Asia under pressure as losses swell

Singapore
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The going really got tough last year for this region's carriers which swung to an eye-watering operating loss of $4.5 billion in 2008 after reporting a relatively healthy profit of $7.3 billion the year before.

Andrew Herdman, director general of the Association of Asia Pacific Airlines, which represents 17 major carriers in the region, says the impact of the economic crisis is worse than 2008's high fuel prices because the downturn "affects top line revenues". Given a choice between last year's strong economy coupled with high fuel prices or this year's weak economy and low fuel prices, Herdman says the strong economy would win out because people are willing to pay higher prices. Equally, in 2007 and early 2008 carriers could pass on the cost of high fuel prices to the consumer, he says.

Airlines have been bleeding money this year because capacity cuts have failed to keep up with plummeting passenger traffic. In a bid to stimulate demand, carriers have discounted their fares, leading to depressed yields and profitability. Herdman believes short-haul international cargo and leisure traffic will be the first to recover because short-haul trips can often be an impulse buy and customers respond well to price promotions.

Herdman declines to predict when the long-haul recovery will begin because it depends on when the North American and European economies recover. But he believes airlines in Asia Pacific have reached the bottom: "We have passed through the worst but it is still very tough."

However, Centre for Asia Pacific Aviation managing director, Peter Harbison, is more pessimistic. He believes there are "no obvious signs things are bottoming out" and "no indication yet of a recovery in 2010". Harbison believes this downturn is particularly harsh because it is deeper, longer and global.

"You can see some indications on the freight side, indicators that it is bottoming," says Harbison. But he adds that this can be misleading because last year's monthly figures were already down year-on-year. Harbison also says international cargo traffic is moderating this year because freight demand is being stimulated by deep discounting. But despite his pessimism, Harbison believes the Asia-Pacific airline market will come out of the downturn earlier than Europe and the USA. Relative to other economies, Asia-Pacific is "under-developed so there is upside potential", he says.

In the meantime, airlines in the region continue to suffer, even ones that have traditionally been very strong. Singapore Airlines and Qantas Airways have been two of the most profitable carriers in Asia-Pacific, but for the year ending 31 March SIA reported a 48% drop in net profit to S$1.06 billion ($723 million). Qantas' international arm has been losing money and the whole group, including domestic, is forecasting a pre-tax profit of between A$100 million ($80 million) and A$200 million for the year ending 30 June. In 2007 it had a pre-tax profit of A$1.41 billion.

Japan is also a barometer for the Asian airline industry. In the 12 months ending 31 March, Japan Airlines posted a ¥63 billion ($648 million) net loss and All Nippon Airways posted its first full-year net loss in six years, totalling ¥4.2 billion.

Losses in India have been even higher. The parent of Air India, which merged last year with its state-owned sibling Indian Airlines, is expected to reporta loss of around Rs50billion ($1.02billion) for the year toMarch. Meanwhile Jet Airways' net loss for same period widened to Rs4 billionfrom Rs2.5 billion. Jet warns that the upcoming lean season means "load factors and yields will continue to be under severe pressure".

Indian carriers have tried to stem the losses by cutting capacity and reducing staff costs, but governments have largely hampered these efforts. Taxes on airline operations remain persistently high and the national government has criticised carriers that have tried to retrench large numbers of workers. In China, governments too have been intervening and three of the country's four largest carriers -China Eastern, China Southern and Hainan Airlines have received government bail-outs totalling over 10 billion yuan ($1.5 billion).