Industry players diversified their business activities amid consolidation to stay afloat, as highlighted in the second part of this aviation article

Looking at everything in totality, aviation analyst Shukor Yusof is certain that the sector will recover but to what extent and how quickly, well, that is down to anyone’s guess.

“I certainly don’t think it will recover any time soon. I know many of us in Southeast Asia, especially in Singapore and Malaysia think that the recovery for this part of the world will happen beyond 2025 but that is contingent on Covid-19 not coming back in different mutations,” Kuala Lumpur-based Shukor said in a recent interview with The Economic Times, presaging that the outlook is grim. “The next six months is bleak.”

In 2020, the global industry chalked up more than $126 billion in net loss, according to the International Air Transport Association (IATA), which however, anticipates net losses to narrow to around $48 billion this year.

It said every region made substantial losses last year, in excess of 20 per cent of revenues at an operating level.

Unlike North American airlines, particularly the US, which is benefitting from rapid vaccination rollout and large home market, Asia Pacific remained a “very mixed region”, IATA indicated in April.

Airlines in China and Australia are likely to benefit from good virus control and large home markets but a risk averse approach to travel restrictions means “very little recovery” of international passenger revenues are expected.

This perhaps describes the challenges faced by the tiny aviation sector in Cambodia, which is thoroughly dependent on the tourism sector to lift its wings. And where 80 per cent of the air routes are dominated by the Chinese market, any setback can jeopardise the tourism sector.

The recent travel notice by the Chinese Embassy in Cambodia for travellers to China from Cambodia where two weeks quarantine and dual Covid-19 tests prior to departure are compulsory, is one such example.

As it is merely a “supporter” of tourism rather than a “leader”, growth plans for the aviation sector are dictated by Ministry of Tourism’s roadmap (2021-2025), said State Secretariat of Civil Aviation (SSCA) spokesman Sinn Chansereyvutha.

In that, the two-week quarantine period, proof of minimum $50,000 insurance policy and payment of $2,000 deposit for Covid-19 tests and accommodation remain in place, much to the chagrin of tourism players. They hope that these measures are dropped in due course so as to not deter travel to Cambodia.

But with an unrelenting rise in coronavirus cases and new variants emerging since February 20 this year in Cambodia coupled with start-and-stop government policies on travel and border openings in the region, optimism for growth is running low in the industry.

The tourism sector, which contributed 18.7 per cent to gross domestic product in 2019, second to construction, according to the World Bank, collapsed in a year since Covid-19 with a huge portion of the 620,000 workforce left jobless.

Even the airport segment took a beating where some 50 per cent of 1,180 employees of French-listed Vinci SA’s majority-owned Cambodia Airports have been relieved on “authorised absence”.

Source: Tourism Statistics Department, Ministry of Tourism.

The hardest hit are the airports in Siem Reap and Sihanoukville, SSCA data showed where in the first four months this year, nearly zero passengers were recorded.

However, the affected employees continue to receive a “very reasonable” portion of their salary, Cambodia Airports communication and public relations director Norinda Khek said.

He added that the airports have been kept open to fulfill their public service mission but has had to scale down and adopt cost-saving measures, though it is not adequate to offset revenue loss caused by the sharp fall in traffic.

“We consolidated terminal operations at the airports to cut utility costs and adapt to less traffic [as well as] internalise tasks that used to be carried out by external service providers,” he told The Post via email.

‘Trying to survive’

As of now, about 13 out of 22 aircrafts leased by local airlines are grounded, translating to an airline operating loss of 60 to 65 per cent, Chansereyvutha said.

Granted, all five local airlines – foreign and local-owned – have yet to breakeven, never mind taking a profit, given their short stint of operation of between four and 11 years.

Government bailout has been rudimentary, apart from the extension of tax relief till September this year, which is part of the fiscal measures to ease the burden on affected parties.

The fate is the same with national flag carrier Cambodia Angkor Air, which is 51 per cent state-owned and whose history dates back to 1950s.

Despite the entry of new owners, comprising Chinese investors who acquired Vietnam Airlines’ 49 per cent stake for $37 million, Chansereyvutha said no action plan has been announced to rejuvenate the airline, possibly due to Covid-19.

“It is two years now … the investors have not taken any action since the pandemic,” he told The Post via a social messaging app.

The airline’s chairman Samrach Tekreth did not respond to questions.

However, Angkor Air, as it is known locally, and other Cambodia-based airlines - Lanmei Airlines, Cambodia Airways, JC International Airlines and Sky Angkor Airlines continue to serve their severely reduced number of routes on a weekly basis despite fewer landing slots.

“It has been really hard for airlines, not just for us. Our operation has [dropped] a lot and we are trying to survive by making efficient expenses without compromising the airworthiness of our aircrafts and safety,” said Zaidan Hilman, quality assurance director of Sky Angkor, a Korean-owned airline.

