Asian Airlines - March 2006

Abstract

The Asia-Pacific region has enjoyed steady expansion of air traffic since the end of the 1990s, with the exception of the first half of 2003, which was marred by the crisis that followed the outbreak of severe acute respiratory syndrome (SARS). Since January 1999 international passenger revenue passenger kilometres (RPKs) has grown by approximately 37%. The growth in freight transport has been even stronger, rising by around 70% over the period, as measured by freight tonne kilometres (FTKs). By comparison with the rest of the world, the Asian airline sector is leveraged to cargo activities in particular, especially on long-haul transcontinental routes as opposed to passenger transport.

Currently, growth is shifting more to the regions domestic markets and short-haul travel with the launching of new airlines, and especially low-cost carriers (LCCs). This development has been made possible by the progressive deregulation of air space, especially in key markets such as China and India, which should continue to see rapid expansion in air traffic, and aircraft capacity. Indeed, LCCs are gaining significant share in most markets, but not always directly at the expense of traditional airlines. In many cases, these new entrants are expanding the market for air travel, tapping into segments of the population that were not previously travelling by air.

Over the last 18 months, airlines, both in Asia and around the world, have been under severe margin pressure due to the spectacular rise in the price of jet fuel. The airlines have reacted by imposing fuel surcharges, which have compensated the increased cost only to a limited extent. Another approach has involved rationalising routes and resolving bottlenecks at airports to avoid having aircraft burning extra fuel unnecessarily. In this difficult trading environment, it is becoming increasingly clear which airlines are adapting and surviving and which are floundering. Although LCCs have generated significant volumes of business and market share gains, it remains to be seen whether their business model is financially viable in the medium to long term. There has already been some degree of shakeout and consolidation in the sector, with more to come.