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READ PART ONE OF, Do airline dreams come true?

In the first part of this Cirium Ascend Consultancy Team Perspective, we looked at the airlines with the largest order backlogs. The example of Emirates (and Norwegian) gave some indications as to how airlines sometimes misread the longer-term market, leading to a degree of double-counting of order backlog. Now we look at another market, this time primarily a point-to-point short-haul example, and then discuss some of the metrics and factors that can help understand the risk that may be present in any long-term future delivery stream. Again, all fleet figures refer to single-aisle and twin-aisle passenger aircraft, both in service and stored, operated by airlines.

Case study – Southeast Asia

In 2014 the two largest order backlogs were held by the Lion Air and AirAsia groups. They still rank at 5^th and 6^th biggest today. Indeed, many of the aircraft that were ordered before 2014 remain on order today, having been deferred. Both groups planned to take advantage of ‘open skies’ liberalisation across the Association of Southeast Asian Nations (ASEAN) region, which promised to spur rapid growth on international markets from 2015 onwards. Each has set up operations in multiple countries, although ownership rules have prevented a wholly-owned approach. Establishing cross-border brands not tied to a specific country aimed to follow the success of Easyjet and Ryanair in Europe.

This strategy appeared to be successful for a while, as Lion Air expanded into Malaysia and Thailand, establishing both low-cost and full-service airlines, and AirAsia launched in Thailand, the Philippines, and Indonesia.

AirAsia went further than Lion Air, in setting up airlines outside Southeast Asia, in Japan and India. AirAsia has also established a much larger medium/long-haul operation than Lion Air, with the AirAsia X brand, although both fly twin-aisle aircraft.

The chart below shows capacity (available seat kilometres, ASKs) flown within Southeast Asia, plus the combined market share for the two airline groups.

Chart 1: Intra-Southeast Asia capacity 2004-2024

It can be seen there was remarkable growth in capacity between 2004-2014, with the overall Intra-Southeast Asia market expanding at 11.7% per annum. Notably, domestic markets had fed most of this growth, expanding by 13.5% per annum. However, international deregulation awaited.

This period coincided with AirAsia and Lion Air increasing market share from 10% to 40%, hence they saw growth of 25% and 32% per annum respectively. The huge orders placed likely assumed this would continue, as well as expanding the brands outside this market. However, a period of consolidation occurred from 2014-2019, primarily due to lack of profitability resulting from intense competition. The two carriers did not increase share further, so were reliant on natural growth in the region, which amounted to just 5.4% per annum. Then Covid hit, and the market was still well below 2019 levels in 2024.

Markets don’t experience tremendous growth indefinitely.

So, what can the examples of Emirates and Air Asia/Lion Air tell us about the current order backlog? Firstly, markets don’t experience tremendous growth indefinitely. Secondly, market share, even for the best-run or lowest cost carrier, tends to plateau eventually. This is usually due to competition – either incumbent airlines learn how to compete better, or new competitors emerge to take advantage of market opportunities.

Looking at the airlines with the largest backlogs today, and those that have the highest backlog-to-fleet ratio, several stand out. The three Indian carriers (IndiGo, Air India and Akasa Air) obviously anticipate huge market growth over the next decade, and this cannot be ruled out, provided infrastructure, trained personnel, and maintenance services can be put in place quickly enough to support the growth.

VietJet Air has 270 aircraft on order, plus another 50 for its Thai offshoot. This places it in a similar position to AirAsia and Lion Air 10 years ago. It needs huge growth to continue, or it needs to gain market share, or both. Lion Air and AirAsia themselves still have over 800 orders in place, sufficient to replace all the current fleet, and grow another 40%. However, as each year goes past, the ratio will decline. They remain the largest airlines in a region with nearly 700 million people, and a very young demographic. The jury remains out on whether these airlines can absorb all these aircraft.

This brings us back to the Middle East, the location of several airlines with massive ambitions for growth.

This brings us back to the Middle East, the location of several airlines with massive ambitions for growth, and the backing of extremely wealthy governments. The region has seen rapid population growth, but much of this is outside the rich oil-producing states. Hence the past reliance on transfer traffic and future plans to develop inbound tourism.

Chart 2 shows the current fleets and firm backlog for key countries in the Middle East, and includes some others for reference, in particular the homes of the other airlines with large orderbooks.

Chart 2: 2024 Fleet & backlog by country

Here, we use the metric of number of aircraft per million head of population as a basis for comparison, and also as a proxy for the propensity to travel by air. If we look at the developed markets of the United States, the United Kingdom and Germany, the number of aircraft (current airline fleet) per million people is 15, 11 and six respectively.

Malaysia sticks out as a higher figure, particularly for the backlog, due to including all AirAsia Groups backlog here. However, even on this basis, the backlog per million people is only 12. For Indonesia, the figure is less than two aircraft per million people. This highlights the potential for growth in the country, which has nearly 300 million people today. Perhaps for countries like Indonesia and Vietnam, the backlog is justifiable, but maybe not in the timeframe currently scheduled for delivery?

India has a current fleet of around 775 aircraft, which is only just higher than the UK.

India has a current fleet of around 775 aircraft, which is only just higher than the UK, despite having 20 times the population. On this basis, the backlog of 2,000 aircraft could easily be absorbed into the market, and would still be only around 60% of the size of the Chinese fleet.

In terms of current fleet per head of population, unsurprisingly the UAE and Qatar are outliers. Their reliance on transfer traffic has allowed this. Some of their order backlog is for replacement. However, the prospect of more direct service by Indian carriers to Europe and North America, continued strong competition from Turkey and others, plus more capacity going into Saudi Arabia likely caps their growth to some extent.

Lastly, Saudi Arabia, with 34 million people, only has seven aircraft per million today. The current backlog implies an increase to around 12-15 per million. This is perhaps realistic for a wealthy advanced nation, but may require some market share capture from today’s incumbent transfer airlines.

Does every airline dream come true? Some already have, but the rate of expansion does not usually continue in a straight line forever. Some have turned to nightmares, often as a result of trying to change the business model from what made it successful. Think Norwegian or AirAsia. Some remain dreams which may still come true, but perhaps after a longer wait than anticipated.

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