Asia's carriers, having recovered from the economic downturn of three years ago, are facing a series of fresh financial challenges, writes Nicholas Ionides.
This time last year, most major Asian airlines were reporting a return to healthy profits after having recovered from the troubled times which followed the region's decent into economic downturn in 1997. This year looks like a different story. While the Japanese majors and Singapore Airlines (SIA) showed strong profits growth in their recent reporting round for their financial years to March, elsewhere in the region the red ink has started to mount. News out of Thailand, South Korea and Malaysia has been of hefty losses in the year so far.
Garuda Indonesia, Philippine Airlines (PAL) and Air India have meanwhile reported they were hit hard by higher costs last year, while Australasian majors Air New Zealand and Qantas Airways have issued profit warnings amid deteriorating market conditions both at home and abroad.
Even those that performed well last year are now worried. Latest traffic figures show April was a difficult month for SIA, Japan Airlines (JAL) and Cathay Pacific Airways. Cargo, in particular, is showing declines that some say were not even so sharp during the worst of the region's economic downturn of the late 1990s.
The slowing US economy is the main cause of the trouble in cargo, analysts say, as imports of Asian-made electronics and a whole raft of other goods have been tailing off since late last year. This has caught Asian carriers off guard, just as they have been aggressively expanding their freighter fleets, and negatively impacted yields.
While some such as Cathay and SIA believe that passenger traffic should weather the testing times ahead, declines are already showing. SIA, for example, grew capacity in April by just 0.9% in terms of tonne kilometres and 1.7% in terms of seat capacity - more or less in line with the same month last year. But this time passenger traffic fell by 2.5% and freight was down by 7%. The result was that cargo load factor was down 4.8 points, to under 64%. Passenger load factor also fell sharply, by 3.1 points to 73.2%. Analysts put the carrier's break-even load factor at 66.7%, and the downward trend, which appears set to continue, is a concern, especially for a benchmark heavyweight like SIA.
The outlook shows few signs of improving. One senior executive with a well-performing airline in the region says operating conditions in May "were a disaster".
In announcing stellar full-year results in mid-May, much of it on the back of contributions from associates and one-off exceptional items, SIA forecast continued downward pressure on cargo yields but predicted that passenger yields would remain static. It admitted that times ahead were uncertain, however, and was careful not to commit itself to specific forecasts.
"Going forward, the general view is that the economy is not expected to recover for the immediate months ahead," senior executive vice-president commercial Michael Tan said in announcing the fiscal 2000/01 earnings. For cargo, he added, "competition is going to become more intense".
Downturn hurts
The downturn is being felt as many Asian airlines continue to be hurt from the impact of the strong US dollar on outbound tourism. Fuel prices, already much higher than they were at the start of the Asian economic downturn in 1997, are also made even more of a burden for some such as Garuda, PAL, Thai Airways International, Korean Air and Asiana Airlines, which are suffering from the poor states of their local currencies.
Japan's three major carriers, JAL, All Nippon Airways (ANA) and Japan Air System, all reported strong earnings growth for the year ended March as restructuring efforts bore fruit, but they are forecasting falling profits this year.
JAL warned, at the same time as announcing a doubling of net profits, that: "due to the continuing sluggish situation of Japan's economy and the very competitive marketplace, we expect that the severe business environment will continue".
ANA agrees that there was "cause for concern about a slowdown in the US economy". It adds that "the short-term outlook for business conditions remains uncertain."
In Hong Kong, Cathay Pacific says that cargo, which last year was its stellar performer, is faring poorly as slowing Asian exports and overcapacity bite. Carriers such as Cathay, SIA, China Airlines (CAL), KAL and EVA Airways all ordered new Boeing 747-400 freighters last year and in 1999 on the back of strong growth, but are now feeling the pain as demand falls and yields are on the decline.
Several carriers in the region are returning wet-leased freighters to Atlas Air to reduce capacity, while others such as CAL are considering converting outstanding freighter orders into those for passenger aircraft. Uncertainty over just how severe the downturn will be or how long it will last is also starting to show in airline share prices, which are on the decline as analysts cut earnings forecasts.
Source: Airline Business
