Asia’s airlines having to ride wild swings
By Yeoh Siew Hoon
Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA), puts its down to human emotion the current misfortunes of the airline industry in the region.
“Human emotion,” he said at the Aviation Outlook Asia 2008 in Singapore, “can change the way decisions are made.”
For the first nine months of this year, he said, passenger numbers were still up. “We were setting new records up to September. But in the last three months, numbers have fallen off the cliff.
“The mood has changed.”
Firstly profits evaporated when oil prices soared. Then when oil prices dropped, revenues collapsed. “Airlines are thinking on their feet. It’s hard to manage the wild swings.”
The obsession now is with revenues, he said. Passenger loads for the last three years have hovered between 73% and 75%.
“We could have excess capacity if revenue drops and profits will suffer. Good airlines are breaking even. This is the toughest time to model profits and losses,” he said.
Damien Horth, head of transport research at UBS, meanwhile sees opportunities amid the crisis. “The industry has changed but needs to change more through the downturn.”
There are several reasons why the airline industry is in such bad shape, he said. There is structural excess capacity, there is easy (subsidised) access to capital and there is too much government involvement.
“In good times, the industry can make some money but across the cycles, it does not.”
High fuel prices and the credit crunch will force rationality. “The possibility of oil going up to US$140 per barrel will help raise barriers to entry. The days when someone can start an airline with two aircraft and a press release are over,” he said.
UBS Investment Research shows that global capacity growth will be flat in 2009. As such, “there is the possibility pricing growth could surprise on the upside, despite the sluggish economic environment”.
Its research also estimates that at least 35% of the active global fleet faces questionable economics at current oil prices.
However, “there is concern that lower fuel prices will bring back capacity,” said Horth.
Turning to financials, he said balance sheets among Asian airlines were quite weak, other than Singapore Airlines and Cathay Pacific. “All other airlines are run by the banks.”
Noted Horth, “The strong will get stronger. Governments will be more receptive to radical change. Europe is leading the way. Capital will be harder to come by.”
Catch up with Yeoh Siew Hoon every week at The Transit Cafe – www.thetransitcafe.com
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