According to airline executives and analysts, Southeast Asia’s low-cost carriers are hopeful that the worst of the gasoline shock caused by the Middle East is behind them, but they will face a challenging second half as margins continue to be under pressure and demand is threatened by tight household budgets.
The most recent quarterly results from Singapore Airlines’ (SIAL.SI) budget unit Scoot, Malaysia’s AirAsia (AIRG.KL), and the Philippines’ Cebu Pacific (CEB.PS) revealed that attempts to offset skyrocketing fuel costs by raising rates were unsuccessful. While Scoot’s operational deficit almost doubled, AirAsia and Cebu Pacific recorded net losses.
The findings revealed a squeeze at the core of the low-cost model: fuel accounts for a higher portion of costs than at full-service airlines, yet price-conscious customers limit carriers’ ability to raise tickets without reducing demand.
Fuel and aircraft lease expenses, which are normally purchased in US dollars, increased as the Malaysian ringgit, Thai baht, Indonesian rupiah, and Philippine peso declined against the dollar.During an earnings call this month, CEO Mike Szucs stated that the second quarter was the most difficult operating climate Cebu Pacific had encountered since the epidemic.
According to another executive, the airline’s fuel costs more than quadrupled from a year ago, and the impact was exacerbated by the peso’s 8% depreciation.
To ensure short-term security, Cebu Pacific has hedged roughly 30% of its fuel requirements for the third quarter at less than $120 per barrel.
Strong post-pandemic demand from premium travelers has better safeguarded full-service airlines, according to Nathan Gee, head of Asia-Pacific transportation research at BofA Global Research. Because they have smaller loyalty programs and more basic offerings, budget carriers have not benefited as much, he said.
According to AirAsia, the third quarter is usually the weakest for regional travel, therefore the airline is preparing for a weak one. As part of a larger network recalibration, the airline intends to reduce seat capacity by 20% to 25% year over year during the quarter, return 25 aging aircraft to lessors in 2026, and halt its Sydney-Kuala Lumpur service starting in October.
