Airlines to leverage on lower fuel prices

PETALING JAYA: Lower fuel prices and capacity demand growth are fuelling Asia-Pacific airline executives to change their strategy to take advantage of the new era which will go on for the next 12 to 24 months, but still at the expense of yields.

But Malaysia Airlines (MAS) is still in austerity mode, cutting back on capacity as it tries to reshape itself.

In August, MAS will cut 40% capacity on its Australian routes and system-wide cuts of about 15%, Capa Centre for Aviation said in its recent report.

“The reductions are sensible as for the most part they simply reverse earlier expansion that was overambitious and unsustainable,” said Capa, adding that: “MAS does risk leaving an opening for competitors, particularly rival AirAsia X (AAX), but in the current challenging phase of its history it cannot be worried about market share.”

StarBiz recently wrote that MAS had cut Frankfurt, Kunming, Coaching and Krabi off its list. In August it would axe Brisbane, Male and Istanbul routes. It would cut capacity on its Australian routes and also to India, Medan, Guangzhou, Ho Chi Minh City, Hong Kong, Manila, Siem Reap, Taipei, Yangon, Jakarta, Tokyo and Shanghai.

Other regional airlines will fill up capacity that MAS lets go of, and Capa believes that AAX will add capacity to Australia in December and may include Brisbane to its route map, while Malindo Air may begin flying to Perth, taking over MAS slots.

Despite MAS’ move, demand is exceeding supply and Maybank Investment senior analyst Mohshin Aziz expects “load factors for Asia Pacific and world airlines to near record levels and it is clear evidence that the underlying demand for the industry is healthy and airlines will be able to leverage this to their advantage.”

Jet fuel averaged at US$70.8 per barrel since the beginning of the year, 37% lower than 2014’s average of US$112.4 per barrel, while Asia-Pacific airlines’ capacity growth guidance is 7.7% from the historical average of 4.2%.

Airlines have also reduced their fuel hedging levels to be more exposed to the spot market as oil prices are headed south since sanctions on Iran were lifted and with Saudi Arabia flooding the market.

Mohshin believes that the current surplus demand relative to supply will continue over the next 12 to 24 months. To meet this demand, airlines that have not ordered or delayed plane orders are going to the leasing market for planes.

The International Air Transport Association (IATA), however, predicted that passenger yields would decline by 7.5% year-on-year in 2015 with the steep decline in yields led by lower fuel prices, added Mohshin.

“This necessitates the cessation of fuel surcharges which constituted around 12% of revenue at the peak. “However, this is not to be taken negatively as lower yields have provided the benefit of stronger demand and higher load factors,” he added.

Despite that, IATA predicted airlines to report US$29bil in profit this year, up by 17.2% and North American carriers would be top performers.

Despite this, KLIA (KLIA2) is no longer Asia’s biggest LCCT since Bangkok’s Don Mueang, with traffic surging 50% turned into the world’s largest LCCT.

Capa said Don Mueang handled 14.4 million passengers in the first six months of 2015, versus 12.6 million by KLIA2.

“KLIA2 needs to improve its customer services at every touch point in Malaysia to get back the regional traffic,” said an airline executive.

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