Asia Pacific airline profits tipped to fall

(Sydney: 01 April 2007) The Centre for Asia

Pacific Aviation predicts Asia Pacific airline earnings will be depressed in

2007 and 2008, due to cost pressures, increasing liberalisation, rising capacity

growth and rising competition from new entrants, according to its new Outlook

2007 report.

“Long-haul profitability will be weakened by rising competition from Middle East carriers and an intensified focus on Asia by European and North American airlines, as well as increasing long-haul activity by the region’s LCCs”, said Peter Harbison, Executive Chairman of the Centre for Asia Pacific Aviation.

The impact of fuel surcharges on revenue will diminish in 2007, as competitive pressures intensify and yields are predicted to resume their long-term downward trend from late 2007, with a softening of the fuel surcharge and premium demand-led rally in recent years.

The market’s continuing acceptance of rising fuel surcharges has also been key to the growth in yield at numerous carriers, as many Asian flag carriers held down capacity and load factors rose. This – unexpected – level of customer acceptance has not gone unnoticed, as carriers, citing volatility in fuel prices, continued to maintain high surcharge levels as oil prices shifted.

“There is arguably some justification for the reluctance to reduce surcharges quickly, given the initial lag in increasing them as fuel prices rose. But the key observation is the continuing strength of consumer demand, even despite the negative effect of oil price increases in the wider economy”, said Mr Harbison.

Meanwhile, the generally favourable mood of equity markets towards airline stocks at the start of 2007 could provide a brief window of opportunity for some carriers seeking fresh funds. According to the report, up to 23 Asia Pacific/Middle East carriers are seeking to raise funds in the next few years to help them fund fleet expansion plans and/or to assist them restructure and modernise.

“But the sheer number of carriers seeking funds means investors will be spoilt for choice. Not all the carriers seeking funds are attractive targets for reasons that include: weakness of the underlying business, rising competition and unfavourable investment environments. However, a strong wind is sweeping through the markets now, as private equity investment groups start to turn their view towards the airline industry”, concluded Mr Harbison.

These findings from part of the Centre’s 181-page outlook report, available now at centreforaviation.com. This year’s report covers the Big Issues facing Asia Pacific aviation in 2007, including LCCs, liberalisation, restructuring, aircraft orders/deliveries, skills, funding, security, the environment and the economy.

The overall themes of ‘Outlook 2007: Dawn of a New Era’ include an impending “full frontal attack” on flag carriers commencing in 2007, and the continued unfolding of the influential LCC story in Asia.