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Concerted drive for savings

Report by Nicholas Ionides in Singapore  
Analysis by Fabrice Tacoun

In general, however, Asia’s major airlines are still in much better financial shape than their counterparts in the USA and to a lesser extent Europe. But the overall sentiment is that with higher fuel prices expected to remain for some time yet they need to deal with this in new ways.

“Cost cutting is heading in the right direction,” says Hong Kong-based JP Morgan airlines analyst Peter Negline. “There definitely is a focus on every area of cost that airlines can control.” Hong Kong’s Cathay Pacific Airways is one of the carriers that is putting a renewed focus on cutting costs. While it remains profitable, its net result for 2005 was 25% down on 2004 despite healthy growth in revenue. Total operating expenses increased nearly 25%, largely because of a 67% rise in fuel costs. It recently began offering early retirement to 1,600 of its longest-serving (and highest paid) cabin crew in the first such offer to staff ever.

Cathay is still growing, however, and says crew who leave will be replaced through the recruitment of new staff or promotion of existing crew. This year alone it plans to recruit 800 new cabin crew and promote 500 existing staff. The airline is also finding ways to cut costs in other areas, one of them being to strip paint from its freighters.

Its first freighter that was stripped bare of most of its paint went into service recently and Cathay says the cost savings from not having to carry the extra weight – around 200kg per aircraft – should result in annual fuel savings of HK$1.6 million ($206,000) across its fleet of seven Boeing 747-400Fs and HK$1.2 million across its fleet of seven 747-200Fs.

Elsewhere in Asia, Japan Airlines and Malaysia Airlines (MAS) are two of the region’s loss-making carriers that have been implementing some of the more detailed cost-cutting measures. Both are sharply reducing their international flying by suspending loss-making routes in a bid to return to profitability. MAS is also slashing staff numbers through voluntary redundancy. The aim is to cut headcount by 30% over the next few years.

Continuous cost cutting

In nearby Indonesia, troubled national carrier Garuda is also seeking to reduce its overall cost base inclusive of fuel by 5-10%. It wants to restructure its hefty debt obligations with creditors. It stopped making principal payments on its debt late last year to preserve badly needed cash.

New cost-cutting measures are also in place at most other Asia-Pacific carriers, although profits are still being seen at many of the bigger players. In Australasia, both Qantas Airways and Air New Zealand remain profitable, but both say they need to step up cost cutting to cope with higher fuel costs in the longer term. Qantas, for example, is seeking to reduce staff numbers in part because it expects its fuel bill to rise by another A$1 billion ($745 million) in its 2006-7 financial year to June, after a rise of around the same amount this year.

Like Qantas, Singapore Airlines (SIA) remains healthily in the black but says it is not letting up in seeking to better control its costs. It recently reported a better-than-expected 8% drop in net and operating profits for fiscal year 2005, despite a 58% jump in fuel costs, which contributed to a 13% hike in overall costs. But it said it was still optimistic about demand, which has been holding up. “The outlook for air travel is broadly positive,” said SIA. “However fuel costs remain a significant challenge, with fuel price volatility a key variable determining financial performance.”

The Association of Asia Pacific Airlines, which voiced fears late last year about falling demand, said recently in releasing monthly traffic figures for its members that the positive demand trends “reflect generally positive macro-economic conditions”.

There are some vast differences in regional markets, however. In South Korea both Asiana Airlines and Korean Air have been reporting sharply higher quarterly earnings, but in Taiwan, China Airlines and EVA Airways have seen profits fall. They at least remain profitable.

In China, majors China Eastern and China Southern Airlines are losing money largely because of rising costs, while most of the second-tier carriers in the country are also operating in the red. Only flag carrier Air China has reported profits as it has better managed spending increases.

But there are other positive stories in the region, such as at Japan’s All Nippon Airways (ANA) which has been going from strength to strength with its long-running restructuring. Despite sharply higher fuel costs, it exceeded expectations with a flat net profit for its 2005-6 financial year. It has a similar forecast for the current year.

But ANA says: “We cannot rest on our laurels. Oil prices are not likely to abate anytime soon, and we need to ensure that we can continue to weather well the potential risks of a volatile environment as we approach the expansion of [Tokyo’s congested] Haneda airport in 2009.”

Thai Airways International had some good news as its second-quarter profits rose by 78% after previously reporting falling profits for several quarters. While this was mainly due to more favourable exchange rates, revenues were sharply higher.

And this higher revenue story is still being seen all across Asia-Pacific, resulting in positive sentiment after initial fears late last year that sustained higher fuel prices may result in a drop in demand. There were signs then that demand for cargo was falling and since passenger demand tends to follow cargo, there were serious concerns. This fear appears to have eased – at least for now. ■

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