Although its original base is Siem Reap International Airport, the airline with two Airbus 321s made an executive decision to station at Sihanoukville airport after flights to the ancient Angkor Wat city plunged to zero since the pandemic.

It now flies once a week to Chengdu and operates a weekly charter flight to Zhengzhou, and has stopped its “winter-season only” service to Incheon, South Korea.

“[We] will always try to survive in hard situation[s]. Once China and Korea open their skies, [we] hope [the] aviation [sector] will get better,” Zaidan said, adding that the airline has an advantage over the Korean market compared to others in Cambodia.

The hope now is for Cambodia to strike a travel bubble deal with China when herd immunity is reached, said another airline operator, who declined to be named.

“With quarantine still in place, there will be no hope for passenger flights to resume,” he said.

Aircargo sustenance

Going by SSCA data, passenger traffic was down a dismal 94 per cent year-on-year with only 115,353 persons passing through the three airports between January and May this year while aircraft movements slid 82 per cent to 4,134 movements in the period.

However, in May this year, aircraft movements recorded a 30.3 per cent growth to 881 movements from 676 in the corresponding month in 2020. This growth which extended to June where a 32 per cent increase was captured was driven by the shipment of vaccines from China and general cargo, Chansereyvutha said.

It presented an upside in the statistics linked to the steady expansion of aircargo transport where a 4.3 per cent year-on-year increase was logged in May by the authority.

Interestingly, only Phnom Penh International Airport supported segment growth that saw 22,974 tonnes of goods handled between January and May this year, while the other two airports received no shipments.

This bore good news for Cambodia Airports as it helped to bring in some revenue, Norinda said, while sharing that aircargo rose 14 per cent in the January to June period this year versus the corresponding period in 2020.

The rise in local aircargo is in line with global figures which reflected the segment’s performance throughout the pandemic due to export-import trade and the growth of e-commerce activities.

In the first three months of 2021, IATA figures showed that industry-wide cargo tonne-kilometres (CTKs), a measurement of revenue load over distance, grew by 8.4 per cent compared to pre-crisis levels in 2019.

“Unlike a few months ago, the strong performance is now visible in most of the main regions and trade lanes,” it said in a note in April.

In Cambodia, six international airlines operate cargo flights two to five times a week from Phnom Penh to the Middle East, Hyderabad, Singapore, Bangkok and Hong Kong while local airlines continuously compete to secure load. Most are not lucky though.

“We tried to find cargo market but we have not been lucky since last year,” said Sky Angkor’s Zaidan, conceding that he does not know the actual reason as it was not an issue handled by his department.

However, he offered that it might be due to the “less-than-profitable” cargo pricing and that it was better “not to fly than lose money”.

Conversely, one Cambodian passenger airline, owned by an experienced Chinese aviation player, has been surviving so far on transit cargo flights, albeit with diminished revenue and excessive cost-cutting.

“Our airline is the only one that is able to operate cargo as the rest don’t have the capacity. I think they tried but were not successful,” said a top officer of the firm, insisting that the name of his airline is not mentioned as they preferred to remain low profile.

He added though that his airline has not grounded any of its six-aircraft fleet and even took on a replacement aircraft after returning an older one as the lessor wanted it scrapped.

When asked, Chansereyvutha of SSCA countered the notion that only one airline operated cargo, saying that all local airlines have carried “not only passengers but also cargo”.

Meanwhile, Lee Shashitheran, a former IATA head of cargo services for Malaysia and Brunei, said aircargo transport has become the sustaining factor for most airlines in the face of the pandemic.

“Even those without dedicated freighter fleet have been using their passenger aircraft to transport cargo on the space available. Cargo transportation would have played a larger role in reducing losses for the passenger carriers,” he said.

On a normal scenario, cargo can contribute 15 to 35 per cent of total revenue for an airline depending on their focus.

Source: Tourism Statistics Department, Ministry of Tourism.

That being said, Lee who has nearly 30 years of experience in the freighter industry, observed that there were no large scale “conversion” of aircraft from passenger to cargo, although there was definitely an uptick in the conversion activity.

Conversion could be either be in the physical sense – passenger aircraft to freighter – or just converting the aircraft’s use to carrying cargo from passengers.

“Many passenger airlines started using their passenger aircrafts for the purpose of carrying cargo in the belly space and in some instances on the main deck, as well,” he noted.

While he felt that concentrating on aircargo in the interim could be a way to continue creating revenue, many airlines with lesser focus on this business segment experienced a steep learning curve.

“Lack of expertise in [this] business is slowing down the airlines’ effort to concentrate on the logistics business. [However] aside from normal activities an airline can do to stay afloat, aircargo may offer some [income] to sustain themselves,” he said.

But not in terms of offsetting losses, aviation consultant Shukor asserted, adding that he was not convinced that cargo businesses can adequately do so compared to full paying commercial passengers.

He, however, acknowledged that a number of airlines converted their aircrafts, but not in full conversions as that would require a complete overhaul and is very costly.

