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Travel prospects good for the region, despite oil woes

A Malaysia Airlines employee talks on a phone at the flight ticket reservation counter in Kuala Lumpur, Malaysia, on Friday. The unrelenting climb of global oil prices this year has badly hurt the bottom lines of airlines across the Asia Pacific, plunging some like Thai Airways, Malaysia Airlines and China Southern into losses, and forcing many to raise ticket prices through higher fuel surcharges. PHOTO: AP

Soaring oil prices are unlikely to ground Asian travellers ahead of the year-end holiday season but airlines could see profits sharply eroded by escalating jet fuel bills, analysts say.

A wider range of choices, including cheaper tickets from low-cost airlines, would still encourage air travel but long-haul destinations to Europe and the US may give way to hideaways within the region, they say.

The International Air Transport Association (IATA) said that for the first six months of this year, international passenger traffic in the Asia-Pacific region grew 8.1 percent over the same period last year.

Between now and 2008, IATA estimates international passenger volumes in the region will expand 8.3 percent annually, faster than the forecast global average of 6 percent. Newly-affluent Chinese tourists are expected to lead the way.

"Asian markets are still expected to be the fastest growing in the world for both passenger and cargo businesses," a spokesman for the Geneva-based IATA said.

"Asian markets are still expected to be the fastest growing in the world for both passenger and cargo businesses."

Spokesman for the International Air Transport Association

The association is urging airlines worldwide to cut costs to cope with losses from fuel price volatility.

On the ground, however, families may plan year-end holidays more carefully.

John Koldowski, managing director of the Strategic Intelligence Center at the Pacific Asia Travel Association in Bangkok, said: "Travel will not be given up, but the way people travel and move around could very well change."

He said that from January to last month, passenger traffic in the Asia-Pacific region was up 10 percent over last year, despite airlines slapping additional fuel surcharges on passengers.

But resilient passenger numbers may not necessarily translate into robust profits for airlines as additional fuel costs erode ticket gains.

Southeast Asia's crowded budget airlines market saw its first major shake-up in July when Singapore-based budget carrier Valuair merged with Qantas-backed Jetstar Asia. Analysts said this is unlikely to be the last consolidation.

Shukor Yusof, who tracks the aviation sector at US credit rating agency Standard and Poor's in Singapore, said jet fuel normally accounts for around 20 percent of total costs in airlines, second only to labor at about 35 percent.

"Few airlines in Asia are well-hedged, but even the best-hedged carriers are not immune to higher oil prices," he said.

"The protection afforded by hedging depends a lot on the strike price of oil and what commodity index is used. Airlines' ability to pass on fuel costs in the form of surcharges are somewhat capped because of severe price competition," he said.

Based on oil prices averaging US$47 a barrel for the year, the global aviation industry's fuel bill this year would total US$83 billion, nearly double the US$44 billion chalked up in 2003, IATA said.

The aviation industry's total loss globally this year is estimated at US$6 billion , also based on US$47 dollar average oil prices. Losses and fuel bills are likely to mount given current oil price levels near US$70 dollar a barrel.

US investment bank JP Morgan said that Asian carriers like Singapore Airlines and Hong Kong's Cathay Pacific, which have maintained strong revenue growth and adopted stringent cost-cutting measures, are likely to cope better.

Airlines can limit the damage by withdrawing from the most unprofitable routes, JP Morgan suggested, but noted that "unfortunately, we have yet to see any company make the first move in that regard."

"A sustained spike in fuel prices or the crack premium in jet fuel and/or customer resistance to fuel surcharges would escalate the crisis," it warned.

IATA said aggressive cost-cutting measures remain critical.

"There is no silver bullet, but every ounce of savings counts," it said.

For example, washing aircraft more frequently to reduce friction or using lighter catering equipment on board would have an incremental impact, it said.

IATA added that it was working with governments, airports and air traffic control in order to improve operations.

IATA has initiated five projects estimated to generate US$6.5 billion in savings for the industry annually, the "most urgent" of which is pushing for 100 percent electronic ticketing by 2007.

E-ticketing could save the industry an estimated US$3 billion a year.

IATA called on other sectors of the industry to help reduce costs, pointing out for example that airport and air navigation service charges account for 10 percent of airline operating expenses.

While airlines are expected to cut non-fuel costs by 4.5 percent this year -- in addition to reductions of 2 to 3 percent in previous years -- airport and air navigation charges remain relatively unchanged, IATA said.

"It is imperative that our partners in the value chain match our efforts," it said.
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