More Profits and Growth for Asia Pacific Aviation in 2005

The Centre for Asia Pacific Aviation predicts that the aviation sector in the Asia Pacific and Middle East regions will continue to defy global industry trends in 2005, maintaining high growth and profitability after a record 2004.

Releasing its annual report on the regional outlook for aviation and tourism, the Centre predicted a more subdued, but still robust performance for airlines and airports in the year ahead. 

The Centre estimates that airlines in Asia and the Middle East achieved a record USD3 billion profit in 2004 – USD750 million from Chinese airlines - on traffic growth of more than 20%. That compares with aggregate losses of USD6-8 billion in the US, and USD500 million in Europe.

“For Asia Pacific airlines, 2004 was an oasis in a desert of global bad news,” according to the Outlook 2005 report, presented today by the Centre’s Managing Director Peter Harbison on the opening day of the Asia Pacific & Middle East Aviation and Tourism Outlook 2005 conference in Singapore. 

The two-day conference at the Suntec complex, organised by the Centre, is being attended by more than 200 government representatives and senior executives from the aviation and tourism industries. The Singapore Minister for Transport, the Hon Yeo Cheow Tong, delivered the keynote address launching the event. It is being followed by the 2nd Annual Asia Pacific Low-Cost Airline Symposium, also staged by the Centre, on January 26 and 27 at Suntec, Singapore.

“While operators in Europe and North America licked their wounds, the region’s carriers moved rapidly from recovery to robust growth and profitability,” the Centre’s report went on.

“That growth should consolidate in 2005, barring further upsets, and establish the Asia Pacific as a key target for major investment in service expansion and new operations.”

The report, prepared by the Centre’s consultants, notes that “this snowballing development and intensifying competition should deliver substantial benefits to airports, regional economies and tourism and consumers”. “However, for the airlines, the prospect of high growth is overshadowed by likely manpower shortages and a further depletion of yields, raising the potential for a profitless (or less profitable) volume scenario for some.”

The Centre believes that the outstanding profit levels of 2004 are unlikely to be repeated in 2005, although results should be positive again this year. “As liberalisation sweeps through the region, traffic growth should be impressive, with double figure increases again commonplace,” it says. “The entry of new airlines in regional markets and expansion of access rights on long haul routes will stimulate the growth, but at the same time dilute profitability.”

The Outlook 2005 report provides an overview of the industry’s prospects, as well as coverage of 21 countries in four geographic regions of Asia Pacific and the Middle East.

2004 Highlights

* Economic conditions generally strong, including Japan;
* Estimated net profit of USD3 billion for Asia Pacific and Middle East airlines, including USD750 million from China. Compares with losses of USD6-8 billion in US and USD500 million in Europe;
* Rapid recovery with passenger traffic growth of more than 20%, rising above 2002 levels
* Freight volumes also robust, driven by regional economies and high US/European demand for exports;
* Intensive fleet rebuilding programmes – 916 aircraft currently on order throughout region for the next five years;
* Fuel price hike eroded recovery benefits, but impact partly offset by ticket surcharges;
* Airline/airport share prices in Asia Pacific dampened by weak global sentiment;
* Airports mostly thrived in high growth conditions, encouraging investment and privatisation moves;
* Market liberalisation reached turning point, with China taking regulatory leadership role and first developments towards ASEAN “open skies” passenger services agreement; and
* Tourism growth exceeded expectations, despite appreciation of local currencies.

CAPA Outlook for 2005

* Slightly lower economic growth, but still robust;
* Airline profitability unlikely to meet 2004 levels, remains positive overall;
* Passenger traffic growth above long-term trend rates, spurred by further liberalisation and investment in new entrant carriers;
* More strong freight growth, reflecting China’s increasing domination;
* Fuel prices still volatile, may plateau at USD40 a barrel (but industry generally better prepared);
* Improvement in share prices likely, especially for more competitive, restructured operators;
* Positive operating outlook for airports, privatisation and construction programmes gather momentum;
* Accelerated liberalisation, driven by China, India and ASEAN countries; and
* More tourism growth, albeit at lower levels (impact of tsunami disaster).

