Capacity hikes give concern

Asia's carriers present a mixed picture as profit figures head in all directions. But cost-cutting continues and revenues remain solid across the region

Impressive revenue growth is continuing across the Asia-Pacific, but the same consistency has not been the case on the profit front. Bottom-line growth has been recorded by some of the region's carriers, however many are reporting earnings dives and others are dipping into the red.

"There are some good turnaround stories, like Malaysia Airlines and Thai Airways, but not everyone is doing so well," says Hong Kong-based JP Morgan analyst Peter Negline.

"Cargo is choppy. As an example we're seeing Beijing airport cargo volumes skyrocketing in October, but Singapore Airlines' cargo volumes [are] down in the same month. We're not used to seeing that - it usually moves in similar ways across the region."

Negline and other analysts say the region's carriers are for the most part managing their non-fuel costs well, which has helped them as fuel prices have come down recently.

The revenue picture also remains solid, with all the region's majors posting rises in their recent quarterly results. Australia's Qantas Airways also announced an upgraded profit forecast for the fiscal year ending 30 June, "as a result of strong trading conditions and subject to fuel prices remaining around current levels". It expects its pre-tax profit for the full fiscal year to be around 25-30% higher than its 2005-6 result.

Singapore Airlines (SIA) is one that recorded healthy growth in operating revenue in the three months to 30 September, of 7.7%. However, net profit was down 14.6% and operating profit fell 21.5% - and increased fuel prices were cited as the culprit. Its cargo arm has also been hurting, although things improved in the final months of 2006.

While SIA believes "demand for air travel is expected to remain buoyant" in the near term, "beyond that, uncertainty in the direction of the global economy calls for caution".

It was a more positive story in Thailand, where national carrier Thai Airways posted a 33% rise in net profit for its fiscal year to 30 September. It came with 10% growth in revenue.

In Malaysia, long-suffering Malaysia Airlines (MAS) also performed better with its first net profit in five quarters. The net profit included one-time gains from property sales and government compensation for its withdrawal from most domestic routes, but a rare operating profit was still recorded in the period.

Malaysian recovery

MAS has been restructuring, and says its efforts have been producing results more quickly than expected. "The improvement is a result of a considerable increase in revenue due to major improvements in passenger and cargo yields, and termination of unprofitable routes," it says.

Things were not so positive in Taiwan, however, with China Airlines suffering a sharp drop in net profit in the third quarter and rival EVA Air suffering a fall into the red. Both blamed high fuel prices for the weaker results, which came despite strong revenue growth.

In China, Air China and China Southern Airlines recorded strong growth in profits during the third quarter, which is traditionally a busy one for the country's airlines. However China Eastern Airlines recorded a sharp drop in profit. It blamed increased fuel costs and expects losses for the full calendar year.

In Japan, All Nippon Airways reported a record net profit for its fiscal first half thanks to 9% growth in operating revenue and continued success with restructuring initiatives.

While Japan Airlines returned to bottom-line profitability in the same period, it was the result of one-time gains from asset sales. Operating profit also fell during the same period as costs increased, and as a result it has revised downward its full-year operating profit forecast.

It was also a mixed picture in South Korea. Asiana Airlines returned to profitability in the third quarter as revenue increased by nearly 25% on growth in demand and a strengthening of the local currency. However, Korean Air's net profit dived 18% during the same period as fuel, labour and other costs increased.

Looking forward, demand is expected to remain healthy on both the passenger and cargo front, but there are some concerns.

"For 2007, my outlook is one of cautious optimism," says Negline. "From the share market standpoint, stocks have had a very good run. It's unclear whether oil prices will hold at lower levels and the concern is that the weaker oil prices could be the result of weaker global economic conditions."

He also says surcharges have "started to bite a bit from the traffic standpoint". Traffic numbers are hitting record highs, but growth rates have been slowing.

Negline also warns that Asia-Pacific airlines have plenty of additional capacity being added in 2007, both on the cargo and passenger sides of the business, and "capacity could be a big problem going forward".

Source: Airline Business