Southeast Asia’s budget airlines are hoping the worst of the Middle East-driven fuel shock is over, but high costs and strained household budgets continue to threaten demand and profitability in the second half of the year, airline executives and analysts said (24/08).

Recent quarterly results from Malaysia’s AirAsia, Singapore Airlines’ budget arm Scoot and the Philippines’ Cebu Pacific showed that higher fares were not enough to fully recover soaring fuel costs.

AirAsia and Cebu Pacific reported net losses, while Scoot’s operating loss nearly doubled.

The results highlighted a key challenge for the low-cost airline model. Fuel accounts for a larger share of expenses than at full-service airlines, while price-sensitive passengers give budget carriers less room to raise fares without weakening demand.

Currency weakness has added to the pressure. The Malaysian ringgit, Thai baht, Indonesian rupiah and Philippine peso weakened against the U.S. dollar, increasing fuel and aircraft leasing costs that are typically priced in the U.S. currency.

Cebu Pacific Fuel Costs More Than Double

"The second quarter was the most challenging operating environment Cebu Pacific has faced post-pandemic," Cebu Pacific CEO Mike Szucs said on an earnings call this month.

The airline’s fuel expense more than doubled from a year earlier, according to another executive, while the impact was magnified by an 8% weakening of the peso.

Cebu Pacific has hedged about 30% of its third-quarter fuel needs at below $120 per barrel to secure near-term protection.

Full-service airlines have been better protected by strong post-pandemic demand from premium passengers, said Nathan Gee, head of Asia-Pacific transportation research at BofA Global Research.

Budget carriers have benefited less because of their more basic products and smaller loyalty programmes, he said.

AirAsia Cuts Capacity Ahead of Fourth-Quarter Recovery

AirAsia is preparing for a weak third quarter, which is typically the softest period for regional travel.

The airline plans to cut seat capacity by 20% to 25% year-on-year during the quarter. It also plans to return 25 older aircraft to lessors during 2026 and suspend its Sydney-Kuala Lumpur route from October as part of a broader network recalibration.

AirAsia CEO Bo Lingam said the airline was taking a "deliberate, tactical approach" to protect its bottom line after average jet fuel prices reached $183 a barrel in the second quarter.

AirAsia also recorded a net foreign exchange loss of about $82 million.

Lingam said the airline expects to restore capacity to pre-war levels in the fourth quarter, with forward bookings tracking in line with last year.

Scoot’s Operating Loss Nearly Doubles

Scoot has continued to add capacity as demand remains strong. However, its passenger unit costs rose 21.7% in the three months to June.

The increase pushed its operating loss to S$32 million ($25.2 million), compared with S$17 million a year earlier, despite higher fares and coverage under parent Singapore Airlines’ fuel-hedging programme.

The higher costs lifted Scoot’s break-even load factor to 100%. This means the airline would have needed to fill every seat to cover its passenger operating costs, compared with an actual load factor of 90.6%.

Scoot Chief Commercial Officer Calvin Chan said the carrier’s fare adjustments had not fully offset higher fuel prices, while the Middle East conflict continued to cloud the outlook.

Lower Fuel Prices Could Increase Fare Competition

A decline in fuel prices would ease immediate cost pressures but could encourage airlines to restore capacity and compete more aggressively on fares, Gee said.

Intra-Asian routes are particularly exposed because supplies of narrowbody aircraft are recovering faster than those of widebody jets, he said.

That additional capacity could face weaker demand.

Independent aviation analyst Brendan Sobie said strained household budgets could curb travel by Southeast Asia’s middle class during the rest of the year and the crucial peak season.

"The short-term outlook is rather bleak," he said. "While there is hope of improvement in the fourth quarter, it is too early to really gauge."

PHOTO: EPA IMAGES PIC

This article was created with AI assistance.

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