With the pandemic taking airlines as victims before the first half of the year, the Kingdom’s airlines hold sway as several factors play to its advantage for now
Like the dull throb of a twin otter engine in midflight, the feeling of anxiety permeates the aviation sector that recently claimed its first “victims” over ballooning losses – a result of Covid-19’s protracted global travel restrictions.
To date, six airlines have filed for bankruptcy, according to an article in the Forbes Middle East which points to a mixture of full service and budget airline entities.
Most of the affected are established flag carriers in their own right such as Thai Airways and Air Mauritius, Virgin Australia, and century-old Avianca Airlines.
At press time, efforts were being made to “rescue” some of these airlines from flying into the sunset via cash injections resulting from a merger, stake sale, or takeovers.
However, many others teeter on uncertainty as full year passenger demand is likely to fall 48 per cent year-on-year in 2020, data by International Air Transport Association (IATA) in April showed.
This could lead to a 55 per cent plummet to $314 billion in airline revenue by the end of 2020, IATA projected on the back of austere Covid-19 measures implemented by governments to reduce the import of coronavirus infections.
In a March 20 report, Moody’s Investor Services Inc projected capacity to fall by 40 per cent to 60 per cent or more for the second quarter of 2020, and in some instances, more than 75 per cent compared with the second quarter of 2019.
On a full-year basis, Moody’s expects global industry capacity to drop up to 35 per cent, assuming the spread of the virus slows by the end of June and passenger demand returns subsequently.
While all this happens in the world, Cambodia’s fairly young airline sector revels in a sweet spot despite rising operating costs consisting of dry lease, aircraft maintenance and airport fees, as well as staff salaries.
So far, the local airline sector has chalked up losses of around 60 per cent for every hour the aircrafts remain grounded, said Sinn Chanserey Vutha, senior deputy director-general of State Secretariat of Civil Aviation.
This, despite the savings from fuel cost which invariably makes up the largest non-fixed cost component in airline operation.
Presently, some 25 aircrafts belonging to six locally-registered airlines – Cambodia Angkor Air, Lanmei Airlines, Sky Angkor Air, JC International Airways, Cambodia Airways and Bassaka Air – are parked at the Phnom Penh International Airport and Siem Reap International Airport.
A few of these airlines are operating one overseas route weekly to Guangzhou, China, to transport passengers and cargo, whereas Bassaka Air Ltd which handles charter flights has been flying empty at times to maintain its licence.
Also, flag carrier Cambodia Angkor Air, which is 51 per cent-owned by the government, plies inbound routes as part of its national obligation although passenger travel has dropped drastically.
Passenger figures slipped 49 per cent while cargo handling dipped eight per cent from January 1 to April 15. In that period, flight movements declined 35 per cent.
A small bailout in the form of tax waivers was implemented by the government within its Covid-19 fiscal stimulus measures at the end of March.
This involved a three-month exemption till May, 2020, on the minimum tax obligation and prepayment of tax on income.
But the savings did not amount to much as it only meant a slight tax reduction on revenue and a postponement of passenger levy payments, said an airline operator who declined to be named.
The airlines have taken a 95 per cent hit on revenue and there is no profit per se, as the entities have yet to breakeven, having only been in operation for less than 10 years.
“[In the meantime] we still have to pay value-added tax, fuel tax, airport tax and air navigation fees,” the operator said.
Yet, these airlines continue to linger.
What sets them apart?
Seeing that these airlines are small in size with $50 million to $200 million in initial capital investments, structure and scalability likely play to their advantage with regards to sustainability over the current economic turmoil.
“That is partly correct [but] it is also helpful that some of these airlines are financially backed by Chinese enterprises,” said Shukor Yusof, head of aviation at Endau Analytics.
In the past decade, Cambodia has unwittingly drawn Chinese investors to indulge in the country’s open economy and to feast on the tourism market that was fed by Chinese tourists, who made up nearly 30 per cent of foreign visitors in 2019.
Cursory aviation regulations and the government’s somewhat friendly business terms whetted the appetite of cash-rich investors from China.
They were mainly those who made their wealth in the real estate sector such as Prince International Group and Yunnan Jingcheng Group Co Ltd.
Requirements such as displaying a five-year financial model and proof of secure investment to avoid flight risk were some basic conditions that investors have to meet before they are allowed to apply for the air operator’s certificate from the SSCA.
About five years ago, nearly 20 airlines were operating or vying for AOCs in Cambodia. Today, the number has whittled down to six, after its contemporaries quit at different stages of application or operation due to burgeoning costs.
