Demand for air travel remains strong among Asia-Pacific carriers, as traffic levels stay high despite various market uncertainties.
Figures from the Association of Asia-Pacific Airlines (AAPA) show passenger growth of 6.8% and a traffic rise of 7.3% over the first seven months of the year. This is just shy of the 7.9% and 8.2% passenger and traffic growth the region's carriers enjoyed in 2015.
Indeed, the most recent monthly figures available, for July, shows growth outpacing last year's rate. Passengers numbers rose more than 10% year-on-year in July and traffic was up 8.4%.
"You can see from the traffic statistics that passenger growth continues at a good pace," says AAPA director general Andrew Herdman. "That's encouraging because the global macro environment is quite uncertain, yet passenger demand continues to grow.
"The transpacific market is relatively strong and you've seen a big surge in mainland Chinese airline capacity on the transpacific. That's partly in response to the fact the market is now driven much more by outbound tourism from China, whereas historically it would have been inbound from the USA," he notes.
"For Asia-Europe, the terrorist attacks has dampened demand to Paris, France; the impact on other destinations in Europe is less clear. It may have dampened it a little. Turkey has obviously been major affected, but that's not a major market from Asia.
"The north-south flows are strong," he adds. "The underlying driver is outbound China tourism to Australia and New Zealand is high on the list of desirable destinations and we are seeing a lot of growth. Some of that is going through Asian hubs, but some is going direct.
"Having said that, profitability for Asian airlines is challenging. The expectation [for 2016] was we would see margins widening. If you look at Asian [and European] carriers margins have improved slightly for some, but not dramatically so, and the feeling is it's pretty tough because of competition and yield pressure. And now the oil price has come off its lows.
"'[It means] the cost side of things have moved, but the downward pressure on fares as lower fuel prices got passed on has continued. So the margins have not widened."
The impact of currency movements against the strong US dollar also hits yields. "If you are pricing in non-US dollars, even if you don't move your fares, the translation into US dollars has moved down, so you are seeing yield declines even if you don't do anything," he notes.
Overall, Asia-Pacific carriers reported stronger profits during the second quarter, but weaker revenue results demonstrate that competition continues to pressure yields.
For most carriers that reported growing operating profits, a large uplift came from the continued low price in fuel. That was offset in part by legacy hedging positions, but that overhang is set to lessen as those positions roll over in following quarters.
Revenues at a number of carriers across the region declined, however, in the clearest sign that yield pressures are hitting a number of the major premium carriers.
Second-quarter figures covering nine Asian operators show collective operating profits up around $250 million to just under $800 million. That is on fractional decline in revenues over the same period last year.
The freight market, in which Asian carriers are relatively large players, continues to prove tough. Herdman notes a slight uptick in cargo volumes in the last couple of months, but yields continue to fall.
It leaves the sector in a mixed position, but one in which the demand for air travel in Asia remains strong.
"Corporate confidence is somewhat subdued in terms of investment outlook. But on the other hand, if you look at consumer confidence, that appears to be robust – even though wage growth is modest and consumers could be worried about the future of the economy. It seems travel demand is robust. It tells us that travel is part of everyday life and people still want to take their holidays, and more of them."
But Herdman warns of the possible impact should oil prices jump back up. "Some of that [demand] might be lower airfares as a result of the fall in oil prices. So one risk factor, is if oil prices were to go back up, that would have to go back into the average fares levels, and these would go back up. So that might dampen some of the volume growth."
Source: Cirium Dashboard
