Industry consolidation results in better yields for airlines

KUCHING: With the Interna­tional Air Transport Associa­tion (IATA) raising its financial year 2012 (FY12) profit forecast to US$6.7 billion thanks to cost-saving initiatives and industry consolidations by aviators, the future looks bright for airline players including Malaysia.

Late last week, IATA director general and chief executive of­ficer (CEO) Tony Tyler during the Global Media Day in Ge­neva said although the gloomy outlook for cargo business remained, robust travel demand would sustain the growth mo­mentum in passenger segment going forward.

Despite lingering high fuel price and slower global eco­nomic growth, major airlines performed well than expected mainly due to the cost saving initiatives and industry con­solidations. Tyler also expected breakeven profits for the Euro­pean zone area.

“One of the drivers of perform­ance has always been demand growth,” he said in his speech.

“Even in these difficult eco­nomic times, it is clear that the demand for global passenger connectivity is rising. It is a demand that only aviation can efficiently meet.

“If you look closely at our forecast for 2013, we expect that – for the first time – the industry will handle over three billion passengers,” he revealed.

“To help us understand the impact that aviation has on our world, last year we commis­sioned a series of reports from Oxford Economics. The aim was to quantify the benefits of aviation—particularly on jobs and in generating GDP. These have been rolled out for nearly 60 countries.

And the Air Transport Action Group built on the research to come up with a global study which showed that aviation supports some 57 million jobs and US$2.2 trillion in economic activity. Put simply, airline growth is a catalyst for jobs and economic expansion.

The good news, Tyler added, was that the industry’s potential to continue to grow was strong.

“Last week we released the Air­line Industry Forecast for 2012 to 2016. In 2016 we expect some 3.6 bil­lion travellers to take advantage of aviation’s connectivity. And the majority of that growth will take place in developing markets,” he stressed.

“If we look at a snapshot of the industry’s expected structure in 2016, we will see that 38 per cent of global air travel will focus on routes to, from, or within Asia-Pacific,” he explained. “That is up from 34 per cent in 2011.”

Across the regions, IATA had raised the earnings projec­tions for Asia Pacific and North America by US$0.7 billion and US$0.5 billion respectively.

“Many airlines in the US ran into troubles during the 2008 financial crisis and, in the after­math, had gone through several mergers,” Tyler noted.

“The industry consolidations had reshaped the industry land­scape and successfully eliminated redundant capacity by circa 10 per cent in the US domestic market alone when compared to pre-cri­sis levels.”

Additionally, European zone aviation players are expected to breakeven this year against previ­ous forecast of net loss at US$1.2 billion notwithstanding the hith­erto unresolved debt crisis.

“For the European market, IATA saw improved overall operating performance among the major airlines owning to the elimination of smaller airlines and decreasing number of new entrants which helped to reduce unyielding competitions.”

Closer to home, local players are expected to benefit from this revision as outlined below:

Malaysian Airlines Systems Bhd (MAS)

“The recent unveiling of its RM3.1 billion right issue plan should inject the capital lifeline necessary for MAS to lower its highly-levered adjusted net gearing at 4.4 times based on the latest disclosure,” underscored the research division of MIDF Amanah Investment Bank Bhd (MIDF Research).

The funding plan was also essential to optimise its capital structure and to execute MAS’ fleet renewal plan in the next two years, it added.

“From the IATA’s FY13 out­look, robust demand in leisure travel demand should keep its passenger business at bay but cargo segment remains depressed due to weak freight market.

“After registering RM3 mil­lion slim breakeven at operat­ing level for the third quarter of financial year 2012, we opine that MAS is paving its way to gain more significant turnaround in the coming quarters.”

AirAsia Bhd (AirAsia)

With a confirmation of an ad­ditional 100 aircraft order, MIDF Research believed that AirAsia’s bulk purchase strategy and rela­tionship with Airbus would give the former substantial discount on the order which would result in huge savings on its fixed expense.

In a separate report, MIDF Research added that FY13 will be a year with record fleet growth for AirAsia, with its Malaysian operation taking 10 aircraft, eight for Thailand, nine for Indo­nesia, three for the Philippines and four for Japan.

“Of the 34 aircraft, 21 will be secured from third party leasing. In addition, the fleet retirement plan will be initiated from the year 2020 onwards,” MIDF Re­search highlighted.

“Meanwhile, the completion of KLIA2 will relieve AirAsia of the space constraints in the congested LCCT area and help it to pursue its regional expansion plans.”

Malaysia Airport Holdings Bhd (MAHB)

Benefiting from the intensify­ing competitions among low-cost carrier players, MAHB is set to deliver another jump in traffic growth in FY13 with the open­ing of KLIA2. The new terminal occupies four times larger floor space than current Low Cost Carrier Terminal.

MAHB is also one of the par­ties involved in the bidding for Stansted Airport in England. Stansted is the third busiest airport after London’s Heathrow and Gatwick. It is located 48km northeast of central London at Stansted Mountfitchet in Ut­tlesford in Essex. The airport is known to predominantly be a leisure and holiday airport.

To date, MAHB now manages 39 airports in Malaysia, and will manage KLIA2 when it opens its doors in May next year. It is also the owner and manager along with GMR of Indira Gandhi airport in Delhi, and also Hy­derabad airport, and the low-cost air terminal in Turkey.

Currently, the group was in various stages of bidding for more airport contracts in China and Indonesia.