This year, aviation reports frequently feature an image of a Thai AirAsia aircraft carrying more fuel than it actually requires because the nation it is traveling to is no longer able to consistently supply it. Tankering is the term for the activity. It’s costly, ineffective, and uncommon until recently. In some parts of Asia, it is now considered standard practice. That in and of itself ought to reveal the true location of the pressure.
Asian aviation appears to be doing well on paper. Compared to the same month last year, Cathay Pacific carried 24% more passengers in March. As travelers reroute away from Dubai, Doha, and other Gulf hubs disrupted by the Middle East conflict, flights from East Asia to Europe are selling out weeks in advance. The cost of tickets for flights from Shanghai to London and Hong Kong to London is several times higher than usual. To put it another way, demand is not the issue. The level of demand is almost embarrassingly high. However, there has been consistent pressure on airline shares throughout the region for weeks; Chinese majors have dropped 3 to 5 percent, Japan Airlines has trimmed due to fuel concerns, and Korean Air has dropped nearly 8 percent in a single session.
Plumbing is the root of the disconnect. Nearly 21% of the world’s seaborne jet fuel supply was cut off when Iran closed the Strait of Hormuz. Due to its greater reliance on Gulf flows and smaller supply cushion, Asia was hit more severely than Europe almost immediately. Exports of jet fuel were stopped by China and Thailand. They were capped at last year’s levels by South Korea. Vietnam Airlines reduced its weekly domestic flight schedule by 23 in order to save fuel. For portions of March, domestic service was suspended in Myanmar. It is recommended that Pakistani pilots bring as much fuel from overseas as possible. Refueling for international departures is restricted in Tahiti. By themselves, these are little things. When combined, they depict a fuel rationing situation that hasn’t affected Europe in the same manner.
Naturally, European airlines are preparing. Michael O’Leary of Ryanair has issued a warning, stating that airlines will have to begin canceling flights if 10 to 20 percent of Europe’s fuel supply remains compromised until summer. However, Europe has better-capitalized carriers, more extensive hedging programs, and—most importantly—a single, integrated aviation market that allows airlines to shift capacity with fewer regulatory obstacles. Despite their animosity toward one another, Ryanair and Lufthansa work in a system built to withstand shocks. That isn’t really present in Asia.
And that’s the more complex tale. For many years, Asia-Pacific has been the world’s biggest aviation market. Prior to the pandemic, it accounted for 34.7% of all traffic worldwide. More low-cost carriers are produced there than in any other area. However, it has never created a massive low-cost carrier like Southwest or Ryanair. The region’s fragmentation has made it more difficult for its carriers to absorb a crisis like this one due to fragmented regulations, incompatible bilateral agreements, and widely disparate investment regimes across nations. With 219 aircraft, AirAsia is the largest low-cost carrier in Asia. 811 is flown by Southwest. The entire story is revealed by the math.
Speaking with analysts in Tokyo and Singapore, it seems that the current fuel price spike isn’t the true vulnerability. In contrast to what is flying overhead, the Asian aviation balance sheet is structurally thin. Full planes, higher fares, stronger bookings — and underneath, a finance layer that bends more easily than Europe’s. That bend might turn into something worse if the conflict continues into the summer. As this develops, it’s difficult to ignore how frequently the sectors that appear to be the most resilient are also the most vulnerable when the plumbing fails.
