Improved earnings outlook for Indian, Southeast Asian airlines
PETALING JAYA: The earnings outlook for Indian and Southeast Asian airlines should improve in 2016, driven by higher demand, lower fuel costs and ongoing industry restructuring, Fitch Ratings said.
However, in a report yesterday, the rating agency said the operating environment will be challenging due to strong competition and capacity expansion.
“Macroeconomic growth should help bolster demand and top-line growth for the region's airlines, and data so far in 2015 is already showing strong demand growth,” it said.
Fitch noted that passenger load factors (PLF) in India and Southeast Asia have risen steadily, with the average PLF across seven major airlines based in the region hitting multi-year highs above 80% in third quarter 2015 (Q3’15).
Fitch expects real gross domestic product growth to accelerate in India and most parts of Southeast Asia next year.
“Malaysia and Singapore are exceptions, with growth forecast to slow to 4.4% in the former and remain broadly flat in the latter. We expect emerging Asia excluding China and India to expand by 5.2% in 2016, the fastest of any emerging-market region,” it said.
The continued decline in global oil prices will provide a much-needed boost to airline earnings.
Fitch, however, does not expect any meaningful recovery in oil prices next year.
Jet fuel costs comprise around 50% of airline operating costs and earnings before interest, taxes, depreciation, amortisation and rent/restructuring costs (ebitdar) has been rising steadily as oil prices have fallen.
Fitch said currency weakness throughout the region will partially offset the benefits of the falling oil price, which is denominated in US dollars.
But it noted that oil prices have declined significantly even in local-currency terms.
“Airlines will be reluctant to cut capacity or exit routes and therefore any sustainable profit improvement resulting from low fuel prices could be delayed,” Fitch said.
The rating agency said industry consolidation and restructuring should also start to result in improved profitability.
Many airlines hit by overcapacity and a weaker economy in recent years have sought to delay aircraft deliveries, cut loss-making routes, improve utilisation and consolidate operations.
Low-cost carriers’ capacity in south-east Asia grew 9% in 2015, compared with 14% growth in 2014 and 30% in 2013.
Fitch said AirAsia and Tiger Airways are trying to replicate the successes from the consolidation of the Philippine carriers as well as the remarkable turnaround of India’s SpiceJet.
“AirAsia is likely to shrink its fleet for the first time in 2015, and has indicated that would defer a number of new A320 CEO aircraft deliveries. Tiger Airways is persisting with its capacity rationalisation plan and is seeking better commercial integration with sister airline Scoot, now a subsidiary of Singapore Airlines,” it said.
Nonetheless, Fitch said aggressive competition and capacity expansion remain key risks for the sector over the longer term.
Capacity growth in Southeast Asia and India has slowed in 2015 as airlines focused on profitability, but a huge order book for new aircraft remains, which could make it difficult to improve profitability for the sector.