- POSTED: 31 Dec 2013 19:28
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When the US Federal Reserve tapering eventually happens, experts said it will likely affect liquidity in aviation circles in 2014. However, they said Singapore Airlines (SIA), with its strong cashflow, should come out relatively unscathed.
SINGAPORE: Asia Pacific airlines are expected to post a profit of US$4.1 billion in 2014, and according to the International Air Transport Association (IATA), a slight reduction in jet fuel prices is a major driver of the improved outlook.
IATA said Asia Pacific airlines are expected to post a US$3.2 billion profit in 2013, which will be a third consecutive year of declining profits.
Still, when the US Federal Reserve tapering eventually happens, experts said it will likely affect liquidity in aviation circles in 2014.
However, they said Singapore Airlines (SIA), with its strong cashflow, should come out relatively unscathed.
SIA may have reported better operating profits this year in its fiscal second quarter in the financial year of 2013/2014, but with the encroachment of low-cost operators in the region and other competitors, it is expecting increased pressure on yields from more aggressive promotional activities.
In FY2013/2014, SIA reported a second-quarter (July to September) operating profit of S$97 million (US$78 million), up 15 per cent from S$84 million year-on-year.
But the Singapore national flag carrier is fighting back.
Its associate, Tigerair (in which SIA owns a 30 per cent stake), has announced a joint venture with Taiwan-based China Airlines.
And its mid-to-long-haul budget carrier Scoot said it will be setting up a new airline with Thailand's Nok Air. The Nok Air-Scoot venture has a registered capital of S$85 million.
Ellis Taylor, a reporter at Flightglobal, said: “Part of SIA's problem in the past is that they didn't want to embrace the low-cost phenomenon, and to his credit, Goh Choon Phong (SIA’s chief executive officer) has been very strong in pushing that agenda.
“They've managed to weather the storm quite well, so for them it's not a huge amount, they've got bigger amounts going into the Tata-SIA joint venture and SIA has the ability to draw on multiple funding sources so it won’t affect them too much."
In November, legacy carriers SIA and Garuda both upped their baggage allowance by 10kg across all classes.
Qantas upped theirs from 23kg to 30kg in March and Malaysia Airlines (MAS) did the same in July 2013.
Indeed, all eyes will also be on SIA's upcoming venture with the Tata group in India.
Paul Ng, global head of aviation at Stephenson Harwood, said: “ India has strict rules for all carriers in India -- to have at least had five years of domestic service before they're allowed to do long-haul or overseas business.
“So it will be interesting to see how Tata organises its business in terms of domestic market both with the Singapore Airlines joint venture and the AirAsia joint venture. "
Besides budget carriers and regional competitors, SIA has the Gulf players to contend with.
Greg Waldron, Asia managing editor at Flightglobal, said: “The Middle East carriers are arguably the most powerful force in the airline world today. They have a great deal of influence of design in the aircraft like the 777x, which was launched at the Dubai airshow, as well as the massive orders.
"These carriers will continue to put immense pressure on Asian carriers. The simple fact is that in the Middle East, you can connect so many points through one point in the Middle East with one stop, (which) makes them extremely challenging for other people to compete with. "
The Gulf carriers are flushed with cash -- something not all Asian carriers can boast of.
Despite a softer market in Europe and the US, analysts said SIA should be in a better position to weather the challenges confronting the aviation industry in the coming months.
The airline has taken steps to control its costs, including pilot redundancies, the divestment of the very expensive A340 aircraft and the cancellation of unprofitable business routes to Los Angeles.
Analysts said they expect to see more independent leasing companies helping to fund aircraft for second and third-tier carriers within Southeast Asia in 2014.
Shukor Yusof, an analyst at Standard & Poor's Capital IQ, said: “We think we will see more of that in 2014, as well as new forms of instruments, perhaps securitisation, perhaps more bond issues to fund this aircraft acquisition, more Islamic financing because of the potential rise in interest rates that we could expect to see in the first half of next year, so that's going to alter the profile of many airlines in the region who are typically short of cash.”
Players in Thailand's aviation market, however, seem undeterred with the likes of low-cost carriers like Thai Lion Air and Thai VietJet Air purchasing new planes and launching new routes from Bangkok‘s Don Mueang international airport into the region and beyond.