South-east Asia's budget airlines eye recovery but fuel scars linger

Southeast Asia's budget airlines are cautiously optimistic that the worst of the fuel crisis is over, but they face a tough second half as margins remain squeezed and consumer spending power weakens, industry executives and analysts warn. The latest quarterly results from Malaysia's AirAsia, Singapore's Scoot and the Philippines' Cebu Pacific revealed that attempts to recoup soaring fuel costs through higher fares have not been enough.

AirAsia and Cebu Pacific reported net losses, while Scoot's operating loss nearly doubled. Their challenges stem from the fact that fuel constitutes a larger portion of expenses for budget airlines compared to full-service carriers, but price-sensitive travelers limit their ability to raise fares without risking demand. Currency fluctuations have also exacerbated the situation, with the Malaysian ringgit, Thai baht, Indonesian rupiah and Philippine peso weakening against the US dollar, raising fuel and aircraft leasing costs that are typically priced in US dollars.

"The second quarter was the most challenging operating environment Cebu Pacific has faced post-pandemic," said Cebu Pacific's CEO Mike Szucs on an earnings call. The airline has hedges about 30% of its third-quarter fuel needs at below US$120 per barrel to mitigate near-term risks. Full-service airlines have generally fared better due to robust demand for premium services post-pandemic, but budget carriers have struggled due to their more basic offerings and limited loyalty programs.

AirAsia anticipates a weak third quarter and plans to cut seat capacity by 20-25% year on year, retire 25 older aircraft in 2026 and suspend its Sydney-Kuala Lumpur route starting October. The airline's CEO, Bo Lingam, stated that the company is taking a deliberate, tactical approach to protect its bottom line after fuel prices reached US$183 per barrel in the second quarter.

AirAsia also reported a net foreign exchange loss of about US$82 million. Scoot, on the other hand, has increased capacity as demand remains strong, but its passenger unit costs rose 21.7% in the three months to June, pushing its operating loss to S$32 million from S$17 million a year earlier. Despite higher fares and coverage under parent Singapore Airlines' fuel-hedging program, Scoot's break-even load factor reached 100%, meaning it would have needed to fill every seat to cover passenger operating costs, while the actual load factor was 90.6%.

Scoot's commercial officer, Calvin Chan, said that fare adjustments have not fully offset higher fuel prices, and the ongoing Middle East conflict further clouds the outlook. Aviation analyst Brendan Sobie cautioned that strained household budgets could curb travel by Southeast Asia's middle class during the remainder of 2025 and the crucial peak season, suggesting that while there is hope for improvement in the fourth quarter, it is premature to gauge.