Demand remains strong across all routes except East Asia as travel restrictions remain in place in key markets. 

 

SINGAPORE - Momentum in travel recovery has been the tailwind for Singapore Airlines (SIA) as the flag carrier and its budget arm Scoot carried 2.1 million passengers in September, up 2.5 per cent from the previous month.

 

Demand remains strong across all routes except East Asia as travel restrictions remain in place in key markets, SIA said on Monday in a business update for September.

 

Group passenger capacity dipped 0.8 per cent month on month, but jumped 111.8 per cent from the previous year. This is about 67 per cent of pre-Covid-19 levels for September.

 

Across all markets, the passenger load factor (PLF) has improved at both SIA and Scoot, with the group-level PLF at 87 per cent for September. This is a 1.6 percentage point increase month on month and a surge of 68.5 percentage points from the year prior.

 

With increased passenger services resulting in higher bellyhold capacity, cargo operations have seen capacity expand by 33.3 per cent. However, cargo operations have seen a 31 percentage point fall year on year to 56.4 per cent for September&rsquo s load factor, while loads have declined 14 per cent year on year.

 

In September, SIA stepped up services to East Asia, reinstating services from Beijing, while Scoot resumed flying to Fuzhou and Osaka. SIA served 74 destinations and Scoot 48 destinations in September, while the cargo network consists of 107 destinations.

WITH Taiwan, Japan and Hong Kong having dropped or eased border restrictions, airlines are ramping up capacity to capture pent-up demand for these hot tourist favourites during the year-end holidays.

 

Investors should, however, be cautious about jumping into airline stocks. Analysts said that many of the region&rsquo s listed airline groups could continue to struggle for a while, as they face hurdles rebuilding their businesses.

 

Pangolin Aviation Recovery Fund director Mohshin Aziz, for one, told The Business Times that the likes of Cathay Pacific would require time to pick up the pieces, as shown by peers operating in geographies that have already thrown open their borders.

 

Cathay Pacific is also unable to benefit from a full reopening. Although the Hong Kong authorities relaxed the rules on Covid-19 testing and quarantine for incoming travellers last month, some tests are still required and movement restrictions imposed.

 

Paul Yong and Jason Sum, analysts at DBS, meanwhile, said airlines based in North Asia should naturally benefit the most from the reopening of the borders, but that the recovery trajectory for airlines in Asia continues to be uneven for several reasons. These include reduced capacity, shortage of resources and dependence on mainland China.

 

The passenger capacities and fleet sizes of many airlines in the region are now considerably smaller versus pre-pandemic levels as many carriers, especially the financially weaker ones, were forced to radically streamline and downsize.

 

Airlines that culled a significant proportion of their workforce will have a more difficult time ramping up capacity because of the tight labour market globally, while infrastructure constraints may also prove to be an issue at certain airports.

 

&ldquo A full recovery for airlines in Asia will be elusive if China were to remain closed for a protracted period of time airlines that were more dependent on the China market prior to the pandemic have a more challenging task ahead of them,&rdquo added the DBS analysts.

 

Several airlines in the region &ndash Garuda Indonesia and Thai Airways among them &ndash are also undergoing some restructuring, while several others lack working capital to restore flights at a faster rate despite robust travel demand.

 

Garuda and Thai Airways will continue to be laggards in the region because of their drastically smaller scale of operations and extended restructuring, Yong and Sum of DBS said.

 

Airlines in South Korea and Japan are in a better position to benefit from a solid turnaround in international traffic, with inbound tourism likely to rebound strongly because of the significant depreciation of their currencies, they noted.

 

Joanna Lu, head of consultancy for Asia at aviation analytics provider Cirium, looked at tracked flights of some Asian listed airline groups from the beginning of 2022 and pointed out that Japanese carriers are clearly leading in recovery in flight capacity. All Nippon Airways is almost back to pre-pandemic levels while Japan Airlines is 2 per cent above, as at Oct 11. A strong domestic market contributed to the Japanese carriers&rsquo resilience.

 

But the DBS analysts also noted that these airlines have historically had larger revenue exposure to Chinese travellers. This is true of the South Korean and Taiwan-based carriers too. They therefore see Singapore Airlines (SIA) : C6L -0.79% as best positioned to lead the recovery.

 

Its dependence on mainland China is moderately lower than other airlines, its financials are among the strongest in the sector, the vast majority of its pilots are still on board, and it has not downsized its fleet by much.

 

Changi Airport&rsquo s capacity is also on track to reach pre-pandemic levels by around 2023.

 

Investors show a preference for Cathay Pacific&rsquo s shares over those of SIA. The latter is just 0.2 per cent higher this year, whereas Cathay Pacific has gained about 20 per cent.

 

Yong and Sum of DBS said Cathay Pacific has a solid financial buffer, but it will take a longer time for its passenger capacity to normalise because Hong Kong still has multiple restrictions to curb the spread of Covid-19. Several tests are required during one&rsquo s stay, and no visits are allowed to mask-off premises in the first three days.

 

Lu of Cirium noted Hong Kong&rsquo s relaxed travel policy is more of a sign to the world that Hong Kong is &ldquo coming back&rdquo . Of the long-haul travellers, most would probably want to spend some time in mainland China as they travel all the way to Hong Kong. Chinese visitors were the largest market before the pandemic, so that needs to be resumed before the full recovery of Hong Kong.

 

Also, the flag carrier has cut its crew significantly over the past 2.5 years. Its workforce as at June was about 40 per cent smaller than pre-pandemic levels, and it was considerably reliant on transit traffic from the mainland Chinese market. Its management also stated it could only fully recover in end-2024 or early-2025, said the DBS analysts.

 

&ldquo For airlines, perhaps it makes more sense to seek a new &lsquo normal&rsquo by actively opening new routes or markets, rather than seeking to relaunch old routes, as market demand has significantly changed,&rdquo Cirium&rsquo s Lu said.