Fitch Ratings: Impact of 737 MAX grounding in Asia may worsen in 2q

Lauren Eldershaw
By Lauren Eldershaw April 8, 2019 14:26

Fitch Ratings: Impact of 737 MAX grounding in Asia may worsen in 2q

The impact on airline operations and airfares in Asia from the grounding of Boeing 737 Max jets has been largely muted so far, but could worsen from 2Q19 due to a seasonal pick-up in travel demand, Fitch Ratings says. Delays in the delivery of 737 Max planes, in case the re-certification process for the jet is prolonged, could allow some airlines to improve their balance sheets.

India’s SpiceJet, Indonesia’s Lion Air, Singapore-based SilkAir and Fiji Airways were among the Asian carriers operating 737 MAX planes at the time of grounding and these jets form around 10% or more of their fleet, according to public information. Major Chinese airlines, such as Air China, China Southern Airlines, China Eastern Airlines and Hainan Airlines and airlines related to them also operated the planes. However, the model formed a smaller share of their total fleet.

In most markets, the grounding of the model has had limited impact on airlines’ performance and fares, helped by seasonally low demand in the first quarter and utilisation of spare capacity by airlines. However, the situation could worsen from 2Q19 as air travel demand increases substantially in the summer months. Airlines that do not rely on 737 Max planes may benefit as competitors struggle to replace their grounded fleet with other models, for which leasing rates are likely to increase, pushing airfares upwards.

The Indian aviation market, however, has seen a sharp increase in airfares in the last few months due to tight supply, which has been worsened by the suspension of the 737 MAX. As a result, Fitch expects the growth in revenue passenger kilometres (RPK), which decelerated to 12.4% in January (2018: 19.9%), to weaken further until supply increases. Jet Airways, which along with its subsidiary Jet Lite had the second-largest share of the domestic market until January 2019, has been steadily losing market share as it has been forced to shrink its operating fleet due to financial troubles. Market leader IndiGo cancelled around 30 flights per day (2% of total) from around the middle of February until March, with industry participants highlighting pilot shortage as a key reason. SpiceJet was then forced to ground its 737 MAX jets, which form around 15% of its fleet.

The Boeing 737 MAX is an important part of the fleet expansion strategy of several airlines, such as Lion Air, SpiceJet and VietJet Air, in the growing markets of Asia. Most airlines have refrained from announcing major changes to their fleet plans so far, but Garuda Indonesia has asked Boeing to cancel its remaining order of 49 of the jets.

There is limited flexibility for airlines to switch to alternatives from Airbus or Boeing. Airbus already has a large backlog of orders and Boeing has largely shifted its production lines away from the older version 737NG. If there is a delay in the delivery schedule of the 737 MAX jets by Boeing, affected airlines may choose to either scale back their expansion plans to strengthen their balance sheets or continue to grow by leasing aircraft at increased rates. Both circumstances would support passenger yields and air fares in the respective markets.

Lauren Eldershaw
By Lauren Eldershaw April 8, 2019 14:26