Friday, June 13, 2008

Fuel cost Crisis looming


Oil costs will push some Asian airlines under: analysts say, Record-high oil prices have sparked the biggest crisis in the Asian airline industry since the SARS scare, and analysts say some carriers are likely to go under if prices do not let up soon. They say many of the region's airlines are ill-prepared to cope with the price surge, which saw oil top 139 dollars per barrel last week amid wide expectation prices will only keep rising in the months ahead."No one is going to escape this crisis unscathed," said Derek Sabudin, an analyst from the Sydney-based Centre for Asia Pacific Aviation consultancy.

He said airlines face a "severe shakeout" if extremely high fuel prices continue, with the industry already coping with the fallout from a US-led global economic slowdown."Carriers will be exiting the market," Sabudin said. "The weaker ones will go, and stronger carriers will shrink in size, if we see prices where they are above 120 dollars beyond the summer peak."Shukor Yusof, an aviation analyst with Standard and Poor's Equity Research, said most carriers had not factored in prices at such "stratospheric" levels -- and that they were now not moving quickly enough in response."Few Asian airlines are reacting, in our view, adequately and aggressively enough to the oil shock and the devastation soon to follow," Shukor said.

If prices continue rising and hit 150 dollars a barrel or even higher, he said, "expect to see a rash of Asian carriers grounded and go bust."The International Air Transport Association (IATA), which had predicted an industry profit of 4.5 billion US dollars this year, is now projecting a loss of 2.3 billion dollars.The IATA, which represents more than 200 carriers that account for 94 percent of global traffic, says that every one dollar rise in oil prices will increase airline operating costs by 1.6 billion US dollars annually.Airlines already expected to pay about 176 billion US dollars for fuel expenses this year based on oil prices of 106.5 US dollars per barrel, said IATA, adding fuel accounts for 34 percent of operating costs.

Overall, analysts say, it is the worst crisis to hit Asia's aviation industry since the pneumonia-like Severe Acute Respiratory Syndrome (SARS) killed almost 800 people in 32 countries in a 2002-2003 outbreak.The health scare led to a massive slump in regional travel as well as financial losses for major carriers including Japan Airlines Group, China Airlines of Taiwan, and Singapore Airlines (SIA).To deal with the crisis, SIA slashed capacity by 30 percent while Philippine low-cost carrier Cebu Pacific suspended its route to Singapore.

In the face of the current situation, some regional carriers have begun to replicate the cost-cutting measures rolled out by US airlines trying to cope with the steep oil price rise. Australian flag carrier Qantas announced plans last month to slash domestic capacity by five percent, cut payroll, and retire several aircraft. The airline also reduced service to Asia. Thai Airways said last Friday it is cancelling its direct flight from Bangkok to New York, starting July, and selling four planes used on that route. Malaysia Airlines said it would freeze recruitment and was considering axing more routes as part of cost-cutting measures triggered by rising fuel prices.

Apart from their financial reserves, the strategies adopted by Asian carriers will determine whether they can survive this latest crisis, said Jason Pereira, a senior associate with Las Vegas-based Globalysis consultancy."It is a combination of financial reserve strength and smart strategy that will see some airlines come out on top," said Pereira, who monitors the region from Singapore.Some analysts say the region's low-cost carriers are more vulnerable to rising oil prices because they are typically managed on a tight budget.

Tiger Airways and AirAsia, two leading budget airlines in Southeast Asia, have both said will survive the turbulence -- and even emerge stronger."Profits are obviously going to be affected when oil triples in price but I take a very different approach," said Tony Fernandes, group chief executive of AirAsia, which pioneered regional low-cost travel."We think the time is to grow now," he told AFP. "There is a limit to what you can cut" in terms of costs.Tiger Airways chief operating officer Steve Burns said the carrier keeps costs to a minimum and is confident it can weather the fuel price onslaught."What we focus on is to be as lean and as efficient as possible," he said.---End Quote---

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