Performing under pressure

Singapore
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Traffic growth may have slowed in 2006, but nearly all major Asia-Pacific airlines are reporting improved earnings as demand remains robust, fuel prices ease off and restructuring efforts prove successful

Analysts and airlines are relatively upbeat about market conditions going forward, predicting that without any major shock influencing sentiment the remainder of this year should be even better for earnings.

Several of the weaker Asia-Pacific carriers, such as Garuda Indonesia and Malaysia Airlines (MAS), have been restructuring and are reporting better-than-expected results - with the qualifier that they are not out of trouble yet. Both, for example, are still suffering underlying losses while Garuda continues to struggle to pay its bills.

The financially stronger carriers, meanwhile, such as Hong Kong's Cathay Pacific Airways and Singapore Airlines (SIA), have been successfully cutting costs while continuing to benefit from healthy demand. All this capacity growth has generally been kept in check, resulting in strong yield improvements.

Cathay reported full-year earnings in March with net profit increasing 24% on nearly 20% growth in revenue. The solid results came on the back of productivity gains and healthy traffic growth, which although slower than in 2005, was strong. Its fuel bill increased 30% over 2005, but unit costs excluding fuel were reduced by 1.3%.

In mainland China, the major airlines have yet to report 2006 calendar-year earnings, but expectations were for relatively positive figures to be made public in April.

Air China has been consistently profitable while China Eastern and China Southern have suffered losses as they struggled with increased fuel prices. They are expected to report turn­arounds for 2006.

SIA reported record earnings for its fiscal third-quarter as it benefited from solid growth in demand and the sale of assets, and the outlook for the full financial year was upbeat. While passenger and cargo demand remains robust, delays in Airbus A380 deliveries, which should have begun in the first half of last year, have resulted in slower-than-planned capacity growth, boosting yield.

Looking forward, it says in its earnings report: "Advance bookings reflect continued strength in demand for air travel. However, revenue growth will be constrained by the shortfall in capacity growth from the Airbus A380 delivery delays. Efforts are being focused on improving yields and loads."

In nearby Malaysia, MAS reported significantly reduced losses for the 2006 calendar year as restructuring efforts produced positive results ahead of targets. It also looks on course to produce profits this year. But MAS warned it "cannot afford to be complacent. We are not 'out of the woods' yet and there is more to do."

Garuda Indonesia also reduced its losses in 2006, by more than half. The state-owned carrier, which is in severe financial trouble and seeking to win relief from its debt obligations, says that during the year it "showed improvements in revenue, passenger volume, load factor [and] yield".

Indian carriers are generally continuing to struggle, meanwhile, as a result of cut-throat competition and domestic overcapacity. But there are signs there will be consolidation and stability in the market perhaps in around a year.

Mixed picture

It also remains a mixed picture in Japan, with All Nippon Airways (ANA) reporting healthy growth and Japan Airlines (JAL) still showing weakness.

ANA recently upgraded its earnings forecast for the fiscal year thanks to a better-than-expected performance in the first nine months. It attributed this to "strong demand for travel in general, buoyed by the continuing recovery of the Japanese economy, the demand for business travel in particular, and a gradual increase in frequency on routes within ANA's network".

But JAL reported another net loss for its fiscal third-quarter and stood by a full-year forecast for only a small net profit despite stepped-up restructuring initiatives. While most airlines have been increasing revenue forecasts, JAL reduced its full-year forecast due to "stagnant tourism demand for travel to Guam and Hawaii, stagnant individual domestic passenger demand, a drop in ski demand due to poor snowfall and a drop in international cargo traffic out of Japan".

In South Korea, however, both Asiana Airlines and Korean Air recorded strong growth in profit in calendar 2006 as demand increased.

In Australasia, Air New Zealand (ANZ) and Qantas Airways also reported improved earnings.

Qantas raised its profit forecast after a better-than-expected performance in the fiscal first half, in part thanks to double-digit percentage revenue growth. It says there has been "buoyant consumer demand and efficiency improvements".

ANZ also credited efficiency gains as being partly responsible for a 61% jump in net profit for the fiscal first half. It also benefited from strong growth in revenue and yield.

"All our key metrics - including yield, passenger numbers, revenue, profitability and share price are up, despite significant external pressures," says chairman John Palmer, in a statement that aptly summed up the situation for most other Asia-Pacific carriers.




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