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Northeast Asia's outlook remains bright – and perhaps more so than before

Airline Leader

A few years ago amidst the economic downturn it was Northeast Asia - with its main Chinese market - that was a strategic bright spot for aviation.

Strategically the region's outlook remains bright - and perhaps more so than before. Growth will be strong and while expansion in percentage terms can fluctuate, the net number of additional passengers will set new records, notably in China where annual growth figures are numbered in tens of millions.

Financially however the region lags peers and its own capability. Yet Northeast Asia is hardly a region that answers to the investment community for quarterly improvements. Some airlines are family owned or part of conglomerates while others are state owned and have to respond to the government prioritising strategic growth over financial expansion. Although in China intervention is excessive, fundamentally governments understand the immense economic impact from having people fly, a new paradigm.

Some airlines may argue they are very financially focused, but their spectrum stretches years - perhaps a decade. The unifying theme for lacklustre results is capacity being added ahead of demand and yields falling, even looking past the distortion from lower operating costs due to the fuel price decline.

Many airlines - mainly in China and those that compete in sixth freedom Chinese markets - are taking a "now or never" approach to growth. To be relevant in the future, when growth will slow and there could be consolidation, expansion needs to occur now. A route may not be profitable this year or next, but delaying means another airline will occupy the market. This is especially relevant in mainland China where one local airline generally has monopoly rights to individual long haul routes.

Chinese airlines are expanding internationally, encouraged by government and usually opaque slot allocation that favours international services. With improved products, service and partners - the Delta-China Eastern relationship - Chinese airlines are gaining in confidence. Economic concerns are not the concern they may seem for the outbound China market: most travel is personal and not related to the economy. More Chinese are entering the middle class, and thirst for international experience is multiplying.

Cathay Pacific, which significantly uses mainland China as a source market, has to keep up with growth. The Taiwanese airlines have only recently been granted the right to carry connecting passengers out of mainland China, so this market is not a concern and nor do they plan for it to be a significant contributor in the future owing to the political risks of relations between the two sides. China Airlines and EVA are caught up in the Southeast Asia-North America market. EVA is a larger player but its bold future is now uncertain following a management change. China Airlines, which was not so interested in North American growth, wants to improve in Europe with non-stops (instead of via Bangkok) on its new A350.

Both Korean Air and Asiana are in a quiet period of growth. Korean Air, the largest Asian airline across the Pacific, elected not to enter the North America-Asia race that has generated double digit growth for multiple years. Asiana might do well to grow: it is sub-scale in long haul with too much short haul capacity that is under growing competition from LCCs. Asiana's restructuring plan for now is probably inadequate. Asiana blamed a bad 2015 on economic conditions and MERS, yet Korean Air achieved a record performance.

In Japan, ANA continues its growth streak long haul and within Asia as it seeks to capture opportunities before JAL, under bankruptcy-imposed restrictions, returns to growth. Japan's LCC market is becoming crowded with AirAsia Japan planning to re-enter while ANA confronts increasing overlap between its two LCCs.

In general a combination of protective bilateral access and unsuitable geography have limited the inroads made by the Gulf carriers on long haul, allowing the region's airlines more flexibility than some others.

Fuel hedging has produced mixed fortunes; Cathay has been especially hurt (again) in 2015 while mainland Chinese airlines have not hedged. The most promising is what is missing: weak demand. Unlike past downturns globally, North Asia's airlines are having no trouble finding passengers. Their issue is growth ahead of already solid demand. Few seem likely to follow Korean Air and limit growth. For those expanding with weak financial results, they do so in the name of long term opportunities. The present cannot be judged until well into the future.