In- flight drinks at risk as fuel prices rise

Some of Asia’s marquee airlines that spoil passengers with free alcohol and in- flight entertainment may soon have to kick the habit.

The on- board giveaways, famously rolled out to every passenger in the 1970s by Singapore Airlines, will be unsustainable for some carriers after Opec’s production cuts announced last week drive up the cost of fuel, according to aviation analysts. Other options include cutting unprofitable routes, retiring gas- guzzling aircraft and raising fares.

The deal reached by the Organisation of Petroleum Exporting Countries ( Opec) on November 30 couldn’t have come at a worse time for carriers such as Cathay Pacific Airways and Singapore Air, which are battling excess capacity and declining premium traffic. Asian operators are also particularly vulnerable to rising fuel costs as their profit margins are about half those of their North American peers after competition pushed down fares.

To survive, some Asian airlines may be forced to ape US low- cost

Air New Zealand in the past year made a pre- tax profit of $ 806 million but in guidance issued in August said increased competition meant earnings in the 2017 year would be in a range between $ 400m and $ 600m.

Middle Eastern carriers are forecast to generate a net profit of US$ 0.3b for a net margin of 0.5 per cent and an average profit per passenger of US$ 1.56. carriers and charge for extras — ranging from food and alcohol to checked- in baggage — that have been taken for granted on longhaul flights for decades, according to Mathieu De Marchi, a Bangkokbased aviation consultant at Landrum & Brown.

“More full- service airlines in Asia Pacific might consider doing the same,” he said, declining to pick out the carriers in the region most likely to make customers pay.

Making money out of so- called ancillary services emerged among traditional US carriers following the global financial crisis, when their losses ballooned. Delta Air Lines, profitable every year since 2010, now employs the strategy to good effect, De Marchi said.

US airlines are likely to generate an operating profit margin of 15 per cent in 2016 versus about 8 per cent for Asia- Pacific carriers, according to the International Air Transport Association.

Fuel is typically an airline’s biggest expense and this year’s 30 per cent price increase is enough to threaten the industry’s five- year run of earnings growth, according to Flight Ascend Consultancy.

“Threats are emerging to the success story of the Gulf carriers, including increases in airport charges across the Gulf States and growing air traffic management delays,” de Juniac said.

Latin American airlines are expected to post a net profit of US$ 200m, which is lower than the US$ 300m forecast for 2016. Profit per passenger is expected to be US$ 0.76.