The Big Issues

The major issues affecting aviation and tourism in 2005 are:

Liberalisation: A new era begins

“2004 was a watershed year for liberalisation in the Asia Pacific region. This was provoked by some major new forces: the new leadership role of China and the symbolic impact of low cost airline entry into the market, as well as a sea change in Indian aviation policy; and the Singapore government's vital restatement of the relative roles of national airline and national hub airport.

The year started with the signing of China’s first “open skies” agreement (with Thailand in January) and ended with the multilateral passenger “open skies” agreement between Singapore, Thailand and Brunei, which will act as the platform for the ASEAN multilateral “open skies” agreement, due to be implemented by 2008.

In every month of 2004, significant new liberal agreements were reached between major trading partners within and outside the Asia Pacific region.

Action occurred at both bilateral and multilateral levels.

There is no reason why this pace should not continue, and probably accelerate - in 2005, with far reaching implications for the region's airlines and airports. But 2004 will be remembered as the year when the new era began.”

Human Resources: The hidden crisis

“The resumption of growth by the region's airlines in 2005 will intensify the focus on associated human resources issues. Skills shortages which effectively were put on hold because of September 11, the Middle East and SARS will next year begin to surface in a more significant manner as the expansion of services and fleet continue to gather momentum.

Asia Pacific carriers are moving to step up the size and diversity of their fleets and networks, and improve aircraft utilisation by working their assets harder. As a consequence, the demand for skilled employees from pilots and cabin crew to maintenance workers and ground staff is progressively increasing, placing immense pressure on training programmes and resources.

The ability of the airlines to satisfy this demand is being sorely tested. In fact, there are preliminary signs that service development is being constrained, particularly in areas where growth is most significant such as China and India.

This situation threatens, ultimately, to limit the realisation of the current growth potential on offer. The possible repercussions include:

* A slow-down in service and route development;
* Possible deferral of start-up operations and/or aircraft orders;
* Rising employee costs due to increasing salary levels (there is already some
* evidence of this creating establishment problems for low-cost start-up ventures);
* Accelerated training programmes, with significant opportunities for third party suppliers;
* Increased outsourcing of operations and use of foreign and/or contract labour; and
* A relaxation of regulatory restrictions and company policies relating to foreign employees.

Projections prepared by the Centre indicate a requirement for some 94,200 additional airline employees in the Asia Pacific over the next five years, almost 19,000 a year. This includes 10,000 extra pilots, 21,000 flight attendants and 15,700 maintenance workers.

Such demand considerably outstrips historic levels in employment growth at the region’s airlines, and has the potential to stretch the resources of most operators. According to the Centre’s projections, employee demand will be greatest in North Asia (including China and Japan) with 42.2% of the additional employee requirements, then India/the Middle East with 29.8% and Southeast Asia with 22.6%. In Oceania (Australia, New Zealand and the Pacific), demand is relatively low and offset in the flight crew area by the present surplus of former Ansett pilots.”

Yields: Where are they heading?

“The remorseless trend over the past decade has been downwards, and there is no prospect that this will change in 2005.

However, 2005 may be different in a number of ways, some positive, some less so. Throughout Europe and North America, and across the Atlantic, major airlines are adopting new domestic pricing strategies in the face of rapidly-changing market conditions.

In Asia, fears that the entry of low cost airlines on Asian routes will drive down profits may or may not be justified (although we think the fears are exaggerated for reasons specific to the region). But a more significant concern may actually involve long-haul routes, where low-cost operations are unlikely to have a large impact for some time. On those routes, premium yields at least have remained strong. Premium yields rose by 7% in 2003-04, lifting overall passenger yields on international sectors by 4.5% to a level close to their historic high. However, much of the yield growth related to the appreciation of regional currencies against the US dollar. In other words, the net movement in yield generally appeared marginal at best.

