IATA: More airline consolidations in Asia Pacific expected

It is ‘clear’ that airlines globally are ‘in dire straits’ as they continue to operate with limited cashflow, says regional VP

by AFIQ AZIZ / pic by BLOOMBERG

MORE regional airlines may be forced to consolidate soon due to prolonged restrictions on cross-border travel as the Covid-19 pandemic does not seem to be showing any sign of slowing down.

The International Air Transport Association (IATA) regional VP for Asia Pacific Conrad Clifford said more aviation companies within the same countries are expected to face the fate similar to Asiana Airlines Inc which was acquired by Korean Air Co Ltd.

Last week, Korean Air announced its US$1.62 billion (RM6.62 billion) investment to become the largest shareholder of indebted Asiana Airlines.

The deal, which will create the world’s 15th biggest carrier, is also expected to help both airlines survive the pandemic for the next couple of years.

Clifford said it is “clear” that airlines globally are “in dire straits” as they continue to operate with limited cashflow.

He added that governments’ intervention is crucial — either to mediate the buyout or continue aids to airlines and the affected supply chains.

“The opportunities to make cash at the moment are very, very few and far between because all of the borders are closed. I think it’s highly likely that we will see more consolidations,” he told a virtual media conference yesterday.

Clifford said the Korean AirAsiana deal is a good example of airlines getting together in a very difficult market to ensure their survival and the continuation of jobs and employment for the staff.

He said the unprecedented move and measure are needed during such difficult times.

Clifford also reiterated IATA’s call for governments to reopen borders safely.

“If we can’t find a way to open borders effectively through testing, and if we have to wait for a vaccine, then we may well see more consolidations in this region,” he added.

In July, former airline regulator Dr Nungsari Ahmad Radhi told The Malaysian Reserve that Malaysia’s airlines must consolidate to survive in the post-pandemic environment.

National carrier Malaysia Airlines Bhd (MAB) was already bleeding before Covid-19 wreaked havoc on travel business, while low-cost carrier AirAsia Group Bhd was slashing its manpower to sustain its business.

Nungsari suggested that the government should intervene with a proper and immediate plan, even if it means for airlines in the country to be looking at foreign partners.

However, Clifford said due to technicalities and regulations set by each country where the airlines are based, cross-nation mergers will be difficult.

“We have had a number of airlines that tried to set up regional operations, but they tended to be challenged by the ownership and control rules that apply in different countries with respect to air operator certificates.

“I would think that cross-border consolidation is probably going to be unlikely. However, for consolidation within countries, I would think that there’s certainly a possibility,” he said.

Clifford said the pandemic has also forced governments and regulators to change their approach to consolidation efforts.

“If you look at Korean Air and Asiana a year ago, who would ever have thought that the Korean government could agree to a merger between the two? But that’s where we are today.

“It reflects a realistic approach to the fact that airlines around the world are in very poor financial condition, and in many cases, that means that consolidation, mergers make a lot of sense,” Clifford added.

In April, Senior Minister (Economic Cluster) Datuk Seri Mohamed Azmin Ali said local airlines need a financial lifeline to survive the Covid-19 crisis, and any merger talk will need to be pushed to the back burner for now. He was responding to the talk of a possible MAB-AirAsia merger.

Azmin’s view is also echoed by Association of Asia Pacific Airlines head Subhas Menon, which stated in a separate briefing last week that it would be difficult to see airlines pursuing mergers and acquisitions at the moment, because each is focused on its own survival.

“They’re focused on making sure that they conserve cash and able to withstand this crisis,” he said as reported by flightglobal.com.

At the association’s AGM that was held virtually, IATA chief economist Brian Pearce warned of an uptick in airline failures in the coming years amid piling debt and rapid cash burn.

IATA also flagged a US$118.5 billion net loss for the global airline industry for 2020, some US$34 billion deeper than a June projection.

For the Asia-Pacific carriers, the combined net loss is forecast at close to US$32 billion.

IATA estimates Asia-Pacific carriers to lose US$7.5 billion in 2021 — the smallest loss of the three biggest regions — on the back of a positive outlook for cargo and strong recovery in the Chinese domestic market.