‘Won’t stop the bleeding’

This just means that airlines would continue to burn cash, although the quantum would be reduced, to ride through this period even as they report losses.

According to global management consultant McKinsey & Co, retraining pilots who have not flown for a considerable time and getting aircraft flight-ready is going to cost money.

It estimated that the industry could accumulate between $870 billion and $1.1 trillion by 2024, when air travel is likely to recover fully.

For small airlines like those in Cambodia, the reality is surreal but they might be able to leverage on their market size to recover faster.

Still, Shukor reminded that that growth could be hampered by leases and fuel – major costs for airlines – which are denominated in US dollars.

“That is a disadvantage,” he said, adding that airlines have done all they can to cut costs including grounding planes, laying off staff and deferring aircraft deliveries.

“But these aren’t enough to stop the bleeding. They [would] just have to wait it out, if possible,” said Shukor, who founded Endau Analytics, an advisory and research firm focussed on aviation economics and aircraft and airport financing in Asia Pacific.

The common approach for sustainability under the current economic landscape has been to restructure whether by consolidating flights, removing loss-making joint-ventures or non-core businesses and renegotiate to defer or cancel aircraft deliveries.

Contending that everybody is fighting to survive now, Mohshin Aziz, director and analyst at Singapore-based Pangolin Investment Management Pte Ltd, said it is the worst crisis the aviation industry has seen so far.

His fund management firm, backed by high net worth individuals, invests in equities related to aviation-related companies such as aircraft lessors, airlines, airports, aircraft manufacturers and terminal retail companies.

To date, Pangolin has equity in three airline portfolios comprising Brazilian carrier GOL Airlines, Norwegian Air Shuttle and UK-based JET2 Airways.

Asked if there was appetite to invest in the sector as global travel is likely to pick up in the second half, Mohshin said there have been small start-up airlines popping up all over the world, taking advantage of “cheap assets and plentiful qualified staff”.

“However, they are small in size and backed by entrepreneurs with questionable sustainable financing capabilities. Rich people can be poor very fast in the airline industry. It has happened time and time again,” he pointed out.

The business model in Cambodia operated in the same way where most of the owners are cash-rich investors whose core business is rooted in real estate and finance.

“I suspect like many other companies, the business owners have injected their own capital to keep the business afloat,” Mohshin said.

Looking beyond the horizon

For many airlines, the path forward is uncertain, given that debt levels rise and cash flow impeded growth but local airlines might hold an advantage over its peers in the region as vaccination increase and regional frameworks strengthen.

Based on this, analysts including Moody’s Investors Service Inc have changed their outlook to positive as air travel is expected in the second half of 2021 with governments likely to lower barriers to entry.

A common view among research houses is that leisure travels will lead the growth. For Cambodia, this is good news, seeing that its vaccination programme has inoculated 4.5 million people or more than 45 per cent of its target population.

Source: First quarter 2021 results, Vinci SA

“To be ready for the medium-term and full return of air travel, we continue to invest in our infrastructure, particularly by introducing technologies that make travel safer for hygiene-conscious passengers,” said Cambodia Airports’ Norinda.

On the whole, the airport firm, which holds a 45-year concession on all three airports, has not changed its medium-term outlook for the country since it started in 1995.

With opportunities still untapped, Cambodia will continue to attract business and leisure travellers, with air connectivity remaining the gateway.

“Taking advantage of Vinci Airports’ network, we have been pitching Cambodia to airlines, tour operators and other tourism authorities as a safe bet for future travels,” Norinda said.

Jennifer Meszaros, international aviation consultant of the Civil Aviation Cooperation Initiative (CACI) in Mekong-Lancang countries commented that obligations under the Convention on International Civil Aviation are being done now by the Kingdom.

Through this, it can ensure a security oversight system, implement a state safety programme, strengthen legislation such as environmental provisions, and build a technical talent pool to fill critical workforce gaps.

Additionally, the ASEAN-EU Comprehensive Air Transport Agreement concluded in June will help rebuild air connectivity and spur economic activity on both sides while joint efforts under bi and multilateral frameworks with regional and international partners advance safety, security, and sustainable practices in the aviation industry.

The opening up of three new international airports will also increase employment, air cargo, and business opportunities such as aircraft maintenance, VIP services, and ground handling, said Meszaros, who authored “The Case of Cambodia: Challenges in training the next generation of aviation professionals”.

In the meantime, Sopontara Pichr, chief of members of aviation sub-committee at the Pacific Asia Travel Association Cambodia chapter, suggested that airlines re-evaluate the economics of operations to narrow the gap between non-stop pricing and connecting pricing.

They should also consider reconfiguring cabin layout, dealing closely with authorities to set standards on the rise of cash-on-hand to make it resilient against future shocks, investing more in information technology and automation and making the check-in and boarding process seamless.

At present, many governments remain rightfully focussed on safeguarding health and the well-being of their citizens, Meszaros said.

However, she shared Cambodia’s optimism that the aviation sector “will not only recover” but also strengthen.