonesia, Malaysia, Philippines, Thailand and Vietnam may all experience double-digit declines in passenger numbers with domestic demand particularly impacted.
Singapore could also see a decline, albeit less significantly as it does not have a domestic market. It also has a relatively high portion of long-haul traffic, which has been growing in the current environment as intercontinental transit passengers that typically fly via the Middle East are instead flying through Singapore.
The SIA Group has been handling record passenger traffic in the last few months and will continue to carry more passengers than it did pre-crisis. However, cuts by foreign airlines, particularly low-cost carriers, are adding up fast and could start to offset the gains of SIA.
AirAsia, Citilink, Cebu Pacific, Lion and VietJet have all cut capacity in Singapore. Several routes have been suspended entirely, resulting in monopolies for Scoot or the SIA Group.
AirAsia has cut the most at about 40 per cent since the fuel crisis started and has now reduced capacity in Singapore by about 60 per cent since 2023, according to OAG data. It now has only five routes from Singapore, having cut three over the last month and another nine from 2023 to 2025.
For more than a decade, AirAsia had been the second largest competitor in Singapore after SIA Group but based on OAG data it will lose this distinction next month to Qantas Group. This is somewhat ironic as even before the shutdown last year of Qantas affiliate Jetstar Asia, AirAsia Group was the bigger player.
The cuts at AirAsia highlight how challenging the budget end of the market has become in Singapore, and more broadly in Southeast Asia. Fuel prices should eventually come back down and low-cost carriers will continue to have a major role in connecting Southeast Asia, but the pre-COVID glory days may never return.
Brendan Sobie is the founder of Singapore-based independent aviation consulting and analysis firm Sobie Aviation.
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