Still, those which persisted may have done so because they have a lower debt legacy, seeing that they are young.
Attempts to contact the airlines were futile.
Some experience in the field could be another factor. For instance, property developer Yunnan Jingcheng which owns JC International Airlines Co Ltd also operates Kunming-based Ruili Airlines in China. Interestingly, both airlines started in 2014.
Similarly, Lanmei Airlines Co Ltd chief operating officer Captain Darren Chan said its investors, including its chairman and chief executive officer Li Kun, have been in the airline business for four decades.
“Airline [operation] is our core business ... our bread and butter. We sold [our stake in another airline] two years ago to focus on expanding within Southeast Asia,” Chan told The Post.
Could this explain why comparatively small players keep operating costs low while biding the time for growth? Shukor was sceptical.
“Smaller airlines have lower operating costs but airlines are by definition capital intensive, and there are fixed costs typically denominated in US dollars which may be disadvantageous for Cambodian companies now,” he said.
Cost savings on fuel, labour
For airlines, labour and fuel prices are big ticket expenses, representing slightly more than a third of operating costs. But this outgoing cash flow has been reduced with Covid-19.
While West Texas Intermediate (WTI) futures tanked last month, oil prices for both Brent crude and WTI have rallied over the weeks to settle in the range of $35 to $38 per barrel on the back of supply cuts and the slight easing of lockdowns.
During good times, airline industry earnings would have soared with fuel prices at this level, as air travels take flight on competitive ticket fares but with many borders still closed, planes have nowhere to fly, inadvertently saving cost because of low demand for fuel.
Unfortunately, industry workers suffer the consequences, owing to business decisions to manage cash flow.
Some 2,000 workers comprising of in-flight and airline staff on the ground, and airport employees have been forced to take no pay leave for two to three months, said Ron Ravan, president of Cambodia Transport Workers Federation.
“We estimate flight crew to be about 50 people. If we include airline staff, it comes up to 1,000 and together with suspended airport workers in three airports, we have over 2,000 people with no salary,” he said.
The rest who remain employed are essential personnel who have agreed to half month wages, said an airline executive, stressing that it is the norm in the aviation sector for the management to downsize when times are bad.
“Many airline employees are on no pay leave [now] while some are being partly subsidised by governments for a limited period, such as Singapore, UK and the US,” Shukor said.
So far, the affected workers have not received any form of allocation from the government. It is not known if they would benefit from the “Cash for Work” social assistance programme under the Covid-19 fiscal stimulus package.
What lies ahead?
To date, none of the six airlines have filed for bankruptcy yet, Chanserey Vutha confirmed.
“Why do you think other airlines in the world have filed for bankruptcy? It is because of the scale of the airline, the impact of Covid-19 and the airline’s affordability,” he said.
He said in the US, Europe and Latin America, operation scale is evidenced by a big workforce, fleet and routes, which makes for a deeper impact during a crisis.
“[Closer to home] for example, Thai Airways has more than 10,000 staff, over 200 aircrafts, and its cost is high because it is not a long haul carrier. It is a legacy airline, so the impact is very huge.
“Therefore, they have no choice but to file for bankruptcy,” he said.
For now, Chanserey Vutha noted that airlines are on standby for a slight recovery in the second half of the year as governments relax travel measures globally.
In Cambodia, the travel ban on those from the US, France, Germany, Italy, Spain and Iran has been lifted, although travellers must possess health insurance coverage of at least $50,000 and a health certificate upon arrival.
The requirements continue to pose some difficulty for travellers, but this has not deterred some local airlines which have ramped up cargo flights since March despite stiff competition.
“Cargo is the most effective way to eke out some revenue given that tourism [a staple for Cambodia] has been decimated all over the world due to Covid-19,” Shukor said.
This is exemplified by Prince’s Cambodia Airways Co Ltd and Lanmei which have been transporting cargo made up mostly of medical equipment from China.
“It is a temporary measure to wait for passenger travel to return,” said Chan, adding that the airline is also involved in adhoc repatriation to Manila, Jakarta and Kuala Lumpur.
Going forward, the path remains turbulent, particularly if the pandemic prolongs. More airlines will likely fold due to piling debts.
On the flipside, this will push the market to consolidate.
“That is certainly a possibility unless their owners can keep the airlines afloat by injecting funds when planes are grounded and passenger traffic is very low. A correction in global airline markets is anticipated, in any case,” Shukor reiterated.