Airlines in Asia-Pacific region cut flights, jack up surcharges to beat fuel prices

Like elsewhere in the world, airlines across the Asia-Pacific region are feeling the pinch of the phenomenal rise in prices of aviation fuel. In a desperate effort to survive, airlines in the region are resorting to various steps to cut operating costs, including cutting flights and increasing surcharges.

Fuel costs for airlines, which now typically account for nearly 40% of total operating expenses, have already shot up by over 50% since the start of 2007, a report in the website www.msnbc.msn.com says.

The website quoted analysts as saying that the aviation industry in Asia is facing its worst crisis since the SARS (severe acute respiratory syndrome) epidemic of 2003, “with worse to come if prices continue to rise and erode airlines’ profitability.”

Goldman Sachs, the world’s largest investment bank, has predicted that the price of crude oil could cross US $140 a barrel in the summer of 2008 and touch US $200 in 2009.

These higher costs will radically change the aviation sector, analysts say.

The website www.msnbc.msn.com quoted Damien Horth, head of Asia transport research at UBS AG, the global financial services company based in Switzerland, as saying: “If oil prices stay this high, then the entire airline industry will be fundamentally different in a year’s time. It will make the strong stronger and the weak weaker. This could result in consolidation where weak airlines may be downsized and restructured.”

Profit-making airlines in the Asia-Pacific region such as Singapore Airlines, Cathay Pacific Airways, and Qantas Airways are “in a better position to weather the fuel crisis than their less competitive rivals, given their greater focus on high yielding premium traffic,” Damien Horth added.

An analyst at Nomura International, the United Kingdom-based subsidiary of Japan’s Nomura Holdings, commented: “In the face of expensive oil, survival is based on an airline’s ability to boost revenue. Carriers with stronger premium traffic will be more able to pass on their fuel costs to their passengers. But even these robust carriers are taking bold steps to cope with the high cost of fuel.”

Qantas, Australia’s national airline and also the country’s largest carrier, had said recently that would lay off employees, implement an executive pay freeze and cut capacity across its domestic and international networks by around 5% to offset higher fuel costs. Earlier, it had announced plans to hike fares and increase hedging.

Cathay Pacific Airways, of Hong Kong, responded to high fuel costs by cutting some routes, particularly on the long-haul North American services, and speeding up retirement of aircraft.

Korean Air Company has said it will temporarily cut flights on 12 international routes and suspend 5 routes from June to mid-July 2008.

Taiwan’s China Airlines has announced that it is considering a reduction in frequencies or suspension of certain routes, mostly the long-haul ones.

EVA Airways Corporations, of Taiwan, China Airlines’ smaller rival, is considering cutting some frequencies on routes where demand is not strong, possibly in south-east Asia.

Malaysian Airline System (MAS) has reported a 10% drop in net profit in the first quarter of 2008, compared to a year earlier.

All Nippon Airways, Japan’s second-biggest airline, had said in April 2008 that it expected the high fuel prices to cause a fall in net profit for the fiscal year ending March 2009.

Air New Zealand, based in Auckland, New Zealand, and the country’s national flag carrier, has lowered its fiscal year profit guidance.

According to the International Air Transport Association, despite airfares getting costlier and the slowdown in the United States’ economy, passenger demand in the Asia-Pacific region has so far remained relatively strong. Though growth has slowed somewhat from the levels in 2007, passenger traffic rose by 5.9% in the first quarter of 2008 in the region.