Turbulence ahead for local airlines?
Profit margins will likely be squeezed by higher oil prices, say analysts
LOCAL airlines are expected to fly through turbulence in the second and third quarters of the year as their profit margins will be squeezed by higher oil prices, said analysts.
However, they are expected to recover in the final quarter if oil prices stay at the current level.
Analysts said airlines that have put in place efficient hedging strategy and operate fuelefficient aircraft will have an edge over others.
Maybank Investment Bank Bhd aviation analyst Mohshin Aziz said at times when oil prices are volatile, it is better for airlines to defer new routes or add capacity because of the “uncertainty” factor.
“Airlines should instead focus on existing network and boost ticket prices and load factor. The profit margin will contract when supply and demand for air travel remains modest. Airlines should try to fill up seats as much as possible,” he said.
Mohshin said ultra-long haul flights would be most sensitive to rising fuel price environment.
He cited Singapore Airlines’ move to re-launch the world’s longest commercial flight in October from Singapore to New York for 19 hours.
“When a plane flies far, it needs to carry fuel and it becomes heavier, burning more fuel. It makes the flight extremely expensive, particularly when oil prices increase,” he said.
Mohshin said Malaysia Airlines Bhd’s (MAS) long-haul flight between Kuala Lumpur and London would only be slightly impacted as the national carrier recently switched to the smaller, more fuel efficient A350-900 for the route from the A380 previously.
The A380 flights, he added, were never efficient as MAS had struggled to fill up the superjumbo aircraft.
“By switching to a smaller aircraft, MAS will able to fill the capacity. When the aircraft is full, the airline will get more revenue, backed by a smaller engine that burns less fuel. That is how an airline optimises its profitability,” he said, noting that MAS was now in a better position.
He said airlines should focus on improving flight capacities to achieve economies of scale and higher profitability for ancillary income.
“If airlines have more people in their aircraft, passengers will buy more food, drinks and merchandises — it’s all a volume game,” he said, adding that ancillary income would mitigate additional cost pressure.
Brent crude breached the US$80 (RM317.60) a barrel last month for the first time since November 2014, spurred by the geopolitical risks.
Asian transport equity research firm Crucial Perspective chief executive officer Corrine Png said oil shock has often been the airline’s worst enemy as fuel cost is the largest cost component, contributing 30 per cent to total cost.
“Most airlines have limited fuel hedging in Malaysia and the AsiaPacific region. So, we expect profit margins to be squeezed this year,” she said.
Png said Malaysian carriers need to manage their capacity deployment better and avoid expanding too aggressively to cushion the impact of rising in oil prices.
“Overcapacity will make it tougher to pass on the higher fuel prices to customers,” she said.
Png said leisure travel market was more price sensitive and higher fares would indeed dampen air travel demand.
“However, higher fares tend not to impact business-related travel demand,” she said.
Malaysian carriers operate young aircraft fleet, averaging about six years for MAS and AirAsia and three years for Malindo.
“This helps mitigate the impact of the higher oil prices to some extent as newer aircraft are more fuel-efficient,” she said, adding that the cost pressure was relatively more manageable for AirAsia given its higher profit margins which cushion its earnings from oil shocks.
However, she said if oil prices rise further from the current level, it would pose a greater challenge to MAS and Malindo due to their weaker financial position.
Png said airlines should use technology and big data to optimise the aircraft’s cruising speed, reduce fuel consumption and wastage to off-set additional cost pressures.