Asia-Pacific traffic recovers but profits are still elusive

Singapore Air Show » 2010
January 27, 2010, 10:35 AM

This year will likely be an improvement on 2009 for airlines in this part of the world but it won’t mean a quick return to profitability, according to Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA). But the substantial losses the group’s members have suffered in the last two years should at least be reduced, he told AIN in an interview ahead of this week’s Singapore Airshow.

Herdman said, “2009 was a very tough year but the mood definitely shifted in the last couple of months, with steady improvement on the cargo side and the passenger business coming back slowly,” said Herdman. “But we are still very challenged because yields are still weak and the oil price is still high at $80 per barrel.”

According to projections from the International Air Transport Association (IATA), Asian carriers were expected to account for approximately $4 billion of the more than $11 billion in losses by all world airlines last year. “There has been a lot of damage to balance sheets,” said Herdman, explaining that some AAPA carriers have had to patch up their financial reserves by raising funds through new equity or increasing debt.

Capacity also has been cut, mainly through simply reducing flight schedules but also with the retirement of some older aircraft and the temporary grounding of new models. Unlike carriers in the West, Asian airlines have generally tried to avoid laying off staff–partly because of a desire to retain skilled personnel. To keep staff costs down they have opted to scrap bonus payments (which form a significant part of payroll costs in the region) and have imposed unpaid leave.

According to Herdman, all types of Asian airline have been hit by the economic downturn. But he added that market conditions have been hardest on carriers that fly a lot of long-haul flights and that aim to attract high-yield business-and first-class passengers. These include carriers such as Japan Airlines, Cathay Pacific, Qantas and Singapore Airlines.

Proportionately, cargo operators have had a harder time than the passenger sector as international trade has contracted severely. On the other hand, short-haul operators focusing on the leisure market, including both low-cost carriers and regional airlines, have not had it quite so hard and some of them have actually achieved some growth.

The impact of the downturn has not been uniform in geographical terms either, with continued growth in China, Indonesia and India, and with Australia avoiding a recession. Much of this has come down to the fact that domestic and intra-Asia demand has compensated for a fall in international business. But Herdman was clear that AAPA members will not see a full return to prosperity until the global economy is more uniformly back on its feet.

Herdman shares the view that government restrictions on issues such as foreign ownership of airlines and the difficulty in negotiating bilateral traffic rights has continued to stand in the way of very necessary industry restructuring and consolidation. “The industry operates under a very archaic framework,” he commented. “It is almost impossible to merge airlines in different jurisdictions and the industry is calling for fresh thinking on the part of governments.”

AAPA also wants to see fresh government thinking on the vexed issue of security. In the wake of the December 25 attempt by a passenger to blow up a U.S. airliner en route to Detroit, Herdman complained of ill-considered “knee-jerk” reactions in moves such as the decision to accelerate the introduction of full-body scanners at airports.

Threat Assessment
“Good security is based on a proper assessment of the threats and risks, measuring the probabilities and the possibilities,” said Herdman, arguing that the new measures rushed into effect right after the attempted Christmas Day attack may prove to be disproportionate to the ongoing risk of a repeat attempt. “It is much harder to reverse restrictions than to introduce them; it took years to get metal cutlery back onto planes [following the 9/11 terrorist attacks].” AAPA is also concerned that airline passengers will end up confused by conflicting approaches to security resulting from disparate initiatives taken by different countries.

On the increasingly contentious issue of aviation’s environmental footprint, AAPA shares the IATA view that industry must take the lead in pushing through a uniform global response through the International Civil Aviation Organization. The airline lobby is adamant that unilateral responses such as Europe’s new emissions trading scheme and plans for different taxes and levies on aircraft fuels in individual countries will result in anti-competitive market distortion.

But Herdman insisted that airlines have never been more economically motivated to reduce their carbon footprint by cutting the amount of fuel they burn.
However, without political consensus as to the economic measures they believe are necessary to ensure a comprehensive approach, airlines can focus only on incremental improvements in fuel efficiency and technological solutions. In Herdman’s view, the industry continues to be frustrated by the obstructive, parochial agendas of national governments and it wants to see more decisive action on efforts to rationalize air traffic management to cut back on the extra fuel that is needlessly burned worldwide.

AAPA has 17 member airlines, which account for almost one fifth of global passenger traffic and one third of cargo traffic. The Asia Pacific air transport industry collectively represents one quarter of the world’s passenger traffic and two fifths of all freight.     

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