Premium Asian airlines hit by fuel prices, budget carriers

SINGAPORE – Premium airlines in Asia are rethinking their strategies and slashing costs as high fuel prices, global economic uncertainty and pressure from Middle East and budget carriers squeeze profits.

Singapore Airlines (SIA) reported Wednesday, May 9, that its net profit for the financial year ended in March tumbled 69% to $268 million, weighed down by a rare loss in the 4th quarter.

It was only SIA’s third quarterly loss in its 40-year history of uninterrupted full-year profit. The first took place during the SARS health scare in 2003 and the second during the global financial crisis in 2009.

SIA’s Asian rival Cathay Pacific of Hong Kong has warned shareholders that its first-half results, due out in August, are “expected to be disappointing” on the heels of a 61% net profit fall in 2011.

Both carriers are looking for more opportunities in Asia, the world’s fast-growing aviation market, as long-haul operations take a hit from the European debt crisis and the patchy US recovery.

Australian flag carrier Qantas is also attempting to refocus on Asia as part of its strategy to revitalize its loss-making international business.

“This is not just a Cathay Pacific problem,” chief executive John Slosar said in a statement to the Hong Kong stock exchange.

“It is clearly an industry-wide issue, and continued high fuel prices in particular are hitting airlines hard across the globe,” he said, calling for “concerted action” to address the volatile environment.

SIA’s performance is regarded as an indicator of industry trends and its reliance on business and first-class passengers to generate high margins is now being called into question.

Premium carriers such as SIA and Cathay are among the most affected by the economic headwinds because of their heavy reliance on top-paying passengers who can account for more than 50 percent of revenues, analysts said.

Some analysts say SIA has not been not been quick enough to seize opportunities at the lower end of the market.

“While SIA’s current slump is more a result of tough economic conditions and external factors, they are also now paying the price for standing still,” the Sydney-based Centre for Aviation consultancy said in a report.

Air travelers are more price-conscious and have a wider range of choices from budget carriers to premium airlines, Shukor Yusof, an aviation analyst in Singapore with Standard & Poor’s Equities Research, told AFP.

Last year, one in 4 of the 46.5 million passengers who passed through Singapore’s Changi Airport travelled on a low-cost airline, compared to one in 5 in 2010, the airport operator said.

SIA is also being challenged by Middle Eastern carriers such as Etihad, Qatar Airways and Emirates, which have expanded their fleets and improved cabin services to compete with the famous “Singapore Girl” flight attendants.

“They have closed the gap,” said Shukor.

“They now offer services that are at par or better than SIA and at lower ticket prices,” he said, noting that SIA fares are around 20% higher.

But Middle East carriers are equally under pressure, with Dubai’s Emirates airline group announcing a 61% slump in profit in the year to March to 2.3 billion dirhams ($629 million).

Cathay said its cost-cutting measures include reducing flight frequencies on some routes to Europe and the United States while expanding its profitable Asian network through sister firm Dragonair.

It will deploy more fuel-efficient aircraft, speed up the retirement of older Boeing 747-400 planes, freeze hiring of ground staff and offer voluntary unpaid leave for cabin crew from June.

SIA said in March it had asked its pilots to volunteer for unpaid leave for up to two years during which they can work for other airlines.

It has retired the Boeing 747-400 and is pushing through with orders for new more fuel-efficient Airbus and Boeing planes.

Global airline industry group IATA in March cut back its 2012 profit forecast for the industry to $3.0 billion from $3.5 billion due to persistently high fuel prices, with Brent crude staying above $100 a barrel.

The Association of Asia Pacific Airlines (AAPA) said the aggregate net profit of members based in the region tumbled 47% last year to $4.8 billion due to high oil prices and soft cargo demand.

Fuel accounted for 34% of total costs, up from 30% the year before, AAPA said.

Its director general Andrew Herdman said that with revenues totalling $162 billion, the aggregate net profit represented “only a 3% profit margin and a poor return on invested capital.”

But he said the region’s carriers were adapting.

“Asia Pacific carriers are at the forefront of business model innovation, with changing dynamics rapidly reshaping the region’s industry,” he told AFP.

A number of airlines are already combining the elements of both full-service and budget models, while others are forming alliances, he noted.

“New strategies involving partnerships of full service airlines and low cost carriers are breaking new ground in Asia,” he said.

And SIA is not ignoring the budget market: its wholly-owned low-cost carrier Scoot is set to start flying next month to Australia.

In addition, SIA owns nearly 33% of Tiger Airways, another low-cost carrier which holds more than a third of Indonesia’s Mandala Airlines.

Shukor said SIA remains fundamentally strong, with up to Sg$6.0 billion in cash.

“No airline in the world has that kind of money. That war chest will put them in a position that will allow them to manoeuvre and overcome any near-term turbulence,” he said. – Agence France-Presse