Outlook for 2007: Prepare for shakeout

Press Release

(Singapore: 10 November 2006) The latest instalment of the Centre for Asia Pacific Aviation’s annual Outlook series concluded this afternoon with the message that the upcoming year will be a reckoning for those airlines that do not excel in implementing their business plans.

Outlook 2006

In the event’s final panel, moderated by the Centre’s Executive Chairman, Peter Harbison, numerous leading industry watchers proffered their opinion on the likely near-term shape of the Asia Pacific industry. The consensus voiced was that the imminent period would see the end of the overall revenue growth that has lifted all ships in the last few years. However, they suggested that 2007 will probably not bring the calamity that some have predicted, but that it will present new, painful challenges to the region’s – and the world’s – carriers that do not distinguish themselves from the field.

Chief Economist at IATA, Brian Pearce, noted that the global economy most likely peaked in the second quarter of 2006, with “the US economy in particular having slowed very sharply.” Mr Pearce stated, “we’re at or past the peak of the revenue boom.” Although, he feels the overall effect on airlines of the economic slowdown will be benign, Mr Pearce foresees a “serious slowdown on demand for services to the US.”

Don Birch, President and Chief Executive Officer of distribution services provider Abacus, sees the current period as possibly being kinder to carriers in Asia than elsewhere because of the evolutionary effects the period just passed has had on regional demographics. “We’re seeing that people in Asia travel as soon as they have some extra money in their pocket, and the last two to three years has dramatically increased the amount of average disposable income among the populace.”

Mr Birch, who noted that increases in discretionary income have been especially marked in Korea and Vietnam (with the effect in the latter market being a 30% increase in outbound leisure air travel), added that the key bellweather period for the whole year is the upcoming Chinese New Year/Easter period, and that he is “confident it will be basically fine.”

Chief Researcher for All Nippon Airlines, Tsutomu Ota, agreed, noting that the Japanese market, beneficiary of several years’ strong growth, is seeing a sizable increase in both the levels on inbound and domestic travel. Furthermore, he observed that premium travel has been strong enough for the resurgent ANA to reconfigure its long-haul aircraft with more first and business class seats.  

This development illustrates another trend that surfaced throughout Outlook: the need to focus on revenue. Numerous industry experts pointed out that the recent trend of focusing strategic attention on cost cuts had distracted needed attention from yield enhancement. As costs get to a point where areas for further cuts are not realistically available, the well-prepared full-service carriers will have begun to focus on improving the value of their revenue.

Among the factors that will mean divergent fortunes for sector stars and underperformers is the future shortage of capital. With financial experts predicting that funding aircraft acquisitions with equity and affordable debt will be much more difficult in the near future, only those airlines that have exhibited an ability to wisely increase capacity will be able to grow their operations.

Patrick Murphy, former Chairman of Ryanair and currently Principal of Aviation Performance Consultants, explained this phenomenon, noting that investor interest is unlikely to be piqued by the present shape of the sector as a whole, “but there are individual airlines that will outperform the industry at large.” Those carriers, he said, will continue to attract the necessary levels of investor enthusiasm.

Outlook 2007 was the Centre for Asia Pacific Aviation’s annual examination of the prospects for the Asia Pacific airline industry. This year held in Singapore with the participation of 30 CEOs and 300 vital stakeholders from all components of the aviation sector, Outlook and the CAPA Aviation Awards for Excellence are the premier gatherings of the region’s aviation decision makers, providing a forum for dialogue between leaders from the airline, airport, supplier and regulatory communities.    

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