CAPA releases Outlook 2006 report

The Centre for Asia Pacific Aviation has released its annual Outlook 2006 report which predicts Asia Pacific airlines, airports and tourism operators should experience relatively benign, “normalised” market conditions in 2006.

According to the Centre’s Executive Chairman, Peter Harbison, “passenger traffic growth should maintain recent high levels, broadly in line with capacity increases. But that depends upon continued economic strength as the effects of high fuel prices percolate through the system, adding a larger than usual level of unpredictability for the year.

“In any event, 2006 may be the lull before the storm – a rare opportunity for the aviation sector to consolidate, ahead of the challenges likely in 2007 as fleet deliveries escalate, new products enter the market and pressures intensify on manpower costs, competition, capacity and yields.

The report states that while economic conditions apparently remain robust across the region, led by China, there are tentative signs of a looming downturn with air freight trends (traditionally a lead indicator of the strength of underlying economic conditions) recently showing only tepid growth.

“Last year’s boom in aircraft orders, which reached record levels, also suggests that a cyclical “bust” is not far behind, if previous experience is anything to go by”, said Mr Harbison.

Airline Outlook

The uncertain prospects suggest 2006 will be a watershed year for the region’s airlines, with:

- Relatively benign economic and market conditions across the region, and continuing near double-digit growth in China. However, high energy costs and the prospect of rising inflation and/or interest rates may slow GDP growth, with immediate effects on the aviation market;

- The pace of liberalisation in North Asia (including Japan) gathering momentum due to the entry of a number of low cost carriers in domestic and regional markets;

- Passenger traffic growth of 5-6% region-wide, but with a further slowing of freight volumes;

- Continuing airline profitability in the Asia Pacific region on an aggregated basis, though jet fuel prices will maintain pressure on costs and profitability at an anticipated US$50-US$60, plus a refining premium of US$10-US$15;

- The near term unpredictability, coupled with added capital pressures as aircraft orders are accounted, making it likely that most of the region’s airlines’ stock performances will continue below par;

- Accelerated efforts to undertake/complete airline business restructuring, especially at the more vulnerable carriers;

- Industrial relations reaching flash point at a number of airlines in the region this year as cost reduction and productivity initiatives increase workforce tensions. MRO, in particular, faces dramatic changes with more airlines looking to outsource activities; and

- Escalating shortages of skilled workers, particularly pilots and maintenance engineers, despite a slowing in aircraft orders from 2005’s record levels. This will push up wages, adding to the cost equation, and potentially hamper expansion plans. (The Centre estimates the Asia Pacific and Middle East will require 148,000 additional employees to support new aircraft currently on order. China, India and the Middle East will be the worst-affected).

Airport Outlook

Airports in the Asia Pacific are likely to build on the strong growth flowing largely from low-cost carriers and expanded services fostered by more liberal air service agreements. 2006 will see the opening of the region’s first low cost terminals in Singapore and Kuala Lumpur in March, along with Bangkok’s new international airport later in the year. (Bangkok looks likely to become the first hub airport (other than Shanghai) in the region to keep its old airport, Don Muang, open for low cost operations after the new airport opens - although the exact future of Don Muang still remains very confused and unclear.)

As airline cost pressures translate to downward pressure on aeronautical charges, so stresses will continue in airline-airport relationships. Changing retail profiles too should contribute to new challenges for airport revenue streams. But the bottom line is that airports will remain the preferred sector for aviation investors.

Tourism Outlook

Tourism growth of 10% or more is predicted for the Asia Pacific region – though this may be moderated by any deterioration in the economic environment. The continuing strength of China’s market, further liberalisation and the entry of new airlines – LCCs and others – all augur well for traffic growth.

And for all sectors, the risk of reappearance of threats - whether it be SARS, avian flu, terrorist attacks or a new threat – means there can never be room for complacency. In recent times, the region has not experienced a period of more than three years without a major setback.

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