Asia-Pacific aviation sector faces downturn in 2008

24 April, 2008:

The prospects for the aviation industry in the Asia-Pacific region for the remainder of 2008 do not look good, according to the annual Aviation Outlook report for 2008 released by the Centre for Asia-Pacific Aviation.

While the going was good for the aviation sector in the Asia-Pacific region in 2007, hopes were high that 2008 would be even better, especially for the airline industry in the United States that has been having a hard time for long.

According to the 250-page report by the Centre for Asia-Pacific Aviation, which contains detailed reports on all major participants in 2007 and their prospects for the remainder of 2008, “the storm clouds started to gather towards the end of 2007, as fuel prices continued to climb and the fallout from the US sub-prime crisis started to emerge, and continues to emerge.”

Following favourable conditions in 2006, the aviation sector in the Asia-Pacific region had made huge earnings in 2007, leading, in many cases, to record profits for many airlines.

The Asian Development Bank (ADB), says the Aviation Outlook report for 2008, now forecasts that Asian economies will register solid growth in 2008, despite a slowdown in major industrial economies, rising food and fuel prices and the credit crisis in the United States. Developing economies in Asia are expected to expand at the rate of 7.6% in 2008 and 7.8% in 2009 after having registered the highest level of growth in almost two decades in 2007 – an average of 8.7%.

In its latest commentary, the International Monetary Fund (IMF), according to the Centre for Asia-Pacific Aviation report, too has been optimistic on the economic prospects of Asia.

However, the Aviation Outlook report cautions that the aviation sector in the Asia-Pacific region is entering a period of “economic uncertainty” despite the region “having evolved to an airline industry structure that is potentially positioned better to cope with a sharp downturn.”

Also, it would be the first time that the Asia-Pacific region is facing adverse economic conditions even as the region has at is disposal a number of low cost/low fare airline options.

During the so-called Asian Financial Crisis that took place a decade ago, the number of people flying had gone down sharply, leading to the airlines losing in a big way.

But, according to the Aviation Outlook report for 2008, this time around, things could be very different. “We have a new aviation environment – with new, private airlines, mostly well-positioned to survive in difficult conditions. The region’s major network airlines (but not all) have also restructured effectively to allow them to be competitive when times get tough. If the IMF and ADB projections prove accurate, the industry’s pain should not be intense in 2008.”

The report continues,“However, as we move further into the year, there are clear signs of a significant imminent slowing in air travel. Load factors are starting to ease as fresh capacity enters the market. These suggest that the IMF and ADB may be overly optimistic.”

The other key factors pointed out by Aviation Outlook report for 2008 are:

The Middle East airlines are poised to play an accelerated role over the next couple of years. For example, Dubai Airport overtook Singapore’s Changi Airport in the first quarter of 2008, in terms of total passenger numbers. Traffic at the Middle Eastern hub is growing almost three times faster than at Changi.

Oil prices should start to level out and then to slide, as economies soften and the US dollar stabilises. But in reality, the main problem is not costs but revenues – the threat of globally softening demand is expanding far beyond the slowing US market.

As economic conditions erode profitability, many of the flag carriers that are still influential in the Asia-Pacific region may seek to halt liberalisation moves.

The year 2008 will be a critical signpost to the future.

All things considered, the momentum for change has now become irresistible and will move ahead in 2008. Overall, 2008 is shaping to be one of the most challenging in recent memory for the aviation industry in the Asia-Pacific region, as it copes with intensifying internal and external headwinds.