Southeast Asia's budget airlines eye recovery but fuel scars linger

Southeast Asia's budget airlines hope the fuel crisis is easing, but they face a tough second half with margins still under pressure, according to executives and analysts. Malaysia's AirAsia, Singapore's Scoot, and the Philippines' Cebu Pacific all reported net losses in their latest quarterly results, with operating losses nearly doubling for Scoot.

Fuel costs make up a larger share of expenses for budget carriers compared to full-service airlines, but price-sensitive travelers limit how much fares can be increased without reducing demand. Currency declines have added to the pressure, with the Malaysian ringgit, Thai baht, Indonesian rupiah, and Philippine peso weakening against the dollar, increasing fuel and aircraft leasing costs typically priced in US currency.

Cebu Pacific CEO Mike Szucs said the second quarter was the most challenging since the pandemic, with fuel expenses more than doubling from a year earlier, exacerbated by an 8% weakening of the peso. Full-service airlines benefit from strong post-pandemic demand from premium passengers, but budget carriers have less success due to their basic products and smaller loyalty programs.

AirAsia plans to cut seat capacity by 20-25% year-on-year in the third quarter, return older aircraft to lessors, and suspend a route, while Scoot continues adding capacity despite a 21.7% rise in passenger unit costs. Budget carriers may see additional capacity if fuel prices decline, but strained household budgets could curb travel by Southeast Asia's middle class during the peak season.