When Cathay Pacific announced a sharp fall in revenue it was assumed that the big three Chinese carriers would be showing a boost in their results after winning out a number of key battles, where possible investors had moved in on the Chinese big three expecting a quick gain. Alas, only one of the big three is even partially on-form. China Southern posted a 30% rise in earnings for the 2016/17 fiscal year, while China Eastern showed a 0.7% decline in earnings and Air China reporting a 0.6% rise.
These figures come at a time when just about every analyst in the world agrees that earnings are peeking. This indicates tougher times ahead. For a start, these figures for 2016/17 are on the back of a year when RMB was flat against the US dollar appreciating just 0.1% this year to 6.89 but consensus estimates 7.10 by the end of 2017 with that 1% depreciation in RMB leading to 4.4-8.5% lower earnings. China Southern – the best run airline of the bunch – will be able to off-set that with the American Airlines cash injection but the other two will not have that luxury.
Then there is oil. Based on recent historical terms, 2016/17 was a flat affair with Brent crude oil averaging US$45.44 but since the US election oil has been on a rollercoster with Brent Crude flying and then declining back 9.6% (YTD) to US$52.40. The forecast for the 2017 full year average is US$57.75. In both China and India that is very significant because of domestic fuel surcharges. Oil would have to fall back significantly in 2017 for airlines to be where they were on costs in 2016. At the same time, the Chinese big three continue to sacrifice yield as they focus on growth. China Southern, with its American Airlines deal will be able to show an improvement on that too next year, while Air China and China Eastern could slow international growth and improve their yield markedly at speed – but will they? 2017 may be more kind to Air China than the other two airlines the carrier has slowed capacity growth running through this current year of account. Even so, most analysts now agree that the 29% average gain in share price for the Chinese big three over 2016 on the Hong Kong stock market is going to be wiped out in 2017, despite the carriers still trading at lower valuations than their regional rivals, with the trio fetching forward earnings multiples of between eight and ten times.
In India, it has been confirmed that five airlines will operate on the128 UDAN routes from next month connecting 70 airports, including 31 unserved and 12 under-served ones, would be connected with the UDAN flights under the regional connectivity scheme with fares capped at Rs 2,500 for one-hour flights.
The winning bidders were: Air India’s subsidiary Airline Allied Services, SpiceJet, Air Deccan, Air Odisha and Turbo Megha.
All will be operating 19-78 seater aircraft. Make no mistake if this all works out then this will be a huge boost to Indian aviation and a massive boost to ATR and Bombardier and some of the regional jet manufacturers.
On each flight, 50% of the seats would have a cap of Rs 2,500 per seat/hour. Airline Allied Services would operate on 15 routes, SpiceJet (11), Turbo Megha Airways (18), Air Deccan (34) and Air Odisha Aviation (50).
Under UDAN, no airport charges and three-year exclusivity on the routes is standard with the operators being extended viability gap funding for which money is partly raised through a levy of up to Rs 8,500 on flights operating in major routes like Delhi and Mumbai although the government hopes the average per person will be Rs50.
The viability gap funding amount is estimated to be around Rs 205 crore per annum for the operators chosen in the first round of bidding.
Minister of State for Civil Aviation Jayant Sinha said criteria for selecting the winning bidders was based on the level of viability gap funding each of them were on per seat.
The viability gap funding would be in place for three years for the airlines concerned from the date of starting operations in a particular UDAN route.
This looks on the face of it to be a great aviation policy and a great way to increase employment and connect India, but there is a catch. Everything depends on timely payment by the Indian government of the gap funding. If this does not happen then the airlines running these routes will see their cashflow decimated. Knowing full well how Indian red tape works, I would expect these airlines will not be paid on time all of the time and (and I hope I am wrong when I say this) but Air India might be put at the front of the queue for gap funding payments. That would be a travesty and it would put the Indian aviation market back 20 years with Air India stifling competition with government aid all over again. I would not bet against this being the way things pan out, but as I say, I very much hope that I am wrong.
SpiceJet’s Ajay Singh said his airline would not be availing viability gap funding.
People will take comfort in seeing Captain G.R. Gopinath back in Indian aviation with what will be Air Deccan round 2. His new airline has won rights to fly Delhi-Agra, Kolkata-Burnpur, Kolkata-Cooch Behar, Bagdogra-Durgapur, Kolkata-Jamshedpur, Kolkata-Rourkela, Shillong from various cities in the north east, Dehradun-Pantnagar and Delhi-Pantnagar, Mumbai-Kolhapur, Mumbai-Jalgaon, Mumbai-Nashik, Pune-Nashik, Mumbai-Sholapur under UDAN. If anyone can make it work he can and if anyone has the political contacts to shout loud and clear if things are not working as they should then it is him. So, could a new Indian airline worth investing in be rising?
Meanwhile, look out for zoom Air (India), which is attempting to raise capital and is in discussions with an ASEAN-based carrier to expand operations, it is reported.
In Vietnam the market just got scary as AirAsia Bhd announced it is forming a VND1 trillion joint venture low-cost airline in Vietnam, which is expected to commence operations by early 2018. The JV will be “an airline in Vietnam which offers affordable but high-quality service to Vietnamese and foreign tourists. AirAsia has conducted a feasibility study prior to entering into the JV and, based on the study, it is forecasted that the JV will be operationally feasible and commercially viable and is expected to contribute positively to AirAsia’s financials both directly and indirectly in the future,” a stock exchange filing stated today.
AirAsia’s wholly-owned subsidiary AirAsia Investment Ltd (AAIL) executed a shareholders agreement and a share subscription agreement with Gumin Co Ltd, an individual Tran Trong Kien, and existing Vietnamese seaplane service provider Hai Au Aviation Joint Stock Company (HAA).
AirAsia said the JV will require RM194 million (VND1 trillion), of which AAIL will subscribe for a 30% stake or 30 million shares for RM58.2 million (VND300 billion). Gumin will hold a 69.9% stake or 69.99 million shares in HAA, while Tran Trong Kien will hold one share
AirAsia will raise internal funding for its portion of the equity.
AirAsia also said AAIL and HAA signed a new shareholder loan agreement where AAIL will be providing a loan of US$2 million (RM8.84 million) to HAA. Separately, Gumin will also be providing a loan amounting to US$4 million (RM17.68 million) to HAA.
Tran Trong Kien is the chairman of Buffalo Tours service provider Thien Minh Group. HAA is also a member of Thien Minh Group, operating daily direct flights from Hanoi to Halong Bay and sightseeing tours over Halong Bay. HAA operates two Cessna Grand Caravan 208B-EXs turboprops.
So this news today will come as a blow to VietJet, which has a market share of 43%. AirAsia usually enters a market and collapses ticket prices by an average of 15%. This will hurt VietJet but the Vietnam market is just about large enough to cope on some routes, on others under direct competition the tussle between VietJet and AirAsia might just resemble the AirAsia/Lion Air battle. Although, at this time, AirAsia is fighting a very strong and well respected Vietnam brand in its own back yard. Expect the AirAsia logo to carry little weight in the competition between the two that is to come. AirAsia will win big if it can connect with AirAsia X locally and join the dots from the outset this time.Date: March 31, 2017