There was some variation in yield trends from carrier to carrier, with tentative signs of an upturn in the second half of 2004. Qantas, for example, achieved 4.2% growth in international yield, excluding the foreign exchange influence, for the four months to the end of October.

In the year ahead, the upward pressure on premium fares is likely to continue. American Express, for example, predicts a 3-4% increase in international long-haul business class rates across the region in 2005. This is at the upper end of expectations for the global market. Yield benefits from any pricing hikes, however, are likely to be diluted by greater competition in the premium market and efforts to lower corporate travel costs.”

Start-up Airlines

“2005 will see an explosion in start-up airlines, with the focus shifting from Southeast Asia to the North and Southwest of the region. The growth in new operators is highly significant, as it reflects the general buoyancy of the market, optimism about the aviation sector.s prospects and a willingness by investors to capitalise on the robust outlook in Asia.

The investment community’s interest is, in effect, being diverted from the saturated and often low return European and North American markets to Asia's more profitable, high growth centres. As a consequence, there is a plethora of start-up operations emerging, many built in the low-cost mould.

China and India, in particular, are expected take up where Southeast Asia left off in 2004. Of the 26 newcomers planning launches in 2005, 14 will come from China and its SARS, Hong Kong and Macau, and 5 from India/Pakistan. This contrasts with 2004 when half of the 13 start-ups were based in Southeast Asia, especially Singapore. While a liberalised operating environment and policy shift towards broader economic benefits encouraged growth in the Southeast, the maturation of the Chinese market and more relaxed ownership regulations are the catalysts for expansion on the mainland.”

Alliances: Do they have a future in Asia?

“2005 will prove an important turning point for the role of global alliances in the region. Most of the major carriers currently belong to one of the three alliances, Star, SkyTeam and oneworld. Of the longer established airlines, Japan Airlines and Malaysia Airlines are the only ones of note to resist joining any grouping, though MAS does exhibit SkyTeam leanings through its bilateral relationships, and JAL's commercial linkages tend to align it towards the oneworld grouping, although it embraced the global concept elsewhere with its Japan Airlines Cargo joining Lufthansa Cargo, SAS Cargo and Singapore Airlines Cargo in the integrated WOW network.

In China, each of the three pillars, Air China, China Southern and China Eastern, appears to be set to sign up for a major alliance. For the Chinese carriers, there is potentially the double value of membership in: (1) supporting them to achieve global benchmark operations and best practice; and (2) expanding their de facto network capabilities, while China moves steadily towards a more liberalised environment with greater access to new services.

In India, it seems highly likely that the current absence of global alliances will change in 2005, with probably Jet Airways and Air India each moving towards membership of one or other of the major groupings as a natural extension of their new freedom and expansion. There is no shortage of partners.

Meanwhile, within the Middle East, there is a clear division of opinion between the current major operator, Emirates, which expressly rejects the value of global alliances, while entrenching some solid bilateral links (and perhaps global aspirations of its own), and, for example Qatar Airways, which strongly favours membership.”

Airports: Capital investment requirements soar

“Providing adequate airport infrastructure to meet the needs of rapid traffic growth is an ongoing priority for governments in 2005. While SARS provided breathing space for some congested airports, notably Bangkok and Guangzhou, in 2003, the recovery and strong subsequent growth has put pressure firmly back on capacity provision.

Total passenger traffic surged by around 20% at Asia Pacific and Middle East airports in 2004, including a 20-25% increase in international passengers.

Capital expenditure rose sharply in 2004, with global investment (excluding expenditure on new airports) rising 27%, including a massive 94% surge in the Asia Pacific region, according to an ACI sample. The total investment of USD31.1 billion in airports was the highest annual figure since ACI began collecting data in 1995.

