Recovery may be underway for Asian airlines, but the region's leading industry body is warning that this remains tenuous and may not prove to be sustainable.

"Although there are some tentative signs of a fragile recovery led by a number of dynamic Asia Pacific economies, airline revenues remain under severe pressure. Despite strenuous efforts to cut costs, many airlines are still suffering heavy losses," said the Association of Asia Pacific Airlines, which represents 17 of the region's leading carriers, just before its recent general assembly in November.

Overall traffic in RPKs among its members fell 2.8% in October from a year before. That, however, compared favourably with a drop of 9% for the first 10 months of the year. Airlines throughout the region have responded to the crisis by slashing capacity, with ASKs down 6.5% in the month and 6.8% overall.

As a result, while year to date passenger load factors are running nearly two points down at 73.8%, they increased 2.8 points to 75.6% in October. With the regional economies showing some signs of recovery and passenger numbers picking up as a result, carriers have been attempting to increase yields by paring back promotional fares.

"Yields have been severely depressed. AAPA leaders have to steer a difficult course over the next year, tightly managing costs and closely monitoring what still appears to be a fragile economic recovery," says AAPA director-general Andrew Herdman. "Airlines will also need to remain sharply focused on fuel prices, environmental commitments, and other regulatory challenges."

Driven by forecasts for economic growth in key developing markets, particularly China and India, IATA is now projecting the region will see the greatest transformation in its fortunes next year. In its latest forecast for 2010, IATA is predicting Asia-Pacific carriers will slash the collective loss of $3.4 billion in 2009 to around $700 million in 2010.

But even in this relatively bright spot for the industry, IATA sees a long road ahead. "I would expect to see quite good growth in loads in that region and a modest recovery in yields [for 2010], but certainly not back to previous levels," says IATA chief economist Brian Pearce.

Slow Improvement

Cathay Pacific chief executive Tony Tyler concurs. "We are seeing things get slightly better but it is unlikely that things will be the same as in 2007," he says.

Amid this situation, AAPA slams governments for putting up barriers to progress. "Some of the these restrictive policies include airport security measures "that often seem to be driven more by fear than cool reasoning", as well as government taxes, fees and charges that are both "ill-conceived and unjustified".

"AAPA carriers are still enduring the severe impact of the global recession, yet the straightjacket of restrictive government policies and inefficiency remains a clear obstacle to recovery. While airlines grapple with this multiplicity of commercial challenges, governments appear oblivious to the calls of the industry for less interference," says Herdman.

Rules on national ownership and control were also criticised at the AAPA meeting, with the members calling for the authorities to end rules that "hold back consolidation, and hinder access to international capital markets".

"Airlines must have the commercial freedom to compete, just like other international businesses," says Herdman. "In order for the industry to achieve long- term sustainability and growth, it is now time for governments to wake up to the idea of removing policies that have inhibited development for decades."

While acknowledging that the industry needs to support and meet targets on carbon neutral growth and net emissions, AAPA says that governments were holding back airlines on this as well. Negotiations were "making slow progress" within the two parallel tracks; the UNFCCC with responsibility for addressing global climate change, and ICAO as the UN body responsible for aviation.

Failure to reach agreement on issues, such as market-based measures, "highlights the fundamental divisions between developed and developing countries on the broader issue of climate change policies".

Despite these challenges, AAPA believe the future remains positive. While low-cost carriers continue to erode the market share of full service carriers in the Asia Pacific, their impact has not been as bad as some make it out to be, says Herman.

"There are various low-cost models in the region and all of them co-exist with the full-service carriers," he points out.

"Overall, however, it is true that they are gaining market share - although it is not as much as many believe. We think it is around 15% throughout the region, with more in Southeast Asia than elsewhere. This has an impact on the full-service carriers like our members, but we must remember that many of them also have low-cost operations now and so it is not as bad as it may seem," he says.

Source: Airline Business