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Industry prospects really bleak (MAS), but Asian demand remains strong in May (AAPA)

  • MAS calls for more M&A activity, travelling public to prepare to pay more;
  • Predictions follow MAS’ Everyday Low Fares promotion;
  • AAPA reports international passenger demand “held up pretty well” in May-08;
  • AAPA cautions weakening consumer confidence “could further dampen the outlook”

Malaysia Airlines (MAS) Managing Director and CEO, Idris Jala, has published some dire predictions in an open letter to customers in Malaysian newspapers. With oil prices rising to unprecedented levels, Mr Idris stated the prognosis for the industry is “really bleak" and warned the industry could collapse unless “drastic” change occurs rapidly. Of the global airline industry, Mr Idris believes fares may have to go up “by as much as half”, with capacity cut by a quarter and costs cut “even further, by a tenth”.

The MAS head called for more mergers and acquisitions and warned that more airlines are going to be “forced out of business, while the majority of us are going to bleed red ink yet again”.

The bottom line, according to Mr Idris, is the general public everywhere “must be prepared to face sharply higher prices for air travel now”, or be prepared to “stomach even higher prices later when the number of participants become fewer and competition fizzles out in favour of consolidation”.

The predictions however send some conflicting messages to travellers, following the airline’s move to place 30% of its inventory under its Everyday Low Fares (ELF) promotion. Under ELF, MAS is effectively offering free fares, with passengers contributing fuel surcharges and other taxes and charges. The policy has raised the airline’s load factors, but intensified a fare war in Malaysia with AirAsia.

MAS is in the position of having to confront head-on the region's most successful and fastest-growing airline. Winning the hearts and minds of politicians and the public is still seen as key to adjusting regulatory policy in the favour of the flag carrier.

The Association of Asia Pacific Airlines (AAPA), of which MAS is a member, reports May-08 international passenger traffic “held up pretty well under the circumstances”. It is the first month since January that did not contain year-on-year distortions from the leap year and early Easter – and shows international demand growth is actually accelerating.

AAPA members carried 11.8 million international passengers in May-08, with RPKs rising 4.7% year-on-year, taking the year-to-date increase to 3.5%.

AAPA RPKs vs ASKs: Jun-07 to May-08

Source: Centre for Asia Pacific Aviation & AAPA

Capacity growth came in at 4.2% in May-08, resulting in an improvement in load factor to 72.6%.

AAPA passenger load factor: Jun-06 to May-08

Source: Centre for Asia Pacific Aviation & AAPA

AAPA Director General, Andrew Herdman, echoed the thoughts of Mr Idris that high oil prices are making travel significantly more expensive. But the statistics to date show that demand has been remarkably resilient. Mr Herdman added airlines are being “severely pressured by the relentless increase in oil prices, and expectations of slower economic growth”, and cautioned that weakening consumer confidence “could further dampen the outlook for the rest of the year”.

Further route cuts – which have to date been minimal (or related to seasonality) in the Asia Pacific region – would signal a problem with demand. If cuts become widespread, some of Mr Idris’ warnings could play out. In the meantime, the doom and gloom scenarios may prepare consumers to expect to pay more for travel, but does nothing for investor confidence. Airlines need investors just as much as travellers to survive the current turmoil.

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