Southeast Asia ought to bail out private budget airlines as fuel costs surge—here's why

Discount carriers like Malaysia’s AirAsia, Indonesia’s Lion Air and Cebu Air of the Philippines are already bearing the brunt of the energy shock. Policymakers must consider targeted measures in the form of loans, grants or fuel price relief.

The packages should differ by country and reflect conditions on the ground, but pandemic-era policies offer a sound starting point. The advantage this time around is that there is no shortage of demand. In fact, Asia is expected to hold onto the top position in terms of traffic growth this year.

Asia is most exposed to the conflict in the Strait of Hormuz as it uses more than 80% of West Asia’s oil and gas. The countries are divided between those poised to weather a scarcity of jet fuel and those that are not. Wealthier economies like China, Japan and South Korea are using their financial resources to procure fuel.

They have also employed strategies like cutting exports or fuel hedging—using contracts to lock in prices in advance—to maintain supply. Beijing even went so far as to tell its firms over the weekend to disregard US sanctions on private Chinese refiners tied to Iranian oil in a bid to maintain its energy security.

Southeast Asia has fewer options. It’s home to a number of budget carriers that didn’t hedge when crude prices were low, meaning they must now pay the market rate. Airlines had started the year expecting cheap aviation fuel, their biggest single expense. Malaysia and Thailand also had resurgent currencies, which makes the commodity more affordable because it’s denominated in US dollars.

But that was before the Iran conflict began in February. The price of jet fuel in Singapore, the Asian benchmark, has more than doubled to about $200 per barrel. The crack spread—the difference between the price of fuel and the crude oil used for it—hit a record high above $100 a barrel last week. Asian currencies are also weakening against the greenback, in part because of the energy crisis, further reducing their buying power.

The current price is unsustainable for privately owned low-cost carriers. AirAsia is a case in point. Founded in 2001, the region’s largest budget airline was decimated by the pandemic and was just getting back on its feet after a restructuring when the Iran war began.

With fuel accounting for up to 40% of costs and 70% of total expenses denominated in US dollars, the airline is highly exposed to external disruptions. A $1 increase in jet-fuel prices cuts earnings by around 80 million ringgit ($20 million), while a 10-Malaysian sen decline in the currency can affect profits by 280 million ringgit. It’s not hard to see how the current shocks would eat into operating margins, which stood at 5.9% last year.

That’s why it wasn’t a surprise when the airline announced last month it had raised ticket prices by up to 40% and fuel surcharges by one-fifth. It had already cut flights by 10% and closed unprofitable routes. Last week, its affiliate Thai AirAsia said it was reducing available seats by nearly a third. The worst-hit carrier in the region is Batik Air Malaysia, which has cut capacity by 35%.

There haven’t been any murmurs so far about Asian budget carriers falling into insolvency like Florida-based Spirit, for which surging fuel costs were the final straw. But governments shouldn’t be complacent. Still, with hard-hit countries like the Philippines declaring a state of emergency in response to fuel shocks, it’s worth asking whether public resources should go to bailing out airlines.

Unlike the region’s flagship carriers, low-cost providers aren’t backed by sovereign wealth funds. And in Malaysia, Indonesia and the Philippines, they carry more passengers, too. The trio have a vast number of islands that cannot be connected by land transport, so affordable air travel offers a vital lifeline and should be supported to avoid further slowdown in business activity.

That could include subsidies, tax incentives or access to low-cost financing backed by public lenders. In Malaysia, where state-owned national oil and gas company Petronas is the dominant player in supplying jet fuel, there could a grace period offered to struggling airlines giving them more time to make payment.

The energy crisis has affected nearly all aspects of the global economy. It’s not easy for severely strained governments to figure out what to prioritize. But in Southeast Asia, discount airlines offer a crucial service. Help shouldn’t be delayed. ©Bloomberg

The author is a columnist for Bloomberg Opinion’s Asia team, covering corporate strategy and management in the region.