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Aircraft Shortage Adds To Low Cost Carrier Woes In Asia

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Aircraft Shortage Adds To Low Cost Carrier Woes In Asia

Old 7th Sep 2005, 14:08
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Aircraft Shortage Adds To Low Cost Carrier Woes In Asia

Wednesday September 7, 3:55 PM

Aircraft Shortage Adds To Low Cost Carrier Woes In Asia
By Abdul Hadhi

SINGAPORE (Dow Jones)--Strong growth in Asian air traffic over the past year, fueled by the explosion in budget airlines offering cheaper fares, is keeping medium-haul aircraft in tight supply.

Low cost carriers, or LCCs, which typically serve destinations within a four-hour flight, prefer smaller aircraft, such as the Airbus (ABI.YY) A320 and Boeing (BA) B737, that carry fewer passengers than long-haul planes and offer greater fuel economy.

"Airlines tend to sign leases in advance. The (supply) situation is still tight. There are no new aircraft (available for lease) this year," said Robert Martin, chief executive of Singapore Aircraft Leasing Enterprise. SALE, an associate of Singapore Airlines Ltd. (S55.SG), is Asia's leading aircraft leasing company, with about 65 aircraft leased worldwide.

Lease rates for smaller aircraft have risen around 20% since the middle of last year to around US$300,000 a month for a new A320 and US$350,000 for a new B737 on the dearth of available aircraft, industry analysts said.

Asia-Pacific passenger traffic rose 8.1% on year in the first half of 2005, outpacing capacity growth of 7%, according to data from the International Air Transport Association.

"The outlook for aircraft leasing companies has improved quite a lot since late 2004, largely because of an improvement in lease rates for some of the more popular types of aircraft, including the A320 and B737," Standard & Poor's aviation analyst Shukor Yusof said.

"Demand has mostly been from the Asia Pacific and, to a certain extent, the Middle East and India (with the emergence of new airlines and LCCs), following a recovery in air traffic in Asia," he added.

At least 17 LCCs have taken to the skies in Asia over the last 12 months, with four in India, five in China and eight in Southeast Asia. In China, three more airlines have received government approval to operate while eight more are awaiting approval in India.

With A320s and B737s in short supply and prices high, airlines are looking at comparable aircraft types from other makers. Brazilian aircraft maker Embraer (EMBR4.BR), for example, has orders for 20 of its 190LR planes from General Electric Commercial Aviation Services. The company produces a range of commercial aircraft that seat up to 118 passengers.

"Its a healthy situation. The order book outstanding is for 12-18 months," said Embraer Vice-President for the Asia-Pacific Civil Aviation Market Bruce Peddle.

Aircraft prices are also up on rising interest rates, which translates into higher interest costs for purchase loans on these planes.

For LCCs, the high lease rates have only intensified the survival-of-the-fittest battle raging in the industry, as they struggle to absorb soaring fuel costs. Singapore LCCs Jetstar Asia and Valuair have already merged in the face of rising operating costs and intense competition, and at least one potential LCC in China may have fallen victim.

Janet Tan, chief executive of Singapore-based A-Sonic Aerospace Ltd. (A53.SG), referred to the shortage of A320s when she announced plans to set up a budget airline in China late last year. She said then that the venture aimed to start flights in the third quarter of 2005, by which time it was hoped the shortage may have eased.

Late Monday, the company said it has decided to terminate the venture following a delay in securing an Air Operator's Certificate to operate an airline in China. Many industry analysts believe soaring fuel costs and the ongoing aircraft shortage were an additional factor in A-Sonic's decision.

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