Tuesday, June 24, 2008

Asian airlines in better shape than global peers

Fuel costs hurt but big players can cope

Many Asian airlines are expected to fly through the current turmoil caused by high fuel costs and slowing traffic with fewer casualties than their counterparts in other regions, particularly in the United States.

But chances are that better-established Asian airlines including Thai Airways International will see their profits squeezed in the short term, with some losing money, while some smaller carriers in the region could possibly be closed.

This is the most likely scenario for Andrew Herdman, director-general of the Association of Asia Pacific Airlines (AAPA), a grouping of 17 leading Asian airlines and a New Zealand carrier.

With their strong balance sheets, performance records, good reputation for services and diverse markets, Asian airlines are in much better shape than US and European carriers to weather the violent storms, Mr Herdman said.

''But on the other hand, the challenge is fuel is rising very fast, so how quickly you can hedge, and how quickly you can pass on the costs are important,'' he pointed out.

High jet fuel prices, which have gone above $160 a barrel, are causing major headaches for the airline industry in terms of costs and significantly weakening air travel demand both for both business and leisure sectors.

The International Air Transport Association (IATA), which represents 230 airlines, warned recently that the industry may face a collective loss of $6.1 billion this year, if crude oil prices stayed at an average of $135 a barrel for the rest of the year.

Soaring fuel costs are consuming about 40% of each airline's total operating costs, up from about 30% previously, the AAPA said.

Asian airlines get some relief in the form of respectable economic growth in many countries, though they are not entirely insulated from the US downturn and a potential slowdown in Europe.

The Kuala Lumpur-based AAPA anticipates slower growth for Asian carriers than they had experienced.

Smaller carriers in Asia are prone to feel the pinch of a hostile environment, but the extent of potential shutdowns would be smaller than in other regions, the AAPA director-general said.

Signs of a slowdown began to show in April when AAPA member airlines, such as THAI, Singapore Airlines and Cathay Pacific, recorded modest growth.

The member airlines in April carried a total of 11.9 million international passengers, up only 2.2% year-on-year in terms of revenue passenger kilometres (RPK), while growth in international passenger traffic was similarly modest, registering a year-on-year increase of 2.6%.

The growth in demand failed to keep pace with the 3.7% growth in capacity, leading to a decline of 0.8 percentage points in the average passenger load factor to 75.2%, according to AAPA statistics.

Demand for air freight also remained subdued in April, with AAPA international freight traffic growing by 2.1% in FTK (freight tonne kilometre) terms. However, the average cargo load factor for the month gained 1.6 percentage points to 67.2%, on a 0.3% reduction in offered capacity.

In any case, Mr Herdman said, AAPA airlines would not be able to repeat the profitability they achieved last year. They had aggregate profits of $5.2 billion in 2007, representing a 5% net margin, a marked improvement on the 3% margin recorded in 2006. Combined revenues reached $103 billion, 11% higher than in 2006.

International passenger traffic volume set a record, growing by 4.2%, and the passenger load factor rose to a record high of 77.1%. The volume of international air cargo also set a record, although the growth rate was a more modest 2.7%.

Over the long term, he said, Asian carriers could increase their share of global air travel because of their ability to deliver what passengers want.

But the AAPA chief added a word of caution: ''The fact that you are through a downturn does not mean the long-term growth story is intact. The future is bright for those people who can manage through this downturn.''

For a full copy of the report, see:

http://www.aapairlines.org/

resourcecentre/AAPAPRIssue10

-AprilTrafficResults-29May08.pdf

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