High oil prices will not ground Asian travellers; airlines may suffer


SINGAPORE (XFNews) - High oil prices are unlikely to ground Asian travellers ahead of the year-end holiday season but airlines could see profits sharply eroded by escalating jet fuel bills, analysts said.

A wider range of choices, including cheaper tickets from low-cost airlines, will still encourage air travel but long-haul destinations to Europe and the United States may give way to hideaways within the region, they said.

The International Air Transport Association (IATA) said that for the first six months of 2005, international passenger traffic in the Asia-Pacific region grew 8.1 pct over the same period in 2004.

Between now and 2008, IATA estimates international passenger volumes in the region will expand 8.3 pct annually, faster than the forecast global average of 6.0 pct. Newly-affluent Chinese tourists are expected to lead the way.

"Asian markets are still expected to be the fastest growing in the world for both passenger and cargo businesses," a spokesman for the Geneva-based IATA told AFP. The association is urging airlines worldwide to cut costs to cope with losses from fuel price volatility.

On the ground, however, families may plan year-end holidays more carefully.

John Koldowski, managing director of the Strategic Intelligence Centre at the Pacific Asia Travel Association in Bangkok, said: "Travel will not be given up, but the way people travel and move around could very well change."

He said that from January to August, passenger traffic in the Asia-Pacific region was up 10 pct from 2004, despite airlines slapping additional fuel surcharges on passengers.

But resilient passenger numbers may not necessarily translate into robust profits for airlines as additional fuel costs erode ticket gains.

Southeast Asia's crowded budget airlines market saw its first major shake-up in July when Singapore-based budget carrier Valuair merged with Qantas-backed Jetstar Asia. Analysts said this is unlikely to be the last consolidation.

Shukor Yusof, who tracks the aviation sector at Standard and Poor's in Singapore, said jet fuel normally accounts for around 20 pct of total costs in airlines, second only to labor at about 35 pct.

"Few airlines in Asia are well-hedged, but even the best-hedged carriers are not immune to higher oil prices," he told AFP.

"The protection afforded by hedging depends a lot on the strike price of oil and what commodity index is used. Airlines' ability to pass on fuel costs in the form of surcharges are somewhat capped because of severe price competition," he said.

Based on oil prices averaging 47 usd a barrel for the year, the global aviation industry's fuel bill in 2005 will total 83 bln usd, nearly double the 44 bln chalked up in 2003, IATA said.

The aviation industry's total loss globally this year is estimated at 6.0 bln usd, also based on 47-usd average oil prices. Losses and fuel bills are likely to mount given current oil price levels near 70 usd a barrel.

JP Morgan said Asian carriers such as Singapore Airlines and Hong Kong's Cathay Pacific, which have maintained strong revenue growth and adopted stringent cost-cutting measures, are likely to cope better.

Airlines can limit the damage by withdrawing from unprofitable routes, JP Morgan suggested, but noted that "unfortunately, we have yet to see any company make the first move in that regard."

"A sustained spike in fuel prices or the crack premium in jet fuel and/or customer resistance to fuel surcharges would escalate the crisis," it warned.

IATA said aggressive cost-cutting measures remain critical. It said "there is no silver bullet, but every ounce of savings counts."

For example, washing aircraft more frequently to reduce friction or using lighter catering equipment on board will have an incremental impact, it said.

IATA added it was working with governments, airports and air traffic control to improve operations.

IATA has initiated five projects estimated to generate 6.5 bln usd in savings for the industry annually, the "most urgent" of which is pushing for 100 pct electronic ticketing by 2007.

 E-ticketing could save the industry an estimated 3.0 bln usd a year.

IATA called on other sectors of the industry to help reduce costs, pointing out for example that airport and air navigation service charges account for 10 pct of airline operating expenses.

While airlines are expected to cut non-fuel costs by 4.5 pct this year -- in addition to reductions of 2.0-3.0 pct in previous years -- airport and air navigation charges remain relatively unchanged, IATA said.

"It is imperative that our partners in the value chain match our efforts," it said.

Want More Analysis Like This?

CAPA Membership provides access to all news and analysis on the site, along with access to many areas of our comprehensive databases and toolsets.
Find Out More