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Aviation industry flight path in turbulence

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The aviation sector in Cambodia languishes in the overarching effect of the coronavirus pandemic. Post Staff

Aviation industry flight path in turbulence

Cambodian airlines fly low, keeping their expenses tight as they brace the period which is expected to get worse before gaining speed for a smooth climb

Barring unforeseen circumstances, airlines often make a killing, no pun intended, in profit when crude oil prices tank.

With the current depressed prices, and Brent crude plummeting to an 18-year low on March 30, an ideal scenario would have developed for the sector to make up for its less-than-appealing financial performance in recent years.

It is a shame, shrugged an airline operator in Cambodia.

Truth be told, globally, the sector has been slightly dull even before the Covid-19 pandemic rendered a blow to the global economy.

In 2019, the International Air Transport Association (IATA) downgraded its outlook for the year because of rising fuel costs and a damp demand on the back of the Sino-US trade war.

If there was any glimmer of hope for the airline sector to trend upwards on better global trade growth in 2020, it is gone now.

In Cambodia, the situation is somewhat complex as the six local airlines are fairly young, so this pandemic could push them deeper into the red.

The oldest is 51 per cent state-owned Cambodia Angkor Air, which is around 10 years old. The rest – Cambodia Airways, JC Airlines, Lanmei Airlines, Sky Angkor Airlines and Bassaka Air – barely have five years experience under their belt.

With stiff competition, constant price dumping to pull more customers, and tax regulations, profitability has been a faraway dream.

The hope was further dashed by the ban on online gambling which reduced passengers from China and the late 2018 introduction of government policies for the hospitality sector, including accommodation tax and passenger levy.

With the coronavirus crisis, they now struggle even more with load factors, resulting in capacity being slashed by 90 per cent, and a majority of the workforce sent off on no-pay leave.

All these airlines ply the China route to bring cash-rich tourists, business people and workers from the world’s second-largest economy, which has in turn boosted Cambodia’s economy.

Tourism is one of the top three income generators for the Kingdom, chalking up $4.4 billion in international tourism receipts in 2018, a figure that reflects a 10-year compound annual growth rate of 10.6 per cent, including hotel occupancy and transactions.

Although tourist numbers rose 6.6 per cent to 6.6 million in 2019 from 6.2 million a year ago, with nearly one-third of them being Chinese nationals, the numbers dwindled over the months to just a handful. It has cast a pall over the industry, as it has everywhere else in the world.

State Secretariat of Civil Aviation (SSCA) data on passenger and flight movements confirm that the aviation sector started posting negative growth from the middle of January.

“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,” said its deputy director-general Sinn Chanserey Vutha.

Today, almost all but one aircraft of each Cambodian airline is grounded in the airports.

Up to 95 per cent of airline revenue in the Kingdom has been wiped out since the lockdown in Wuhan, and the gradual travel restriction by provinces in China as the Covid-19 numbers grew.

Plunging passenger figures also knocked off an average of five per cent of revenue per available seat kilometre (RASK) or about two cents from 45-50 cents during normal operations.

A lower RASK means the airline is operating inefficiently, and this borders on its profitability.

At Phnom Penh International Airport, cumulative passenger statistics in the first quarter ended March 31, 2020 (1Q20) tumbled 31.2 per cent year-on-year to 1.1 million compared to 1.6 million in 1Q19.

More startling is the near absence of passengers at the airport towards the end of March. For example, on March 31, only 439 passengers passed through Phnom Penh, as opposed to 16,094 on the corresponding date last year, representing a 97.3 per cent slump.

Over at Preah Sihanouk and Siem Reap airports, the situation is even dire. For example, on April 2, 2020, both airports recorded zero passengers.

The situation is so critical that an observer remarked on social media that Sihanoukville was literally a “ghost town”. “I am not exaggerating,” the person wrote.

All three airports, which is 70 per cent owned by Paris-listed Vinci SA via its entity Cambodia Airports, revealed a marked decline of air travellers from a daily five-digit record to just three or two digits.

Correspondingly, cumulative flight movements in Phnom Penh slipped 15 per cent to 11,847 in 1Q20 versus 13,861 in 1Q19, while the other two airports saw more than 95 per cent contraction.

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Airlines going bankrupt

As mentioned, none of the local airlines is profitable, neither have they broken-even. And, despite the cut-throat airfares, and staff downsizing, no profit is to be made as operating expenditures rattle the books.

