Asia Pacific airlines may be settling into a more normalised market cycle


As more Asia-Pacific airlines report financial results, it is becoming clear that while profitability will still be strong this year, many of them will see a step down from the spectacular results of 2023.

Last year demand outstripped supply by a large margin as travel rebounded faster than airlines could reactivate their fleets, and the imbalance helped spur record profits for many companies.

A major factor in 2024 has been the rise of capacity and competition in the international market as airlines restore more routes. This trend would have been even greater, if not for delivery delays and engine maintenance backlogs that are limiting growth for some airlines.

Traffic will be up considerably as services increase. But the overall rise in capacity is expected to cause airfare levels and yields to fall somewhat, and costs remain high - thanks to factors such as supply chain problems and hiring campaigns.

Many Asia-Pacific airlines are also hurt by currency devaluation and operational headaches caused by geopolitical tensions.

One of the terms being repeated in many earnings calls is "normalisation," as longer-term industry dynamics begin to reassert themselves. Profits and yields will ease in most cases, but probably not back to pre-pandemic levels.

Time will tell if 2023 can really be viewed as the peak of the current cycle, or if it was an outlier that will be followed by a more moderate growth rate.

  • ANA forecasts a drop in profit in FY2024, but it would still be higher than in any pre-pandemic year.
  • Cathay Pacific sees supply and demand becoming more balanced as overall capacity increases.
  • Malaysia Airlines reports yields declining from last year, although they will remain markedly higher than in 2019.
  • Philippine Airlines' first-quarter profit declined versus 2023, and Air New Zealand has downgraded guidance.
  • Qantas expects unit revenue to continue to ease, as competition rises and pent-up demand abates.

ANA and Cathay Pacific posted large profits for 2023, although the industry environment is changing this year

The scenario for many Asia-Pacific airlines is illustrated by All Nippon Airways' (ANA) latest financial report.

The airline reported its highest-ever annual operating profit of JPY207.9 billion (USD1.3 billion) for the fiscal year that ended 31-Mar-2024.

ANA is forecasting operating profit of JPY170 billion yen in 2024, and while this would be down from 2023, it would still be greater than at any time before the COVID-19 pandemic. The airline expects that its revenue will climb this year, but it will be outpaced by a steeper rise in costs.

Cathay Pacific posted a profit of HKD9.8 billion (USD1.3 billion) for 2023 - its first annual profit since 2019. However, the airline's passenger yields declined in the first few months of 2024 compared to their peaks in 2023, CEO Ronald Lam said during a 13-Mar-2024 briefing.

Cathay Pacific and its competitors are adding more flights, so supply and demand will become more balanced, Mr Lam said. This means that yields and fares will likely "continue to normalise" through the remainder of this year. He noted that Cathay Pacific and the rest of the global airline industry are facing cost pressure due to the well-known supply chain issues.

Because 2023 was "really exceptional," demand - while still strong - is "softening a bit from last year," said Lavinia Lau, Cathay's Chief Customer and Commercial Officer. This has been particularly evident on traffic originating in Hong Kong.

The airline plans to increase its focus on connecting traffic to keep its flights full this year, said Ms Lau. In contrast, in 2023 the airline's priority was carrying as many point-to-point passengers as possible to and from Hong Kong while capacity was still at low levels.

Other Asia-Pacific airlines are also reporting that yields and unit revenues are coming down from their peaks

Malaysia Airlines' parent Malaysia Aviation Group (MAG) achieved a net profit of MYR766 million (USD162 million) for 2023, which was its first in several years.

The airline was relaunched in 2015, and the last time its predecessor company was profitable was in 2010. MAG is forecasting another net profit in 2024, unless new external challenges emerge.

While MAG's yields are lower this year than in 2023, they are still likely to be up by approximately 14%-18% compared with 2019 levels. The airline expects to face rising competitive capacity in its local markets.

Air New Zealand has revised its fiscal year profit guidance downwards, due mainly to increased pressure on passenger revenue. On 22-Apr-2024 the airline forecast that its revenue would be NZD$40-50 million (USD24-30 million) lower than its previous estimate for the current fiscal year, ending 30-Jun-2024.

When it issued its previous guidance in Feb-2024 the airline warned of "deteriorating economic and operational conditions". This proved to be correct, because since then Air New Zealand "has continued to see softening in revenue conditions over the [fiscal] fourth quarter both domestically and [in] the North American market". The airline's North American routes are being affected by intense competition, due to US airlines adding a significant amount of additional capacity to New Zealand.

Qantas is seeing its international yields and unit revenue decline "as pent-up demand moderates and normal seasonality returns," the airline said. With capacity and competition higher, load factors slipped slightly in the six months through 31-Dec-2023, which was its fiscal first half.

Qantas expects its unit revenue to continue to ease, although it will remain more stable in the domestic market than for international.

Philippine Airlines is another reporting that its profits are under pressure. Its net profit of USD81 million for the first quarter was down 25% from 2023, which it described as "an expected outcome as global travel patterns normalize following the post-pandemic surge of 2023".

The airline cited price hikes for maintenance, ground handling, airport fees and passenger service charges.

Airline growth and financial trends are returning to more familiar - and stable - patterns

Of course, some airlines are still likely to increase their profits this year - for example, Japan Airlines is forecasting that its net profit will be up by approximately 5%, to JPY100 billion.

But it appears likely that more Asia-Pacific airlines will experience declines than increases. That is not a cause for concern, however, as there were many factors that artificially inflated profits in 2023, and these are now easing as the industry settles towards `its "new normal".

The picture will become clearer as more airline earnings reports and outlooks emerge. The heavyweight Singapore Airlines, for example, is due to report its fiscal year earnings in the week of 13-May-2024, and more first-quarter reports will be released in May-2024.

Airlines are increasingly focusing on year-on-year comparisons again, rather than looking back to pre-pandemic comparisons. This shows that the dramatic swings seen during the past four years appear to be flattening out.

This article was written on 09-May-2024.

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