While hopes remain the Asian airline sector might have hit the bottom of the crisis, experts argue structural changes are needed if this sector is to improve profitability in the long-term.

Speaking at Commercial Aviation Online's recent Inside Air Finance Conferencein Hong Kong,UBS head of Asian transport research Damien Horth said he was confident the bottom of the cycle has been reached in terms of falling passenger figures. He believes there is a "one-to two years lag" between traffic recovery and yield recovery.

Business travel demand will return but "not to the peaks" of the last few years, he adds. This leaves airlines with the challenge of how to configure aircraft in the future. On the cargo front, Horth believes "we are now beginning to re-stock inventories", after going through "the mother of all de-stockings in North America".

Association of Asia Pacific Airlines director general Andrew Herdman says airlines continue to be "severely tested" by thecrisis. He says air fares in Asia are still falling, reflecting aggressive pricing in premium markets as airlines fight to win customers back. "We probably lost a couple of years of growth," he says, adding "airlines are taking the appropriate steps to weather the storm. It is a schizophrenic existence for airlines chief executives."

But he too sees light at the end of the tunnel. Cargo volumes in Asia have slowly recovered since the end of last year and are now 10% down on a year ago.While premium traffic in Asia has fallen a quarter and economy traffic by 5-7%, he hopes June marks the bottom of the cycle in terms of passenger volumes.

Ian Reid, chief executive of Skyworks Capital Asia, says many banks have had their recession-depleted capital shored up by government aid and rights issues. But lending is still a long way down from normal levels.

Horth describes 2.6% average profit margin for the sector over the last 60 years as a diabolical performance. "It demonstrates we have a structural problem. The industry should make money but the market never had a chance. Clearly we have a problem with government intervention," he says."There is no point in the value chain where the governments are not involved.In the long-term the structural changes need the governments to get out of the way".

Source: Airline Business