Tue, Sep 30, 2014 - Page 14 News List

Airlines face challenges over market saturation

RISING RISKS:With more carriers entering the market, an oversupply of services to Chinese tier-1 cities and US destinations could affect passenger business next year

By Amy Su  /  Staff reporter

The global airline industry may face headwinds on profitability next year amid the rising risks from passenger routes to China, Japan and the US, UBS Investment Research said.

“The passenger business has remained steady this year, especially in the July-to-September period, the traditional peak season for the sector,” UBS director of Asia Transport Research Eric Lin (連沛堃) told a press gathering on Wednesday last week.

However, oversupply may affect air carriers’ passenger business next year, Lin said.

Taiwanese airlines are also expected to encounter increased risks on their profit margins for flights across the Taiwan Strait, which have been lucrative in the past few years, as the market for cross-strait flights to tier-1 cities has become saturated, Lin said.

While air carriers might focus on launching new services for tier-2 or tier-3 Chinese cities, these new services may not be that profitable compared with current flights to the tier-1 cities, he added.

Meanwhile, the rise of low-cost airlines is set to generate heavier earnings pressures on full-service carriers, especially on routes to Japan, if more budget airlines join the market, Lin said.

He said the oversupply issue may also occur on routes to the US, as several major airlines, including China Airlines Ltd (中華航空) and EVA Airways Corp (長榮航空), have raised flight frequency or launched new routes to the market over the past few years.

As for the aviation cargo sector, Lin said demand has improved this year compared with the sluggish past few years, thanks to the launches of Apple Inc’s iPhone 6 along with new electronics products by other brands this quarter.

Meanwhile, the global bulk shipping sector is likely to see restocking demand next year — which in turn is set to create a necessary support to the overall shipping industry — following a disappointing performance this year because of price declines in coal, iron ore and grain, which are the main dry commodities transported by bulk shippers.

The Baltic Dry Index — a measure of shipping costs for commodities — closed at 1,049 points on Friday last week, declining 53 percent since the beginning of this year and yet to average the 1,230 points forecast by UBS.

Expecting inventory replenishment for bulk shipping next year, UBS expects the index to reach 1,500 points next year.

As for the container shipping sector, demand on intra-Asian routes may be stronger than other routes, despite fundamentals remaining relatively weak on the concerns over continuous oversupply, Lin said.

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