Fasten seat belts for descent

Slower growth and higher capacity levels next year are likely to produce a steep downturn for Asia-Pacific airlines even as they face new demand pressures from companies worried about their environmental image, a leading aviation think tank predicts.

The Sydney-based Centre for Asia Pacific Aviation warns in its latest forecast that airlines may be hit by a “double whammy” of an influx of new aircraft orders at the same time as the credit shortage and high oil prices hit consumer demand.

It expects the combination to put greater pressure on airline yields and warns that corporate response to climate change will be “a new and entirely unexpected” pressure on the industry over the coming year.

“Business travel will be an early casualty of softening demand,” the forecast warns. “Even a few points of softening in premium travel would quickly harm the very attractive yield average which has helped major airlines to drive profitability so successfully.”

CAPA’s predictions come after a sobering International Air Transport Association forecast earlier this month that slashed the global profit outlook for next year from $US7.8billion ($9 billion) to $US5 billion. However, IATA predicted only a minor fall in profits in the Asia-Pacific, and Qantas the same week predicted a 40 per cent boost in 2007-08 pre-tax profit to a record of around $1.4 billion.

The centre notes in its forecast that the past two years were probably the most successful consecutive years ever and says the industry remains – at least for now – in a sweet spot.

It says factors producing the positive environment include strong passenger demand and lower than normal capacity growth by flag carriers, leading to higher passenger load factors and average yields.

But it projects a downturn in early 2008, “perhaps even a steep downturn”, as consumer demand falls.

It says the arrival of new aircraft will make it a difficult year for airlines, particularly those that have not restructured in the past three years.

Low-cost carriers should fare better in terms of passenger loads and profitability, it says. “Economic conditions could deteriorate quickly as credit pressures make themselves felt.

“These negative pressures are already powerful in Europe and the US and it is only a matter of time before the influence starts to dampen consumer demand.”

CAPA warns that the global impact of a substantial shortfall in aviation skills may force costs higher and, in its most serious form, prevent airlines from flying full schedules.

It predicts that pressures to respond to environmental concerns will influence company travel decisions, leading to a swing towards teleconferencing.

It suggests downward pressures will come first from corporate customers, especially global companies anxious to secure quick-fix carbon profile reductions to illustrate their commitment.

“The pressure on them to do so will grow rapidly, especially with fund managers increasingly seeking out ‘greener’ investments,” it says.

“The airline and travel industry is a high-profile activity that is being targeted more aggressively by activists than other sectors.

“Major companies can create a good popular impression – and immediate cost and carbon reduction – by reducing business travel by a few percentage points and substituting teleconferencing.”

Source:AAP