Airline profits will come under increasing pressure, due to a slowdown in the US economy and high fuel prices.
The International Air Transport Association (IATA) reports worldwide premium traffic slowed further during Dec-07 to growth of just 1.4%, from 1.8% the previous month. There was also a “sharp slowdown” in economy travel growth to 4.7%, compared with the robust 6.4% seen in November.
According to IATA, “this is the first sign that the economic weakness already in evidence may be damaging air travel, which has yet to show up in the passenger-kilometer data already reported, since more robust long-haul markets have kept total kilometres flown from weakening significantly”.
There was also a slowdown in premium traffic during 2007 as a whole, with growth down to 2.4% from 4.3% from 2006. However, excluding the weak intra-Europe premium market, the slowdown was much less pronounced - from 6.5% in 2006 to 6.1% in 2007. The fastest growing premium markets continue to be linked to the Middle East.
Premium demand within Asia rose by 3.3% in 2007, although weakness set in late in the year. Premium demand rose 1.8% in Dec-07, following a 0.2% contraction in Nov-07.
In Europe, there are increasingly competitive alternatives in high speed rail and economic pressures are leading to business travellers buying economy tickets for short-haul travel. According to IATA, “that process is less advanced in Asia, but the weakness seen at the end of the year suggests a shift may be under way”.
Singapore Airlines (SIA) chief executive, Chew Choon Seng, said while the airline is open to investment opportunities (particularly in China and India), SIA’s attention is currently engaged on “other things”, such as “planning for contingencies”, given the state of the world financial market.
Mr Chew added Asian airlines are not immune to a US-led global economic slowdown, but its location in Asia, with a strong network in India and China meant it is “better positioned than some others”.
Malaysia Airlines (MAS) Managing Director & CEO, Idris Jala, predicted overcapacity would result in declining margins for Asia Pacific airlines and may even cause some to exit the market. MAS is confident though that it will be in a position to be an active player in any future consolidation in the Asian airline industry.
The sweet spot of industry profit growth is over, following some strong earnings performances in the final quarter of 2007.
Airline financial result in 4Q07 (ended 31-Dec-07): Operating revenue (size of bubble) vs operating profit margin
Source: Centre for Asia Pacific Aviation & company reports
Airline operating profit margins in 4Q07 (ended 31-Dec-07)
Source: Centre for Asia Pacific Aviation
Overall profitability of Asian carriers has fallen to USD700 million last year from USD1.7 billion in 2002, according to IATA. The industry body expects capacity in this region to rise by 8.8% in 2008, against demand growth of 6.4%. 427 new aircraft are scheduled for delivery to the region’s airlines in 2008 and a further 450 in 2009.
According to Bisignani, “this is not a recipe for long-term health”.
It’s not a recipe for short-term health either. IATA is expecting to cut the industry earnings outlook for 2008 in Apr-08, after slashing the outlook by a third in Dec-07. IATA added, “business and first class travel are more highly geared to downturns in GDP and asset prices than travel on economy tickets”.
This means carriers targeting leisure markets, ie LCCs, could perform better this year than premium travel-focused airlines.