It is not unusual though. Airline operating costs are among the highest in the world. And it is an industry that is vulnerable to various headwinds such as low load and yield, price dumping, jet fuel price, strict financial and safety regulations, and air crashes.

Yet, Cambodia attracts zany greenfield investors who are keen on owning airlines despite not having any experience. They continue to soldier on through intense competition and volatile expenditure. In the past 30 years, nearly 22 airlines have shut down.

A majority of the current start-ups comprise Chinese investors who are making their money in property development, such as the Prince Group which owns Cambodia Airways, and JC Airlines owned by Yunnan Jingcheng Group Co Ltd.

This prompted the government to draw up stringent conditions. At last count, the existing airlines have yet to earn their return on investment which amounted to some $100 million – the minimum requirement imposed by SSCA for airlines intending to register in Cambodia.

With Covid-19, their flight routes overseas have dropped to just one from an average of 20, mostly to China and Southeast Asia, during good times.

This phenomenon is likely to test their resilience in keeping their `noses’ above water, especially when established global airlines themselves are teetering on the brink of bankruptcy.

An operator who requested anonymity said: “We are only operating one flight per week to China while the rest of our aircraft are parked. We are trying to get through this period by doing some ad-hoc cargo transport bearing medical supplies.”

As of April 2, the year-on-year decrease in load factor ballooned to 42.1 per cent, having posted a marginal dip on Jan 2. An aircraft’s load factor measures its carrying capacity which essentially indicates its performance.

“The travel restrictions can make many airlines bankrupt. We have to operate on a limited capacity to ensure we can return to [normal] operations after the Covid-19 crisis,” said Cambodia Angkor Air chairman, Samrach Tekreth.

The airline sector is the most affected industry compared to others in Cambodia as it is not able to operate many routes due to travel restrictions implemented by governments. This has impeded air travel from Asia to the US and Europe and vice versa.

Currently, it is only covering the Phnom Penh-Guangzhou (China) route once a week and flies every two days to Siem Reap and Sihanoukville.

“Because we are a state-owned airline, we must [continue] to [cater to] the limited demand and keep the operation [going],” Samrach explained.

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‘Makes no difference’

In the latest release, IATA urged governments to include aviation in stabilisation packages as they at the core of a value chain that supports some 65.5 million jobs worldwide.

The push was made on the back of its updated forecast for passenger revenue loss by $314 billion in 2020, which is a 55 per cent decline compared to 2019.

But the call carries no weight in Cambodia which in itself is challenged by the lack of funds to ensure its economy and people pull through this pandemic.

On March 31, the government announced a minimum tax exemption of three months from March to May 2020 for Cambodian airlines, as well as deferment of the civil aviation fare, otherwise known as the fee for departing passengers – foreigners ($5) and locals ($3).

For the government, the deferment constitutes a loss because it would have to sacrifice an arrears of $11 million which is owed to them by the airlines. This fee, as well as airport tax, is included in ticket fares which airlines are supposed to settle with the government every two to three months but they often delay in doing so.

“Airlines include this fee as their revenue and use it first for their expenses. So the amount is accrued. It is not easy for us to collect back but because of Covid-19, the government agreed to defer the payment to later while urging the airlines to come up with a payback plan,” said Chanserey Vutha.

The move, however, created no stir, as it would seem.

The revenue tax was reduced but the rest of the taxes and fees, such as fuel tax, value-added tax, airport tax and air navigation stayed in place.

“There is neither a bailout nor any funds available. It makes no difference for us during this period,” the operator said.

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Turbulence in the horizon

Around the world, analysts hold a negative outlook in the near future amid the prediction of a global recession.

The continued hard impact on earnings and operating expenditure is a given in the next 12 to 18 months, they said.

IATA expects full-year passenger demand in domestic and international routes to sink 48 per cent in the second half of 2020 as opposed to 2019 because of overall economic developments and travel restrictions.

“Travel restrictions will deepen the impact of the recession on demand for airline tickets. The most severe impact is expected to be in the second quarter of 2020,” said the trade association which represents 82 per cent of the global air traffic.

Moody’s Investors Service Inc which revised its outlook to negative noted that quarantines, government and corporate travel restrictions and lower propensity for leisure travel are driving airline capacity cuts as coronavirus spreads.

An SSCA’s outlook two years ago projected Cambodia’s passenger growth to be more than 18 million in 2034. While that dream holds sway, the flight path is proving to be one filled with turbulence. Whichever airline remains steady in the end can claim to have landed safely.

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