If forecasts from Boeing and Airbus are to be believed, Asian airlines will be paying out around $2 trillion on new, fuel-efficient aircraft over the next couple of decades. But where the money will be coming from is not so easy to forecast.

Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA), reported that in 2014 the average Asia-Pacific airline was operating “narrowly below the level where they would see a profit.”

“Revenue did not keep up with volume growth, resulting in yield declining 5% and a drop in load factors, too,” said Herdman. “Profitability remains elusive.”

More succinctly, the average Asia-Pacific airline was running at a loss, but hoping to outlast the competition. Scoot’s Steven Greenway, head of commercial, is more specific. “LCCs (low-cost carriers} are [in hard times]; we will see a bloodbath,” he said late last year.

Capacity balance

Indeed, despite a significant recent drop in the price of oil and a corresponding easing of pressure on margins, Herdman noted there is still a “supply imbalance” in aircraft capacity across the region—a consequence of “misjudging how much capacity growth was needed.”

This apparent misjudgment has seen some unprecedented orders being placed over recent years, such as those from AirAsia (600 aircraft from Airbus), Lion Air (560 aircraft from Boeing, ATR and Airbus) and the three-year old Vietjet (100 aircraft from Airbus).

According to one industry calculation, for Indonesian LCC Lion Air to absorb the capacity of its current orderbook, it will have to continue growing at around 25% per annum. Even for an ambitious operation like Lion Air, carving out new business in the regional Indonesian market is a big reach.

It is one some commentators and other local operators are increasingly questioning.

“In my opinion, looking at some of the orders that have been placed, there are simply too many [aircraft] being ordered in the region,” Cebu Pacific Airways CEO Lance Gokongwei tells ATW.

According to Gokongwei, this is causing decisions to be made that will eventually lead to an “unsettling conclusion.”

“Painful consolidation will come,” he said, adding that the race to market dominance is pushing some players toward a future that will not likely benefit the industry as a whole.

“The problem is in [this] industry, you can’t have one player that is being rational and others irrational. These [aircraft] orders are definitely concerning,” Gokongwei said.

He said Cebu Pacific Air, one of the most profitable LCCs in the region, is unlikely to place any more orders to stay in the fleet “catch-up race,” but will only add to its aircraft numbers with “odds and ends” for the next two to three years. “We already have enough aircraft,” he asserted.

This is from an airline that last year boarded 8.5 million passengers and reported 8% international and 14% domestic growth across the highly competitive Filipino market.

“We are concerned that some competitors are ordering massive fleets. But while we recognize that capacity is a key variable to profitability, we also know that in this market, growth is being restricted by slot availability,” said Gokongwei.

Stated bluntly, “At the moment, there are too many orders.”

Workforce and capability

With key airports across the region such as in Singapore, Kuala Lumpur, Manila, Jakarta and Bangkok all creaking at the capacity seams and resorting to reopening decommissioned facilities in order to cope, Gokongwei has a valid point.

He is not the only one with concerns about aircraft numbers. CEO at local flag carrier Royal Brunei Airlines, Dermot Mannion, noted the “institutionalized optimism” that currently prevails at many Southeast Asian LCCs. “We [Brunei] won’t go into the LCC market,” he said. “We are not convinced of the merits of the long-haul LCC business model,” he added. “It’s a risky business.”

The airline has already pulled out of many of its short-haul routes in the face of super-low fares from LCCs, and said it does not see a future for a long-haul LCC operation either, despite several new players going into the business on its doorstep.

Nonetheless, some are still convinced ordering even more aircraft is a risk worth taking. Scoot placed an order for 20 Boeing 787-9s, and AirAsia X has joined in with its recent order for 55 Airbus A330neos.

However, the explosion in Asian aircraft numbers doesn’t just mean regional landing-slot scarcity and wafer-thin margins. The practicality of maintaining and operating the hundreds of new aircraft due to arrive in the region over the next few years is another looming issue.

“The shortage of [trained technical] people in the region is a known,” Ruag Aviation Malaysia’s GM David Jones told ATW, “and it’s something that governments are busy trying to address.”

Jones said the shortages caused by limited training capacity and compounded by ever-expanding fleets are also chipping away at the operating margins for LCCs as qualified personnel see their wages increasing in the face of shortages.

One of the reasons for the rapid growth of the aviation industry in Asia over the last few years has been the relatively cheap pool of skilled labor. “Everybody wants into Asia because they think it is cheaper,” Jones said. “But now, that isn’t always the case.”

This byproduct of manpower scarcity brought on by rapid fleet expansion has not escaped the attention of aviation regulatory authorities. Following the recent crash of Indonesia AirAsia QZ8501, the Indonesian Minister for Transportation Ignasius Jonan announced new training and certification regulations for maintenance staff working at LCCs.

Jonan also put forward Indonesian government recommendations for wage and working hour standards in the industry, warning of potential problems if carriers try to spread their available manpower capacity too thinly.

“In my opinion, the (budget airline) industry is not healthy,” he said, noting that the temptation within such a highly competitive environment was to pare costs to the bone—including those associated with MRO schedules. “What will happen if [LCCs] are also thrifty with safety?” Jonan said recently.

With questions such as Jonan’s being asked at parliamentary level, and the operation of LCCs at both crew operation and MRO level being scrutinized ever more closely, the cost of those hundreds of new aircraft will no doubt be given increasing attention by financing and leasing corporations—as well as OEMs.

Indeed, the recent payment default and consequent bankruptcy of Japanese LCC Skymark Airlines could be a warning to carriers that have, like Skymark, trumpeted big prestige orders on the back of projected Asian business.

As Skymark president Shinichi Nishikubo said at the end of 2014 when his company’s default was announced: “We of course understand that Airbus puts first priority on delivering the aircraft … and collecting the bill.”

Two trillion dollars is a big outstanding bill for Southeast Asian airlines. And it is coming due soon.