Asian air transport is experiencing mixed fortunes, with carriers anticipating erratic results for 2005. But Air China and All Nippon Airways have bucked the trend to see profits soar above 2004 figures

The effects of rising fuel prices stormed their way into the Chinese airline market in 2004 leading to mixed results from the major carriers, which are warning that this year's earnings will also be unpredictable. Japan's majors are reporting earnings improvements, however, as they recorded gains in 2004 from ongoing cost-cutting efforts and recovering demand. Airlines in other parts of Asia, meanwhile, are largely anticipating a difficult period ahead as fuel costs begin to have a much greater impact. But the good news, say analysts, is that demand does not appear to have been affected by increases in fuel surcharges.

Flag carrier Air China was the first of the Chinese big three to report its results for 2004 – and it did not disappoint with its first earnings report since its initial public offering and listing on the Hong Kong stock exchange last year.

The Beijing-based carrier saw calendar-year profits soaring over those for 2003 when, like all Chinese airlines, it was badly affected for several months by the effects of the SARS outbreak. Turnover increased sharply as passenger demand returned and the carrier booked more revenue on the back of substantial increases in services.

But while positive overall, Air China warned of difficulty this year, with more competition at home and worryingly high fuel costs. "Influenced by the international political and economic situation, the cost of jet fuel may stay high and the competition can be more severe," says the flag carrier. "Interest rates, exchange rates and the capital markets are all under­going frequent changes. All these have brought new challenges to the company's financial risks control capability."

Jet fuel expenses rose 54% last year, due largely to a sharp increase in services over SARS-affected 2003. But the weighted average jet fuel cost per barrel was also up 26%.

It was a similar story for Shanghai-based China Eastern Airlines, which returned to profitability. Its results were below market expectations, however, due to a greater-than-expected fuel price impact. Operating costs jumped 40%, while aviation fuel expenditure soared by 78%. The airline group used 42% more fuel last year as it boosted services, but the average domestic price of aviation fuel increased in real terms by 24% while the average international price increased 31%, it says.

A big shock to the market came from China Southern Airlines, as it reported a surprise net loss for the year despite strong revenue growth. While losses were greatly reduced over 2003, analysts were overwhelmingly expecting healthy profits on the back of a 37% increase in total operating revenue. Total operating expenses increased 36%: jet fuel expenditure soared 57% and accounted for more than 30% of group operating costs.

Looking forward, chairman Liu Shao Yong says that "2005 is expected to be a year of challenge for the group", which last year acquired from its parent company the assets of two smaller carriers, China Northern Airlines and Xinjiang Airlines. "While managing the integrated post-acquisition operations of the group, the group will also face increasing competition due to increasing supply in capacity in the [Chinese] aviation market," Liu adds.

Japan recovers

In Japan it was a different story as the country's two major airline groups showed gains from cost-cutting efforts as they reported for their 2004-5 financial year to March. All Nippon Airways (ANA) reported the second-highest net result in its history for the year to March, on record-high revenue. Importantly it also recorded a full-year profit from international operations for the first time since it began flying outside Japan in 1986.

ANA attributed the improvement mainly to cost-cutting efforts. Chief executive Mineo Yamamoto says: "We did not have an easy ride in 2004, given unprecedented high oil prices throughout the year and a particularly severe ­typhoon season at the end of the second quarter, which affected our domestic operations. Nevertheless, we have stayed the course and are working towards our aim of turning ANA into an airline that can remain profitable in the face of changes in the operating environment."

Black ink was also reported by Japan Airlines (JAL) as Asia's largest airline group returned to full-year profitability after huge losses in the 2003 fiscal year. The carrier cites "clear signs of steady recovery" in international traffic following the recovery from SARS in 2003, although that had an impact on the number of domestic passengers, together with Japan's severe typhoons. Overall passenger traffic fell 3.7% for the year while international services saw a 25.5% rise.

However, JAL expects net profits to drop by over 40% to ¥17 billion this year, despite higher revenues. Again, fuel is the culprit, with the group expecting kerosene prices to continue to rise, adding to an 18% increase in the fuel bill in 2004-5.

JAL is planning to implement countermeasures to offset higher fuel prices, including a reduction in personnel costs, reducing services on low-yielding international routes and a restructuring of the international passenger business.

Elsewhere in Asia, many airlines have been making first quarter warnings, mainly on the back of increased fuel expenditure. But analysts say there is still strong underlying growth in passenger demand in Asia, and those that manage costs properly will continue to do well.

"The good news is that there has been no visible impact on demand from recent increases in fuel surcharges," says JP Morgan airline analyst Peter Negline. He also says Asian airlines, which tend to have bigger cargo operations than their counterparts in Europe and North America, are benefiting from freight being "into the fourth year of growth".


Source: Airline Business