The great leap upwards: Asian commercial aviation soars12 December 2012
Rising affluence and a new appetite for travel are changing the face of Asian commercial aviation. Tony Griffin, senior vice-president at Airport Strategy and Marketing, talks to Philip Kleinfeld about route development and liberalisation in the region.
Writing in the Financial Times, Asian regional corporate correspondent Jeremy Grant called South-East Asia "the last man standing in the global economy". Recent growth forecasts by the World Bank bear that out. Indonesia, thanks largely to domestic consumption, is expected to grow by over 6% in 2013. In China, the economy may have slowed, but the area is still understandably optimistic. Cambodia, Laos and Vietnam all look strong, according to the same study.
That mood has spilled over into the aviation sector. During the next two decades, the Asian air travel market is expected to become the fastest growing in the world. According to research by New Zealand's department of trade and enterprise, the industry will have tripled in volume between 2005-2025, with an average fleet growth of 6.6%.
Chinese aviation boom
China offers perhaps the most exciting prospect for the industry. Carefully planned investment and a growing middle-class eager to experience international travel have set the framework for wider expansion.
"Aviation to and from China is going to be the defining aspect of the sector over the next ten years," says Tony Griffin, senior vice-president at Airport Strategy and Marketing. "You only have to look at the number of cities in China with over five million to see the potential. If you've got even a small percentage of the total population that are affluent and want to travel oversees, the numbers are eye-watering. Their airport development programme is coming along well - 20 brand-new airports over the country and significant wide-body fleet orders for all the major carriers."
For all the talk of outbound Chinese travel, the issue of intra-Asian travel has been strangely neglected. However popular Western Europe and the US might be, shorter flight times and greater familiarity with the local area makes South-East Asia an equally important destination for tourism.
"In the UK and Europe we tend to be focused on what's relevant to our particular market," says Griffin. "But Chinese travel within Asia has massive growth potential - possibly more so than Europe and America."
Economic growth in South-East Asia
Nor is China the only South-East Asian country to experience a surge in air travel. Almost the entire continent is going through economic growth of some kind or another. In the Philippines, travel volume is growing at 16% each year. The national carrier Philippines Airlines recently announced the biggest aircraft deal in the country's history: a new contract for 50 Airbus aircraft.
Indonesia, one of the largest economies in the region, is also doing well. The country, home to over 230 million people, offers another fine example of emerging affluence, with a middle-class expected to reach 244 million by 2030.
Most travel in the Indonesian aviation space is domestic - hardly surprising in a country so large and sprawling. In 2010, over 60 million journeys were completed from one island to another. The state-owned airline Garuda recently cut back on its European routes, citing fuel costs and weak demand as key reasons. The carrier is now hoping to compete with some of the larger budget airlines in Indonesia by adding new domestic routes and 194 new aircraft to its fleet by 2015.
"These are airlines that have significant orders in place," says Griffin. "Indonesia also has an ambitious, aggressive programme of new airport builds. There's going to be new ones in Bali and Medan, while lots of other capital expenditure programmes are planned for existing airports over the next 10-15 years. It's already started to happen in Indonesia, but nothing like what we're about to see."
Indonesia also has an ambitious, aggressive programme of new airport builds. There's going to be new ones in Bali and Medan, while lots of other capital expenditure programmes are planned for existing airports over the next 10-15 years. It's already started to happen in Indonesia, but nothing like what we're about to see."
Barriers to route development
Problems with air safety remain a barrier to route development, however. Indonesia's record is notoriously poor. Since the first commercial airline accident in 1950, thousands of people have died in numerous crashes. Between 2007-2009 the European Union banned all Indonesian airplanes from its airspace.
Things may have improved since then, but it's feared that rapid growth in the country's infrastructure may compromise standards. The main hub in Java - Soekarno-Hatta International Airport - handled over double the passengers it was designed for last year.
Safety issues in the Philippines are also holding back route development. National carriers are unable to enter European airspace and are limited in the US.
Meanwhile, in India, legacy infrastructure is also hindering growth in the country's air travel sector. Both Kingfisher and Air India remain in bad shape to tackle the rise in demand. "Until India gets its act together on airline viability and commercial footing then it will struggle to supply the demand," Griffin says. "At the moment, it's relying on the old carriers to provide the air lift, but that's not enough."
Tourism is playing a significant role in driving route development across South-East Asia but business travel is just as important. The global competition for cheap labour - peddled by international institutions that are indifferent to the process of production - has turned Vietnam into a popular manufacturing base for multinational corporations. It might not be positive for the local workers but it's been great for the country's emerging airlines.
"Business travel shouldn't be underestimated," Griffin says. "We know from experience that there's a number of European and international carriers that are seeking access to Vietnam."
Domestic vs international airlines
The impact of liberalisation on route development and traffic growth has been well documented over the years. In the mid-1990s, a new regulatory framework was set up across EU member states to enhance competition and improve efficiency. But 'open sky' policies haven't been replicated all over the world. A lot of South-East Asian countries want their nascent carriers protected, preferring the idea of a home-grown industry than a market dominated by international airlines.
Vietnam is a good example of that. The country has given its domestic airlines every opportunity to develop and flourish but, according to Griffin, it's holding back growth. "I think regulation in air travel is a bad thing for nation states," he says. "Those who continue to protect and regulate are going to be losers because carriers will find alternative markets. Airlines have choices. If a particular country is restricted then they will put their capacity into markets that aren't. It's pretty much proven that the likes of EasyJet and Ryanair create markets that didn't exist prior to them operating. These are carriers that can generate traffic in the depths of winter purely through pricing and brand profile. Not all countries in South-East Asia are missing the opportunity. Singapore is very liberal and allows any airline to operate in and out."
Visas remain another of the big inhibitors to route development across the area, particularly China. Most visitors to Western Europe and the US require documented permission that can be costly and time-consuming to procure.
"We know that some countries like New Zealand are looking to relax the Visa restrictions on Chinese nationals," Griffin says. "They won't be waving the need for visas altogether, but making things easier in the way regulation is applied. Those countries that insist on restrictions will be the ones that miss out on lucrative, big-spending traffic."
It's not been an easy year for European air travel. Calculations from the International Air Transport Association suggest the continent's carriers will post a shared loss of over $1 billion for 2012. With demand from South-East Asia growing and infrastructural developments continuing apace, both sides would benefit nicely from re-evaluating their existing frameworks.