European carriers appear to be riding out the storm caused by the fuel price hike, while Asia-Pacific carriers continue to prosper
Although airlines are beginning to fret over the absence of a much-hoped for drop in fuel prices, European and Asia-Pacific airlines seem to be weathering the storm reasonably well for now.
In Europe, although the unhedged proportion of fuel bills has risen through the traditionally weak winter season, fuel surcharges have cushioned the blow. The announcement by British Airways in late March that it was increasing its surcharges is expected by analysts to prompt similar moves from other mainline carriers. Jonathon Wober, analyst at HSBC, says that if there is little or no impact on underlying demand, BA could recoup half of its £300 million ($570 million) extra fuel bill for the coming financial year.
So far the fuel surcharges have stuck as consumers seem to be willing to pay for add-on charges even as they remain sensitive to headline ticket prices. "There has been little push-back from the consumer," says Chris Avery, analyst at JP Morgan.
Low-cost carriers are resisting this surcharge trend, but analysts say that they too are subtly lifting their fares. "They are pushing up into the vacuum that has been vacated by the mainline carriers," says Avery. And they are not immune to adding extra fees themselves, as Ryanair's 50p ($1) wheelchair charge shows.
Avery points to easyJet's announcement that margins in the first half will be flat as further evidence that low-cost carriers have been successfully pushing fares higher. Even bullish observers had been expecting a much tougher winter season for the low-cost sector than actually transpired.
Mainline carriers are still pretty well hedged for the coming year, analysts say, and although the low-cost carriers are slightly more exposed, Wober points out that the higher margins at the likes of Ryanair mean that rising fuel prices have less overall impact – and that they are well positioned to gain from any drop in oil prices.
Looking forward, Avery is watching to see when BA gets pricing power back in its premium cabin. Pointing to the relatively healthy economic environment in the UK compared with some of its European neighbours, he says, "this would be very significant for profits".
In the Asia-Pacific, major airlines have continued to report healthy profits as strong growth in revenue from both passenger and cargo operations outpace increases in operating costs.
Financial analysts say nearly all Asia-Pacific airlines recorded good earnings results in recent months and within this group there were some that stood out, such as Hong Kong's Cathay Pacific Airways. "Basically every airline in the region has reported very good numbers. However reports vary from stellar to could-have-done-better," says Hong Kong-based JP Morgan analyst Peter Negline. "The revenue environment is strong. High oil prices are a concern but the strong global economy which is creating the strong demand for oil is far better for the airline industry than the alternative."
As would be expected, the reports have consistently complained about high oil costs although they say revenue growth is for the most part compensating for it – at least for now. Looking forward, some say cost-cutting must be stepped up as hedging benefits are "running down".
Cathay reported particularly strong growth, with net profits more than doubled over the showing in 2004, when Hong Kong was severely affected for several months by the SARS outbreak. Increased profits came on the back of a nearly one-third increase in turnover, which outpaced a 24% rise in operating expenses.
Other results from the region, such as Korean Air and Taiwan's China Airlines were seen as generally "good", while first half figures from Qantas Airways were well received. Some that fell short of analyst expectations included low-cost darling AirAsia, Malaysia Airlines, and Thai Airways.
REPORT BY COLIN BAKER AND ANALYSIS BY FABRICE TACOUN
Source: Airline Business
