Saturday, August 09, 2008

Aviation: Rising costs spell gloom for regional airlines

Analyst says MAS, AirAsia are stronger than many of them

CATHAY Pacific Airways Ltd - Asia’s third largest carrier by market value - raised enough red flags over the past few months over the tough times it was facing due to rising fuel cost and would report a loss in the first half of 2008. But what it announced yesterday caught many by surprise; it was its first loss in five years.

Much of the loss was due to higher fuel prices as “Cathay had not hedged enough and fuel cost just went up higher.” The carrier also had to make a HK$468mil provision for a fine in the US to resolve an investigation into price fixing by air cargo carriers in June.

Cathay reported first half loss of HK$663mil (US$85mil) versus a net income of HK$2.58bil in 2007. This may be its first loss in five years but it is only half of HK$1.24bil the airline lost in 2003 following the outbreak of SARS.

This time around Cathay did not raise airfares as much as other global carriers despite doubling its fuel surcharges for long haul travel. Cathay only had 30% of its fuel requirements hedged.

In comparison, Asia’s most profitable airline, Singapore Airlines (SIA), hedged 60% of its fuel. Yet SIA also reported lower earnings. Its net profit was 15% lower to S$358mil for second quarter ended June 2008. That was also the second consecutive decline in quarterly profit.

The drop in profit is understandable as the airline industry is in turmoil due to a slowing global economy, higher fuel prices and low demand for air travel.

MAS and AirAsia aircraft sit parked at KL International Airport - AFP. MAS hedges 43% of its oil for 2008 and an analyst estimates that it will report between RM20mil and RM50mil profit for the second quarter.

Cathay chairman Christopher Pratt believes “the industry will not survive in its current form,’’ given the higher fuel cost and slowing demand. He said “global aviation was making a painful adjustment to the new reality of 100-plus US dollar oil.’’

Crude oil prices fell to below US$120 a barrel yesterday after a record high of US$147 in July. Jet fuel is down from its high of US$181 a barrel on July 3.

The International Air Transport Association on Monday said passenger demand grew at is slowest pace in five years in June and warned the situation could get worse with consumer and business confidence falling amid persistently higher oil prices.

Cathay is not the first carrier to have reported a loss and it won't be the last. In fact, 25 airlines have gone bankrupt since the beginning of this year, and more casualties and losses can be expected.

But amid all the gloom, a Malaysian analyst is pretty confident Malaysia Airlines (MAS) and AirAsia Bhd will do better than many airlines in the region.

MAS has 43% of its oil hedged for 2008 and the analyst estimates that MAS will report a small profit of between RM20mil and RM50mil for the second quarter.

As for AirAsia, the analyst said the airline may be facing tough times operationally but “they could beef up their P&L (profit and loss) and could recognise the proceeds of an aircraft disposal. This could strengthen their P&L.’’

“We believe MAS and AirAsia are stronger than some carriers in the region.’’

Click here Rising costs spell gloom for regional airlines
Malaysia Star, Malaysia