The strength of investment in the Asia Pacific reflects airline expansion, market liberalisation and industry developments such as the arrival of the A380 in 2006 and the rise of low cost carriers, with their unique requirements. It also signifies the increasing attractiveness of airports as investment opportunities, given expectations for substantial, continuous growth in the years ahead.

Governments, too, recognise this prospect . a fact that may well lead to the resumption of privatisation efforts in 2005 in Indonesia and new sale initiatives in China and India, as well as moves by some investors in privatised airports in Australia to sell down their stakes and realise capital value.

Interest in Asia’s airports has spiralled as a consequence of the emerging opportunities offered by privatisation and infrastructure programmes and substantial profits reaped by private airport investors such as Macquarie Airports, the owner of Sydney Airport and a number of airports in Europe. The robust response from the investment community to the proposed sales of Delhi and Mumbai airports in India, due to proceed in the first half of 2005, indicates the perceived value of directing funds into airports offering large growth prospects. European groups and, to a lesser extent, those in North America, see airports privatisations as risk-averse opportunities to gain entry to the buoyant regional aviation market.

China, in particular, will provide expansive opportunities for foreign investment in 2005 following the transfer of its provincial airports into the hands of local governments on the mainland. Essential capital for building programmes will be sourced offshore, probably through joint venture arrangements, as the mainland airports seek to accommodate expected high levels of passenger and cargo growth, and the likely additional stimulation issuing from low-cost carrier entry.”

Freight: The harvest should continue

“Fanned by China’s burgeoning manufacturing sector and its greater engagement with other countries on trade through WTO membership, freight growth should continue to be robust through 2005. However, the growth rate may ease slightly from 2004 levels, depending on the stability of the economic environment.

The contribution of freight revenue to the turnovers of Asia Pacific operators has been a major factor in their financial performance. In the six months to the end of June, revenue generated by Korean Air Cargo, for example, accounted for one-third of its parent’s total operating revenue and helped the airline return to profitability.

Cargo is an increasingly large and significant component of airline revenues, accounting for between 40-50% of Taiwan.s top two airlines. revenues and over 30% for Korean Air and Cathay Pacific.”

Aircraft Fleets

“2005 will mark the beginning of a significant upgrade and growth phase for the fleets of the major Asia Pacific operators that should continue for a further 3-5 years, barring unexpected externalities. This reflects the anticipated expansion of the regional market; opportunities offered by the introduction of new, more economic aircraft types; and generally competitive prices from the manufacturers and still-attractive leasing rates.

After three relatively static years, the fleets of the major Asia Pacific airlines expanded by 4% or 49 aircraft net of replacements to 1,273 in 2004. The average annual increase for the preceding 2001-2003 period was only 1%, consistent with strategic response to the various crises, characterised by capacity withdrawal, service reduction and market upheaval. According to the Association of Asia Pacific Airlines (AAPA), the 17 AAPA airlines will take delivery of 359 aircraft over the next five years. However, this appears to considerably understate the overall picture in the Asia Pacific.

Based on announced orders, deliveries of 916 aircraft are expected for the 2005-2009 period. Unlike the AAPA figures, the figure includes the fleet plans of non-AAPA members, including the Low-Cost Carriers (LCCs), domestic airlines and operators from China and the Middle East and India (airlines from these latter two areas alone account for one-third of expected deliveries). In all, it covers 38 airlines.

Allowing for replacements for existing aircraft of some 33% of the additional aircraft, the net growth in the region.s fleet to 2009 is estimated to be 605 aircraft or 47.5%. This amounts to 121 additional aircraft for each of the next five years. Of these fleet additions, 88% would either be narrow-bodies or medium sized wide-bodies (eg A330 or B777), with the remaining 12% comprising very large aircraft (A380s, B747s). The increase in seats during the period would be 45.4%.

As expected, demand for new aircraft will be greatest in the high growth markets, including China, India and the Middle East. North Asia accounts for 37.9% of the current orders and India/Pakistan 21% closely followed by the LCC breeding ground of Southeast Asia with 20.3% and the Middle East with 15.9%.”

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