Airshow buoyancy masks turbulence ahead: Clara Ferreira-Marques

-A +A

SINGAPORE (Feb 6): Aviation bosses gathered in Singapore this week may want a serving of scepticism alongside the champagne. Higher oil prices, creaking infrastructure and too many seats will limit the gains from the regional boom in cheap flights. Full-service carriers may feel turbulence too.

Delegates mingling at the Changi exhibition centre can be excused a little back-slapping. Trade body IATA says the world’s airlines have now been profitable since 2010. This year should mark the fourth in a row with returns exceeding the cost of capital — no mean feat in a business that is notoriously prone to value destruction.

And the industry is shifting east. Asia is already the world’s fastest-growing aviation market. By 2036, IATA estimates Asia will have roughly 3.5 billion passengers — not far from the global total now. An expanding and more affluent middle class will travel more.

There are a few worrying blips on the radar for Asia’s airlines, however, including the recent fast rise in oil prices. Low-cost operators, which have upended Southeast Asian air travel, would be particularly vulnerable if fuel costs rise further. Many, including Malaysia’s AirAsia, hedge less aggressively than traditional players. Fuel surcharges also make for bigger increases on cheap fares.

Meanwhile, larger carriers like Singapore Airlines and Cathay Pacific have had to contend with rising pressure from China and the budget players. Both have warned of yield pressures – meaning they make less on each passenger per mile — as competition keeps fares down.

And everyone is grumbling about infrastructure: in particular, a lack of landing slots and pilots, and higher costs at new airports, many of them privately owned. Oversupply, another perennial worry, is less troubling than it looks, since some aircraft purchases have been quietly postponed.

The best case, especially in the region covered by the Association of Southeast Asian Nations, is real liberalisation. This would follow on from 2016’s so-called “Open Skies” agreement which is supposed to create a free market in the region for routes and prices. While in the short run that should spur yet more intense competition, it could also create healthier players by finally spurring consolidation among a crowd of low-cost carriers.

CONTEXT NEWS

  • The biennial Singapore Airshow starts on Feb. 6. More than 1,000 companies gather at the exhibition, near the city state’s Changi airport.
  • Manufacturers are targeting the Asia Pacific region, as the world’s fastest-growing aviation market. Southeast Asia has nearly as many aircraft on order as it has planes flying.
  • The International Air Transport Association (IATA), the trade association for the world’s airlines, said in December it expects global earnings to hit US$38.4 billion in 2018, up from the US$34.5 billion expected in 2017. According to IATA, 2018 will be the ninth straight year of overall industry profitability, and the fourth in which the return on invested capital exceeds the cost of capital.
  • But IATA Director General and Chief Executive Alexandre de Juniac, a former CEO at Air France–KLM, also warned on Feb. 5 of an infrastructure crisis for the broader industry, thanks to slow development and rising costs.
  • The oil price, which typically accounts for around 30% of an airline’s costs, has risen more than 50% since June 2017. Brent crude closed at US$67.62 a barrel on Feb. 5 in US trading.

(Clara Ferreira-Marques a Reuters Breakingviews columnist. The opinions expressed are her own.)