Concern over profits of airlines in longer term


BY K.P. LEE

TURBULENCE is forecast for the profits of the airline sector despite higher passenger numbers as rising costs from higher fuel prices are matched against the pressure of lower air fares with the swarm of new budget carriers taking off all around Asia. 

Analysts say the abolition on Nov 1 of the Market Development Programme (MDP), the Malaysia Airlines-led price-fixing cartel, was an inevitable result of these pressures.  

Not all analysts agree that this development would not have a major impact on the Malaysia Airlines' (MAS) revenue and profit – because competition from low-cost carriers like AirAsia and non-MDP airlines like Singapore Airlines have already forced air fares down to a very low level – but all concur that a decidedly cloudier outlook for the industry has emerged. 

“It wouldn’t affect air fares very much, and the impact on the airlines is likely to be neutral,” said Mayban Securities aviation analyst Vince Ng. “But there are some concerns over the longer term.” 

With the end of the agreement that set out minimum air fares to be charged by airlines and travel agents, open price competition would be more commonly seen, he said, predicting that impact on travel agents could be much more severe as they start experiencing a tighter margin squeeze. 

OSK Research, meanwhile, had downgraded MAS to “long-term neutral” from “long-term buy” as it expects the national airline to fare less well in the new, more price competitive environment. 

“We view it quite negatively for MAS,” Chris Eng, an analyst there told Bloomberg. ”It will lower its average passenger yield.”  

Mayban’s Ng is sticking with his “buy” call on MAS, with the industry looking still relatively “robust,” but he is neutral on the industry going forward despite passenger numbers growing in the double-digits. 

In its latest research report, Mayban said despite a recovery in air travel – a massive 35% increase in traffic in the Asia-Pacific for the first half-year according to the latest International Air Transport Association (IATA) numbers – airline profitability would not rise at the same rate. Passenger growth is also expected to moderate, said the report. 

However, the broking house has upgraded its call on Malaysia Airports Holdings Bhd (MAHB) to a “hold” from “sell” previously, as valuations were undemanding. “The increase in air travel in the region should benefit airport operators like MAHB,” it said. 

IATA statistics found world air passenger traffic rising 20.4% year-on-year in the first half of 2004 as passenger travel recovered from the effects of the severe acute respiratory syndrome outbreak and the invasion of Iraq, while cargo traffic was up 13%.  

Traffic for the six-month period was up by 44.3% in the Middle East, 35% in the Asia-Pacific, 20.1% in North America and 12.8% in Europe. 

Mayban said although all the aviation traffic and capacity indicators showed strong annual growth, the growth appeared to be moderating. June’s passenger traffic growth, measured by revenue passenger kilometres (RPK), of 25.5% was lower than the RPK growth of 38.1% registered in May, while freight traffic growth (measured by freight traffic kilometres: FTK) of 18% was slightly lower than the FTK registered in May 04. 

Mayban said based on the OECD (Organisation for Economic Co-operation and Development) leading indicator, which provides a good guide for the direction of the aviation industry, a slowdown was expected by late this year.  

“The long-awaited rebound in international travel is unlikely to translate into a similar growth in profits for airlines because of rising fuel costs and competition from budget carriers,” said the report.  

According to the IATA, oil prices at US$42 per barrel were about US$6 per barrel above the anticipated levels for 2004, which added up to US$6bil in costs to the industry. “This puts pressure on airlines to maintain strict control on their costs and capacity,” said Mayban, although this could be partially offset by the imposition of fuel surcharges by some airlines like MAS. 

 MAS :  [Stock Watch]  [NewsAIRPORT :  [Stock Watch]  [News]

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