Asian airlines expect turbulence in 2008


The Association of Asia Pacific Airlines (AAPA) members reported a “very successful 2007”, ensuring they are “well placed” to meet both the opportunities and challenges which lie ahead. AAPA Director General, Andrew Herdman, stated the group is still recording “steady growth” in both passenger and cargo demand. But he added, “there is a growing sense of unease about the likely impact of slowing global economic growth, coupled with cripplingly high oil prices”.

AAPA airlines are “therefore bracing themselves for some turbulence in the remainder of the year”, according to Mr Herdman.

The AAPA outlook is similar to the largest Chinese (non-AAPA member), China Southern Airlines.

China Southern Airlines reported a big increase in profitability in 2007 (which continued into the first quarter of 2008), aided by strong demand and the appreciation of the Chinese currency against the US dollar. While Chairman, Liu Shaoyong, expects traffic growth in China in 2008 to “continue to boom”, profitability will be “subject to enormous pressures, as a result of the US subprime crisis and rising fuel prices”.

2007 was indeed a banner year for airline earnings. The big three Chinese airlines were profitable simultaneously for the first time in six years, according to international accounting standards. AAPA members reported aggregate profits of USD5.2 billion, representing a 5% net margin, a “marked improvement” on the 3% margin recorded in 2006, according to Mr Herdman.

AAPA Airlines net profit margins: 2002 to 2007

Source: Centre for Asia Pacific Aviation & AAPA

But a 5% margin is still well below the industry’s average cost of capital. Those wafer thin margins will come under significant pressure this year under the impact of high fuel prices and a potential slowdown in traffic growth.

The Centre for Asia Pacific Aviation will release its annual Aviation Outlook report for 2008 this week. The 250-page Outlook contains detailed reports on all major participants in 2007 and their prospects for the remainder of this year.

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