The Business Times

Better outlook for region's carriers

Low fuel prices and a tighter rein on capacity growth will boost performance but margins will remain an ongoing concern amid overcapacity

Nisha Ramchandani
Published Sun, Dec 27, 2015 · 09:50 PM


AIRLINES in South-east Asia are on track to post profits this year, thanks to low fuel prices and a tighter rein on capacity growth - a trend that is expected to continue into 2016.

Margins will, however, remain an ongoing concern, especially amid overcapacity and a sizeable aircraft orderbook as carriers grapple with the more challenging operating environment in this part of the world.

"The South-east Asian airline sector is back in the black and should see more improvements in 2016," said industry think-tank CAPA Centre for Aviation.

"But with the intense competition in the region and the huge order book, very few airlines are likely to achieve margins above normal return of investment over the next several years."

The market would also benefit from some consolidation and additional capacity cuts, added CAPA in the report, which estimates that 13 per cent of the global order book of aircraft comes from South-east Asia. South-east Asia's carriers also contribute as much as a quarter of seat capacity in the Asia-Pacific.

A sample of some 20 South-east Asian airlines showed that profits for the first three quarters of this year totalled US$729 million, versus losses amounting to US$557 million a year ago.

Singapore Airlines (SIA) was ranked second with US$203 million in profits, trailing Malaysia's AirAsia, which chalked up U$220 million.

The other Singapore-based carrier which was profitable was SilkAir (US$32 million), while Tiger Airways and SIA Cargo turned in narrower losses. Jetstar Asia was not included in the rankings as the budget carrier does not report quarterly figures, but it swung into the black for FY2015 with a A$45 million (S$46 million) turnaround, based on underlying Ebit (profit before interest and taxes) figures from the Qantas Group.

With excess market capacity driving down yields, Jetstar Asia pulled the plug on capacity growth last year but started to introduce new routes and additional capacity on existing routes in November and December this year. The budget carrier is also trying to boost connecting traffic through codeshare agreements and interline partnerships with full service carriers.

A big contributor to the stronger performance for the aviation industry this year has been cheaper fuel, with crude oil trading below the US$40 per barrel mark. The International Air Transport Association (Iata) expects jet fuel prices to average US$68 per barrel (pbl) this year and US$64 pbl next year, plunging drastically from nearly US$115 pbl in 2014.

In its latest outlook forecast, Iata projected that airlines in the broader Asia-Pacific would net some US$5.8 billion in profit this year and US$6.6 billion next year. But Asia-Pacific airlines lag behind Europe and North American carriers, which are benefiting from the pick-up in their respective economies. Profits of the region's carriers are being hit by a lacklustre cargo market.

"Uncertainty in economic conditions persists, exacerbated by concerns about China's slowing economy, which have led to weakening emerging-market currencies and volatility in stock markets," said SIA last month in its financial results, commenting on the near-term outlook. "The outlook for both passenger and cargo traffic is cautious. Yields remain under pressure in the face of capacity additions from other airlines."

Globally, Iata - which represents some 260 carriers - is expecting US$33 billion in collective profits this year, up from its earlier forecast of US$29.3 billion, on the back of cheaper jet fuel and stronger travel demand. Much of that will come from North American airlines, which are poised to rack up a bottom line of US$19.4 billion.

Next year, profits for the global aviation industry are expected to soar to US$36.3 billion - more than double that in 2014 - translating to an average net profit margin of 5.1 per cent. However, Iata chief Tony Tyler said that the higher return on investment this year is merely "normal" vis-a-vis other industries, and that margins remain susceptible to erosion due to the challenging operating environment.

The year 2016 could also prove to be an interesting year for Singapore flag carrier SIA, with various initiatives in the works, most noticeably its recent take-over offer for Tiger Airways. The offer is due to close on Dec 28 this year.

To put the bleeding budget carrier in better stead to compete in South-east Asia's competitive budget segment, SIA is seeking to delist and privatise Tiger. Last month, the parent airline - which holds nearly 56 per cent in Tiger - offered to snap up the remaining shares at 41 Singapore cents each. Independent financial adviser Maybank Kim Eng has described the offer price - which represents a 32 per cent premium - as fair, although the Securities Investors Association Singapore (SIAS) has been appealing to the airline group on behalf of Tiger's long-term minority shareholders for a higher offer.

SIA's rationale for the offer is closer integration across its four airlines under its "portfolio" strategy, which will not only strengthen Tiger's performance as it claws back towards profitability, but bolster the broader SIA group as well. Already, there has been mixing-and-matching of routes within its portfolio of airlines, and closer ties between medium/long haul budget arm Scoot and Tiger.

The new year will also see some fresh developments for the parent airline. From the first quarter of next year, SIA will start to take delivery of its new, fuel-efficient A350-900s, which will allow the group to mount new routes and direct flights in markets such as Europe.

Also on the cards for SIA is the roll-out of premium economy on more routes, the launch of a pilot training centre in Seletar - which is a joint venture with plane-maker Airbus - as well as the implementation of a wide-ranging partnership with Germany's Lufthansa.

The latter, which is subject to the green light from the relevant authorities, includes enhanced codeshare and commercial cooperation.

Over at Changi Airport, the second half of 2015 posted a pick-up in traffic compared with the first half, which could bode well for 2016.

Singapore' tourism industry struggled slightly this year, with the stronger Singapore dollar dampening travel demand from markets such as Indonesia, Malaysia and Australia. And while traffic from Thailand started to rebound again in 2015, the recent bomb blasts in August have also thrown that recovery off kilter.

"But we expect traffic to bounce back on that front," said Changi Airport Group spokesman Ivan Tan, referring to Thailand.

One bright spot is that airlines have started injecting capacity since the beginning of the Northern Winter season. This comes after a period where overcapacity in the market prompted some carriers to curb capacity growth by restructuring their networks.

New flights launched include those by Singapore-based carriers as well as other carriers such as EVA Air, Garuda Indonesia, Malindo Air, Qantas and Qatar Airways. The airport continues to court new carriers and explore growth with existing ones.

"We are optimistic that new aircraft types like the Boeing 787-9s and A350s will open up new opportunities for long-haul connectivity to markets like North America, Europe and even Africa," added Mr Tan.

For the eleven months spanning January to November, traffic at Changi hit 50.2 million passengers, up 2.4 per cent year on year, with much of the growth coming from July onwards. In fact, passenger growth for July to November has been up by around 5 per cent.

Meanwhile, cargo was flat at 1.69 million tonnes for January-November, while aircraft movements inched up 1.3 per cent to 315,710 flights for the period.

"We definitely hope to see continued sustainable traffic and connectivity growth for Changi Airport in 2016," concluded Mr Tan. "Asia continues to present many exciting growth opportunities for us, with many pockets of untapped tourism potential, and growing affluence within the emerging economies driving travel. We will continue to work closely with airlines to develop new connections between Singapore and secondary cities in countries like China, India and Indonesia."

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