Asia’s air transport industry collapses

The Malaysian government views Malaysian Airline System, which has suffered two horrific airplane losses in the past decade, as both a prestige asset and a necessity. The airline was once privatized and controlled by Tajuddin Ramli, a close associate of Daim Zainuddin, only making a profit by selling off assets.  MAS was repurchased after the airline further deteriorated in private hands through poor management. Today, Malaysian sovereign fund Khazanah holds approximately 70 percent of the company.

Thus, a second option in bailing out the ailing airline was merging MAS with Air Asia. There have been on-and-off negotiations on the assumption that Air Asia CEO Tony Fernandez and his team could manage the airline better. However, there are questions about any synergy between the two as both serve different market segments, and both airlines have based their operations on different equipment. There are also allegations of corruption against the CEO, in regard to taking kickbacks over the purchase of their aircraft from Airbus Industries. The bottom line on airlines mergers in this environment is the merger of two weak financial entities won’t make a strong financial entity.

The third bailout option is to let what happened in the Australian airline industry repeat itself throughout the region, with the market solving the problem. Australia’s Ansett Airlines was an icon founded in 1935, but went into bankruptcy in 2001. A hurried merger with Air New Zealand didn’t save the company. The Australian government allowed Ansett Australia to cease operations, which allowed new low-cost airline business models to fill the void.

A free market approach would allow diversion of scarce money to sectors that will need reviving after the crisis. This will mean survival of the fittest, where a number of airlines will survive, while others collapse. For example, Emirates is cashed up and supported by the Dubai government Investment Corporation. Singapore Airlines is strongly backed, as are a number of Chinese airlines. This is not to mention the potential of a number of new start-ups with different business models.

 One of the ironies about the drastic downturn in air traffic is that air cargo flights are largely unaffected. This segment is almost certainly set to grow exponentially as world trade resumes after the crisis. Air Canada is aggressively refocusing on air cargo operations as a means to counter the downturn.

What is almost certain is that industry recovery will be slow as governments will be hesitant to reopen international borders until there is no risk of any further waves of infection. Tourism and business travelling recovery will be very subdued as people will be reluctant to visit public places like airports and sit for hours in confined places with strangers.

For these reasons, airlines may reconfigure their fleets into combi aircraft that can take added cargo and passengers to make routes profitable.

Governments need to be concerned and even shrewd about bailing out the airlines. The industry by its very nature of being highly geared is fragile. The market is extremely competitive with budget airlines, keeping revenue low on many routes. There has been a long list of bankruptcies. The Covid-19 crisis has already claimed Air Italy in February and Flybe in March. More are almost certain to follow. It may just be better to let the market restructure the air transport industry based on its history.