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Dark clouds over Asia/Pacific airline industry

There has not been much good news lately in Asia Pacific aviation. This is worthy of note, not that airlines in other parts of the world are faring better – far from it – but that this region, in particular Asia, in these challenging times has been touted as the only region expected to be showing any growth.

Air Australia went bust. It is not the first nor will it be the last to bite the dust in light of rising fuel costs against the backdrop of a sluggish global economy. The Australian carrier’s demise raises the question as to whether there is room for such a supposedly boutique airline that grew from the charter business, relying heavily on government contracts, to expand into the wider and more competitive commercial arena of the more established carriers.

The future of India’s Kingfisher Airlines is hanging in the balance as it posted deeper losses – R4.44 billion in the last quarter ending December 31st compared to R2.54 billion in the previous year, plunging 75%. The airline has never made a profit since it was launched in 2008. In a statement that it issued, Kingfisher said: “Steep depreciation of the Indian rupee coupled with consistently high crude oil prices has led to a challenging quarter for the Indian aviation industry.” Its fuel costs had risen by 37% to R1.9 billion. The company has already wounded up its budget arm.

Image Courtesy of Kingfisher Airlines

Tiger Airways reported a net loss of S$17 million for the third-quarter of FY2011 ending December 31st compared to a profit of S$22.5 million a year ago. Both Tiger Australia and Tiger Singapore were in the red. Latest data for Jan 2012 showed a fall in the number of passengers flown by 16% to 466,000 against a seat capacity of 621,000 – giving a load factor of 75% compared to 83% in Dec 2011. High fuel costs and fleet under-utilisation were cited as the culprits.

Malaysia budget carrier AirAsia reported a 56% decline in its 2011 fourth-quarter profit from M$311.1 million a year ago to M$135.7 million. However, full-year result showed increased operating profit by 12% to M$1.2 billion compared to M$1.0 billion the previous year. This was achieved despite a 36% increase in fuel costs. The airline had earlier announced it was terminating flights to Europe and India because of high fuel process and weak demand.

Performance for AirAsia’s 49% stakes in both AirAsia Thailand and AirAsia Indonesia was not encouraging. Although both carriers reported growth in revenue, AirAsia Thailand posted a profit of Bt2.04 million against Bt2.01 the year before, and that for AirAsia Indonesia dropped 53% to Rp150 billion from Rp312 billion. Two new joint-ventures – AirAsia Japan, in which AirAsia has a 49% stake, and AirAsia Philippines, in which it has a 40% stake, have been added to its stable this year.

It is not just the smaller airlines that are feeling the pinch, but the big guys too. Qantas posted a 52% drop in financial first-half profits before tax (PBT) from A$417 million to A$202 million. Earnings for the airline plunged from A$165 million to A$66 million, down 60%. This was attributed largely to the cost of industrial action amounting to A$194 million and increased fuel costs that jumped 26% or A$444 million to A$2.2 billion (“Qantas sets sights on Asian growth despite challenges“, 23rd Feb, 12).

Singapore Airlines (SIA) too reported that fuel prices had adversely affected its performance as net profit for third-quarter of FY2011 fell 64% from S$378 million to S$137m. Expenditure on fuel – which accounted for 40% of expenditure – went up by US$386 million or 33%. All three wholly-owned subsidiaries also recorded fall in operating profit: SIA Engineering, S$28 million down from S$34 million; SilkAir, S$32 million, down from S$45 million; and SIA Cargo, S$40 million from S$48 million. Looking ahead, SIA expects passenger yields to remain under pressure while cargo yields will continue to decline.

Thai Airways International posted a net loss of Bt10.2 billion for the year ending Dec 31, down from Bt14.7 billion the year before. Again, this was attributed largely to a 38.7% increase in jet fuel prices.

In announcing the results for Qantas, chief executive Alan Joyce said: “The highly competitive markets and tough global economy in which we operate mean that we must change.” For Qantas, it means cutting jobs and unprofitable routes – the most likely route that most other airlines would similarly adopt. An added strategy is to grow budget subsidiary Jetstar, which achieved record earnings before interest and tax (EBIT) of A$147  million, up A$4 million and focus more on the Asian market with the setting up of two new subsidiaries – a joint-venture with Japan Airlines (JAL) and Mitsubishi Corporation and a regional all-Asia premium carrier.

SIA is also well supported by SilkAir, Tiger Airways for which it has a 32.8% stake and a new budget arm – Scoot – to be launched in July, operating regional long haul to destinations in Australia and China. In a climate of uncertain trends, it is a catch-all strategy.

Loss-making Malaysia Airlines (MAS) is probably working on a similar strategy, announcing its intention to cooperate with compatriot AirAsia to divide the market between them, with Malaysia Airlines focusing on the long-haul full-service, AirAsia on budget and the likelihood of a regional premium airline in the fashion of Qantas amidst growing speculation that it could be a three-way partnership which, if it materialises, will base the new carrier in Kuala Lumpur.

While some airlines such as SIA, Thai and Hainan Airlines have reported improved traffic in January this year and all eyes are now turned to Cathay’s impending result announcement on 14th March, dark clouds still loom large overhead considering the debt crisis that Europe continues to face and the escalating fuel price especially now that Iran has curbed its export to the European Union and the likelihood of its extension to other political foes. This is apt to squeeze the low-cost operators more than their bigger competitors, considering that fuel expenses make up a higher proportion of the former’s total operating costs. Full-service airlines may be able to cushion the impact by new rounds of fuel surcharge hikes, something that budget carriers are less likely to afford doing without losing market share.

Image Courtesy of PlaneTalking

The higher fare as a consequence of higher fuel costs may reduce the demand for leisure travel, which is likely to affect more the budget carriers that operate to vacation destinations as in the case of Air Australia, whereas business travel is largely price inelastic. Several full-service airlines which thrive on the high yield of the premium market are hopeful of its recovery. The market has strengthened towards the end of 2011, contributing to a full-year growth of 5.5%. While mindful of the risks posed by the Eurozone crisis, the International Air Transport Association (IATA) is expecting some increase in business travel, lending some support to premium travel, in the months ahead. One cannot be too sure too if this lends enough credence to Hong Kong Airlines’ optimism to launch all-business class flights between Hong Kong and London (“Hong Kong Airlines assumes big risk in its ambitious expansion plan“, 28th Nov, 11).

What is happening in Asia-Pacific may be reflected in the strategy of an airline outside the region, namely Swiss International Air Lines – the successor of once the world’s most reputed airline, Swissair, that went bust in 2001. The resurrected Swiss airline has identified business class as its main focus in the competition, and its catchment has to extend beyond Switzerland.

It has also identified Middle East carriers such as Emirates as the “real” competitors, which are threatening to shift intercontinental hubs to where they are based – clearly the same threat that Qantas is facing on the kangaroo route as these carriers are offering strong connection alternatives, and a similar concern for SIA that an airport like Dubai is diverting hub traffic away from Singapore Changi Airport.

Swiss International chief commercial officer Holger Hatty opined that budget and network carriers would become increasingly similar in the short and medium-haul business, and that the main battleground for competition is shifting to the long-haul trunk routes. Are the days of unprecedented growth for short-haul budget carriers over, which explains how some of them are already looking beyond the 4-hour flight-time limitation of the conventional budget model?

As for the long haul, Swiss International believes it has the right ingredients, where it can compete on product quality providing such creature comforts as air-cushioned seats and freshly-made food in first and business class, and on personalised customer service with some “intimacy”. That should be good news for airlines such as SIA and Cathay Pacific, and perhaps Qantas as it restructures its international arm.

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