Moody's Investors Service says that intense competition and capacity growth will continue to pressure the margins of Chinese and Southeast Asian airlines in 2015. Consequently, Southeast Asian carriers will focus on cutting their costs and some could see further restructurings.
''Asian aviation industry margins will remain weak over the next 12 months, as airlines compete to maintain market share amid strong growth in capacity,'' says Dylan Yeo, a Moody's analyst.
''As such, cost management will be the focus of both full-service carriers and low-cost carriers in Southeast Asia over the next 12 months, as the industry seeks to stem the decline in profitability,'' adds Yeo.
Yeo was speaking on the release of a new Moody's report on Chinese and Southeast Asian Airlines, entitled ''Focus Shifts from Expansion to Cost Discipline Amid Intense Competition''.
According to the Moody's report, Southeast Asian full-service carriers are grappling with stiff competition from low-cost carriers on short-haul routes, while Chinese airlines face margin erosion due to a weaker domestic economy and competition from the country's rapidly expanding high-speed rail network.
While competition will continue to hurt EBITDA margins in the Southeast Asian market, Moody's expects the decline in profitability to stabilize, as airlines taper capacity growth.
Moody's also expects airlines to slow their aircraft deliveries and moderate capex plans to protect their balance sheets. Some airlines may also need to reassess the viability of unprofitable operations -- including joint venture investments, low-cost carrier subsidiaries, and certain routes of their network - and restructure.
As such, Moody's expects the rate of credit deterioration to moderate in the next 12 months, as many airlines will need to stretch out expansion plans to remain viable and capex growth will plateau at current levels.
Moody's report further notes the need for strong liquidity buffers to navigate the industry challenges. Chinese carriers have generally maintained lower liquidity buffers than their Southeast Asian peers due to the relatively lower level of competitive pressure in the country, but are supported by strong onshore funding access.
Southeast Asian airlines also continue to face risk from foreign exchange fluctuations as seen during 2013, when profitability was significantly affected by the depreciation of major Southeast Asian currencies against the US dollar.
Chinese airlines are less affected given currency controls over the RMB. Oil price risk has declined in the lower crude price environment. Moody's expects Brent crude to stay at around USD 75 to USD 85 a barrel through 2015.
