Don’t get carried away

December 1st 2015

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It has been a year of relative calm for most Asia-Pacific airlines, free from the crises that have been part of the business for the last decade. Read More » With oil remaining at record low prices of US$42-US$45 a barrel, fuel costs have improved airline profits, although a significant depreciation of several currencies across the region took the shine of the fuel fall.

Heavily hedged airlines were not able to take full advantage of the oil price decline and their balance sheets reflected their bad luck. For Asia-Pacific airlines that did not hedge, including the big Chinese carriers, it was a windfall as they were able to snap up fuel at spot prices.

According to International Air Transport Association (IATA) projections, the region’s carriers will report profits of $5.1 billion in 2015. But behind the raw figures lies is a worrying trend. The Asia-Pacific has been knocked off the top of the profit table by U.S. airlines, which are reaping huge benefits from consolidation. North American airlines will earn $15.7 billion in income this year, or around $18.12 profit per passenger. Asia-Pacific airlines will make $4.24 per passenger.

The region’s topple from the top of the profit table is a reflection of the intensely competitive nature of the market. Full service airlines continue to face competition from expanding LLCs on all their regional routes while capacity is being brought into the region by the major Gulf airlines.

Initial concern about the impact on the industry of China’s slowing economy now appears to have been over-hyped. Economic growth on the Mainland may have more than halved to 6.9%, but the aviation sector has not followed suit and remains strong.

While it has been twelve months free of major crises, there has been no shortage of challenges. Airlines have continued to re-engineer and fine tune their operations and business strategies as they strive to win sustainable profitability.

Congestion at the region’s airports has become an increasingly worrying issue as fleets increase and governments and airport authorities essentially fail to match infrastructure development with demand. Delays on the ground and in the air have worsened through 2015, costing airlines tens of millions of dollars in additional costs.

And air freight, a key part of Asian airline profitability, remains in the doldrums despite what appeared to be a bright start to the year. Air cargo demand began quite strongly in 2015, but by mid-year had lost momentum as a result of a slowdown in global trade and weaker demand for Asian exports.

For the January to July period, the region's carriers reported a 3.5% increase in international air cargo demand, down from the 5.3% growth in 2014. The latest figures, for September, showed an increase of just 0.3%. Conditions in the region remain fragile. China and other key export economies, including South Korea and Chinese Taipei, continue to record disappointing trade growth and, given that manufacturing activity and export orders remain weak in China, a strong acceleration in regional trade in the near-term is unlikely.