By Thanavutd Chutiphongdech*
Before the COVID-19 pandemic, Southeast Asia was one of the fastest growing markets for air transport. But despite being buoyed by high demand, a deregulated airline market squeezed the profit margins of most Southeast Asian airlines, leaving them particularly vulnerable to the economic fallout from COVID-19.
Southeast Asia’s ‘sky liberalisation’ produced fierce competition between low-cost carriers (LCCs) and full-service carriers (FSCs) over the last decade. This rivalry had a revolutionary impact on airfares. But the price war that increased affordability simultaneously reduced margins, with unstable fuel costs further elevating the industry’s cost structure. With the pressure of such a business environment, airlines were already struggling to perform. The emergence of a COVID-19-induced recession has now debilitated the industry.
The tourism and hospitality sectors were first to be hit by public health measures recommended by the World Health Organization. As a link in the tourism value chain, airlines were abruptly affected and several airlines were immediately thrown into the red as domestic and international tourist numbers collapsed. Thai Airways — Thailand’s national carrier— is in bankruptcy court with reported losses of US$564 million in the first half of 2020. Malaysia Airlines is similarly on the brink of bankruptcy after revealing a loss of US$3.32 billion.
Thai Airways suffered from poor performance for more than a decade before the onset of COVID-19 because of its excessive and complicated organisational structure and political forces that bred serious mismanagement and corruption. The Thai Ministry of Finance, its biggest shareholder, now plans to reduce its shareholding — perhaps allowing Thai Airways to shed its state enterprise status. Like Malaysia Airlines, the COVID-19 crisis has forced it to choose between going bankrupt and abandoning its flag carrier status, or being acquired by another airline.
Other airlines in Southeast Asia share the same destiny, with Vietnam Airlines revealing a US$284 million loss, Philippine Airlines posting US$183.1 million in losses and Singapore Airlines recording a loss of approximately US$538 million in the first half of this year. Garuda Indonesia similarly announced US$696 million in losses. The crisis is not contained to FSCs — AirAsia Group, the LCC with the biggest market share in the region, is also in the red, with losses of up to US$188 million.
The underperformance of Southeast Asian airlines will shape how they restructure and downsize post-COVID-19. Airlines are a labour-intensive industry, so layoff policies, wage reductions, leave-without-pay measures and golden handshakes are common and quick-win strategies employed by firms to maintain liquidity. Singapore Airlines recently decided to cut more than 4,000 workers across subsidiaries, while Lion Air Group terminated over 2,000 employees.
Garuda laid off 180 pilots while Malaysia Airlines offered voluntary unpaid leave for 13,000 of its staff as they struggle to make ends meet. This retrenchment strategy has been similarly adopted by AirAsia as it plans to shave costs by 30 per cent, while NokScoot announced huge layoffs a few months before it ceased operations.
But these cost and job-cutting strategies have an adverse impact on local economies. Losing a job means losing a consumer of goods and services. This puts pressure on governments to provide financial support to airlines in order to preserve employment. Financial liquidity could be provided by governments, central banks, airport authorities or even aviation-related organisations to ailing airline companies.
This assistance can take the form of an interest reduction plan, airport fee waiving measures or soft loan schemes, all of which should be extended promptly by governments. But airlines should implement their own strategic responses in lieu of external support to sustain business administration through COVID-19.
Airlines may need to readjust their business models to generate other forms of revenue as the outbreak hits domestic cargo flights. For example, Scoot has adapted by modifying regular passenger cabins so they can carry extra cargo, while Cebu Pacific has chartered aircraft that serve and supply food, water, medical equipment and assistance around the Philippines.
The COVID-19 pandemic has had a catastrophic impact on Southeast Asian airlines. But there is light at the end of the tunnel. The airline industry has weathered many storms since 1950, including the 1997 Asian financial crisis, the 9/11 terror attacks, the SARS pandemic and the global financial crisis.
There will be some airlines that endure this industry-wide disaster. The lessons learned from those who establish best practice will inform future business operation and strategy.
*About the author: Thanavutd Chutiphongdech is Professor at the International College for Sustainability Studies at Srinakharinwirot University, Bangkok.
Source: This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.