Asia Pacific carriers to post bigger profits in 2016 even as competition tightens margins: AAPA

Airline executives pose for obligatory group shot at opening of Association of Asia Pacific Airlines annual gathering in Manila. (Jordan Chong)
Airline executives pose for obligatory group shot at opening of Association of Asia Pacific Airlines annual gathering in Manila. (Jordan Chong)

Association of Asia Pacific Airlines (AAPA) director general Andrew Herdman says carriers in the region are on track to report improved profits in 2016 even as competition reduces airfares and put pressure on margins.

The sharp decline in oil prices that has occurred over the past couple of years has led to lower airfares amid healthy demand for air travel in the region.

However, the benefits of the oil price falls – fuel represented anywhere between 15 to 35 per cent of an airline’s costs – appear to have peaked, leaving airlines having to negotiate some geopolitical worries and macroeconomic jitters while margins are narrowing.

“We’ve probably seen the most of that stimulus and it would be unrealistic to expect to continue above average growth rates,” Herdman told reporters on the sidelines of the AAPA 60th Assembly of Presidents in Manila on Thursday.

“We have seen the growth rate come down a little but it is still above trend, it is still strong.

“Having said that, the number of people competing for a share of that growth is as wide as ever and competition is intense and it is in fares.”

Two of Asia Pacific’s largest flag carriers – Singapore Airlines (SIA) and Cathay Pacific – have warned of difficult times ahead due to low fares and a weak outlook.

SIA reported a 70 per cent decline in net profit for the three months to September 30 2016 and described the economic outlook as “tepid”, while Cathay issued a profit downgrade in response to “overcapacity and strong competition”.

Herdman said airlines in the region have been cutting fares to keep their planes full, with passengers rather than the bottom line the winners from the lower oil price.

“Anecdotally what we are seeing is that to maintain those load factors people have had to give away more on the fares than they expected,” Herdman said.

“We have a situation where very well-managed carriers are doing everything right, things are running smoothly, load factors are good, traffic is growing, but then the bottom line is still disappointing.

“In Asia and other regions you see some situations where the passenger captures all the benefit. The question is, is that sustainable.

“There has never been a better time to fly in terms of choice of services and affordability of fares in all market segments.”

Despite all the well-publicised difficulties some airline are going through, Herdman said figures from the International Air Transport Association (IATA) suggested Asia Pacific carriers as a whole were expected to post an improved profit result for 2016 compared with the $7 billion profit on $166 billion in revenues achieved in the prior year.

“Year to date, Asian carriers’ profits are about in line, slightly ahead of where they were same period last year,” Herdman said.

“The projection that Asian airlines will make slightly more than last year, there’s no reason to doubt that at this moment.”