Low Cost Carriers Aim to Ride Out Uncertainty
According to a report by the Centre for Asia Pacific Aviation, as the full impact of Hurricane Katrina on the US economy is assessed, carriers are already bracing for higher world oil prices. Many full service carriers are already considering the next round of fuel surcharge increases, if the oil price holds in the USD68-70 per barrel range.However, all airlines, including LCCs with limited or no fuel hedging in place, will face more intense pressures until (or if) fuel prices stabilise.
It is increasingly clear we have entered a period of volatility for the global economy and the aviation industry is bracing for further turbulence.
The US - particularly volatile
The US market is particularly volatile in the wake of Hurricane Katrina, with reported major increases in fuel prices in some markets, and the heightened possibility of further airline bankruptcies in coming weeks.
Northwest Airlines announced it is likely to record a net loss of up to USD400 million in the three months ending 30-Sep-05, however the result could worsen depending on the financial impact of Hurricane Katrina. The airline’s cash balance has fallen from USD2.1 billion as at 30-Jun-05 to USD1.7 billion as at 31-Aug-05.
However, Goldman Sachs upgraded Southwest Airlines to “outperform” from “in-line,” stating it is the least likely airline to be impacted from rising fuel prices and the greatest beneficiary from the increased probability of industry consolidation.
Southwest, which has comprehensive fuel hedging strategies in place, is the biggest carrier in New Orleans, with 56 daily departures including major business routes to Houston and Dallas. New Orleans remains closed and could be inoperable for months as repairs are undertaken.
Europe - Full service carriers brace for more fuel surcharges
Europe’s major full service carriers, including British Airways, Virgin Atlantic and Air France-KLM, are considering raising their fuel surcharges in coming days and seeking additional cost compression in other areas. But, latest reports indicate strong summer demand, and possible yield improvements at the major LCCs, including Ryanair and easyJet.
Air France-KLM is targeting an operating profit for the 12 months ending 30-Jun-06 “significantly” above the previous year’s result. After a strong Summer, Air France-KLM also expects a “marked improvement” in second quarter results.
Meanwhile, the only significant evidence of a reduction in LCC operations lately has been related not to fuel, but the imposition of increased charges at some airports, plus a substitution of demand away from traditional destinations to the increasingly popular Eastern Europe.
Asia Pacific - insulated by high traffic growth
Asia Pacific and Middle East carriers are insulated somewhat by higher growth rates, which IATA expect to continue to outperform the global average.
However, slower rates of cargo growth indicate potential weakening in the underlying economy. There are also suggestions from the Pacific Asia Travel Association that travel patterns may change due to the high fuel surcharges in some markets, although growth rates are generally expected to remain strong.
Meanwhile, AirAsia is planning capacity expansion at double-digit rates in the current financial year with new routes to five cities in Mainland China, Hanoi and Clark via Macau all planned and announced. The Group should continue its push into the Mekong Sub-region, Brunei and the Philippines, as well as adding new markets and frequency in Indonesia.