Asia-Pacific carriers en route to higher profits in 2018: Iata

Singapore

FUELLED by a rebound in the cargo market and strong passenger demand, Asia Pacific airlines are expected to rake in profits to the tune of US$9 billion in 2018, up from an expected bottom line of US$8.3 billion for 2017.

Despite burgeoning costs, the International Air Transport Association (Iata) projects that the world's airlines will clock a record profit of US$38.4 billion in 2018, thanks to healthy demand, greater efficiency and reduced interest payments on debt.

All regions are expected to post improved profits year-on-year in 2018 with the North American carriers leading the pack at US$16.4 billion, which is nearly half of the collective bottom line.

Europe's airlines are in second place with an anticipated US$11.5 billion in profit, boosted by economic recovery in their home markets as well as some consolidation in that region.

In its latest forecast, Iata also hoisted its 2017 global profitability forecast for the second time this year. It now expects profits of US$34.5 billion for this year vis-a-vis the US$31.4 billion announced in June.

Iata chief Alexandre de Juniac said: "These are good times for the global air transport industry. The demand for air cargo is at its strongest level in over a decade. Airlines are achieving sustainable levels of profitability. It's still, however, a tough business, and we are being challenged on the cost front by rising fuel, labour and infrastructure expenses."

According to Iata, the industry has leveraged on this period of positive cash flow to pay out dividends as well as to pare debt, which has brought down interest payments. As a result, net margin will edge up from 4.6 per cent in 2017 to 4.7 per cent in 2018 despite operating margins being squeezed by increasing costs. At 9.4 per cent, the return on invested capital will exceed the industry's average cost of capital of 7.4 per cent.

In line with stronger GDP, the world's airlines are expected to carry 4.3 billion passengers next year, up from a projected 4.1 billion this year.

Meanwhile, "the cargo business continues to benefit from a strong cyclical upturn in volumes, with some recovery in yields," Iata pointed out. "The boost to cargo volumes in 2017 was a result of companies needing to re-stock inventories quickly to meet unexpectedly strong demand."

In particular, the cyclical rise in the cargo markets has been a boon for Asia Pacific carriers, which account for nearly 40 per cent of global cargo capacity.

While the momentum may moderate in 2018, e-commerce will likely help underpin global cargo growth. After languishing in the doldrums in recent years, cargo volumes are slated to expand from 59.9 million tonnes this year to 62.5 million tonnes in 2018.

Fuel - once the biggest expense for airlines - is expected to account for roughly 20 per cent of the industry's costs next year, the report showed. With oil prices trending higher, jet fuel prices are expected to rise by 12.5 per cent to US$73.8 per barrel next year.

Andrew Herdman, director-general of the Association of Asia Pacific Airlines, expects that airfares in Asia, which remain at "very affordable levels", may need to be increased in line with higher oil prices.

Labour costs, which have now leapt ahead to become the biggest expense for airlines, will comprise some 31 per cent of total costs in 2018.

Zooming in on South-east Asia, the operating environment looks to be more challenging than that of the wider Asia Pacific market.

While there will be growth in passenger and cargo demand, Iata's chief economist Brian Pearce warned that intense competition will continue to put pressure on passenger yields. "There is significant capacity being added within the region but competition on sixth freedom or connecting markets has eased a little with cutbacks in capacity plans from the Gulf," Mr Pearce said.

The Middle Eastern carriers are poised to double profits to US$600 million next year due to a 7 per cent growth in demand and a scaling back of capacity injection.

"Broadly speaking, South-east Asian airlines' operating profits and profit margins are expected to be lower year on year in 2018, if fuel prices remain at current levels or rise further," said Corrine Png, chief executive of transport research firm Crucial Perspective.

With the exception of Singapore Airlines (SIA) - which has hedged 47 per cent of its fuel needs up till FY22-23 - most other South-east Asian carriers have limited or no fuel hedging, she went on to highlight.

Another potential headwind flagged is foreign exchange rate fluctuations, especially for the greenback since certain operating costs for airlines are in US dollars.

Performance for individual markets in South-east Asia will also vary, Ms Png added. "For Thailand, Indonesia, Myanmar, Cambodia, Laos (and) Malaysia, the airline industry's capacity growth is moderate and we should expect a more favourable earnings outlook for the airlines based in these countries," she said. Players that will receive a lift from the more favourable supply environment include AirAsia.

"On the other hand, the airline capacity growth in the other Asean markets is more aggressive, namely Singapore, Vietnam, the Philippines and Brunei. The airlines based in these markets - SIA, VietJet, Cebu Air - could face greater pressure to discount more to fill up their excess capacity."

In particular, South-east Asian carriers are facing fierce competition on long-haul routes to North America and Europe, from the Gulf trio and the key Chinese carriers. This is putting downward pressure on yields.

The challenging operating environment has prompted carriers such as SIA, Malaysia Airlines, Cathay Pacific and Thai Airways to introduce transformation and/or restructuring efforts, which could help with boosting efficiencies and bringing down costs going forward.