The Centre for Asia Pacific Aviation has today published its annual Aviation Outlook report for 2008. The 250-page Outlook contains detailed reports on all major participants in 2007 and their prospects for the remainder of 2008. Some of the key highlights are provided below.
After the benign conditions of 2006, Asia Pacific aviation entered an earnings sweet spot in 2007 that led, in many cases, to record airline profitability. Just about everyone made money last year and the hopes were high this time last year that 2008 would be even better – particularly for the long-suffering US airline industry.
But the storm clouds started to gather towards the end of last year, as fuel prices continued to climb and the fallout from the US subprime crisis started to emerge – and indeed, continues to emerge.
For now, the Asian Development Bank (ADB) forecasts Asian economies will register solid growth in 2008, despite a slowdown in major industrial economies, surging food and fuel prices and the credit crisis in the US. The ADB forecasts developing Asian economies to expand at 7.6% in 2008 and 7.8% in 2009 after posting the highest level of growth in almost two decades in 2007 - averaging 8.7%. The IMF has been similarly upbeat on Asia’s economic prospects in its latest commentary.
But clearly, Asia Pacific aviation is entering a period of economic uncertainty.
Importantly though, this region has evolved to an airline industry structure that is potentially positioned better to cope with a sharp downturn. It is the first time that the Asia Pacific region will have faced adverse economic conditions with a full armoury of low cost/low fare airline options.
A decade ago, in the Asian Financial Crisis, the outcome was simple: people stopped flying and airlines lost money. This time around, things could be very different. We have a new aviation environment - with new, private airlines, mostly well-positioned to survive in difficult conditions. The region’s major network airlines (but not all) have also restructured effectively to allow them to be competitive when times get tough.
If the IMF and ADB projections prove accurate, the industry’s pain should not be intense in 2008. However, as we move further into the year, there are clear signs of a significant imminent slowing in air travel. Load factors are starting to ease as fresh capacity enters the market. These suggest that the IMF and ADB may be overly optimistic.
In previous downturns, low cost/low fare airlines in the US have managed better than higher cost/higher yield competitors. Even in good economic times, LCCs have been taking a rising share of intra-Asian travel. This could accelerate under a turbulent economic environment. The Middle East airlines are also poised to play an accelerated role over the next couple of years. For example, Dubai Airport overtook Singapore Changi in the first quarter of 2008, in terms of total passenger numbers. Traffic at the Middle Eastern hub is growing almost three times faster than at Changi.
On the issue of oil prices, we suggest that we are near the top. Oil prices should start to level out and then to slide, as economies soften and the US dollar stabilises.
But in reality, the main problem is not costs – but revenues; the threat of globally softening demand is expanding far beyond the slowing US market. That is where the concern really lies.
Turning to Asia Pacific liberalisation, as the first signs of economic turbulence affect the region’s airlines, with premium traffic showing softness, so the first test of government resolve to liberalise arises. Until now, the rash of new entrants has been allowed to expand in a time of economic growth where, simultaneously, established flag carriers have shown high profitability.
However, as economic conditions erode that profitability, many of the region’s still-influential flag carriers may seek to halt liberalisation moves. This will coincide with the lead-up to the first major liberalising stage of the ASEAN Multilateral Agreement (which removes restrictions on inter-capital city operations) at the end of the year. 2008 will therefore be a critical signpost to the future. On balance, the Centre believes that momentum for change has now become irresistible and will move ahead in 2008.
Overall, 2008 is shaping to be one of the most challenging in recent memory for Asia Pacific aviation, as it copes with intensifying internal and external headwinds.
Country-by-country prospects are contained in the Outlook report, which is now available for complimentary download for CAPA Members via the Members’ Area. Login now.
Individual reports may be purchased by clicking here.