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.
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