Saturday, June 16, 2012

Will airlines find the silver lining?

Will airlines find the silver lining?

CLOUDY SKIES: As the industry’s profitability balances on a knife’s edge, some carriers remain upbeat IS THERE still a profitable future in the airline business? Ponder that a return economy fare from Beijing to New York - a 22,000-kilometre journey - is about US$1,500 (RM4,751), which works out to seven cents a km.

Compare this to a taxi ride in Beijing which is 10 yuan (RM5) for the first three km, and 2 yuan per km for the rest of the journey, averaging about 32 cents a km.

Wonder no more, why many airlines are struggling and some have succumbed.

International Air Transport Association (IATA) director general and chief executive officer Tony Tyler described the industry's profitability as balancing on a knife's edge.

According to the latest forecasts from IATA, 2012 is at best a challenging year. Although revenues are expected to be US$631 billion (RM2 trillion), profit will just be US$3 billion (RM9.5 billion), a net margin of 0.5 per cent.

If the bottom line worsens by even the equivalent of only one per cent of revenue, the US$3 billion profit very quickly becomes a US$3 billion loss.

The downside risks are undoubtedly worrying. Chief among them is the price of oil. Even if oil prices soften slightly to a forecast average of US$110/barrel for this year, it still leaves the global airlines industry with a fuel bill of US$207 billion (RM655.7 billion), a third of the carriers' cost.

Any political risk will push the oil price higher again.

But the biggest risk is the debt crisis in the eurozone. If it blows up into a banking crisis, recession will soon set in, pulling down the world's economy as well as airlines' profits.

Still, one can sense some optimism, at least among some carriers, at the 242-member IATA annual general meeting held in Beijing earlier this week.

Malaysia Airlines, which had its share of gloom in recent years, is upbeat about its new code-share agreement with Japan Airlines and poised to double its Asia-Pacific destinations in three years as part of its turnaround plan.

AirAsia X, meanwhile, sees China as a market still offering tremendous potential and plans to add more destinations to the world's second largest economy.

In fact, there is a consensus that not only China, but the Asia-Pacific region, is a bright spot. Regional demand is expected to grow at 3.9 per cent this year, above the anticipated 3.3 per cent growth in capacity.

The outlook supports IATA's forecast that Asia-Pacific carriers this year will contribute US$2 billion (RM6.34 billion) to the global airline industry profits, far more than those in any other regions.

Still, the likes of Malaysia Airlines and AirAsia have a lot of hard work ahead of them. Competition to deliver value is as tough as ever.

On top of that, they are facing daily struggles to keep revenues ahead of cost. And if that is not enough, new airlines, especially low-cost carriers, are popping up in the region at a faster pace than before.

This raises the questions whether the skies above the region is big enough for these additional competitors.

With the rising affluence and construction of new airports in the region (China alone is building 70 additional airports by 2015), it does suggest that there is more room for new airline ventures.

One thing for sure is, some of these newcomers and even some existing carriers will face a difficult time or may not even survive. Which airline will perish and which one will survive will surely depend on its executives and employees.

In a dog-eat-dog world that airlines are operating in today, every cent saved passed on to passengers or even the slightest of smile from frontline staff will determine whether a passenger will use the airline again the next time.

Publish date: 16/06/12

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