Story ID: 242 AAPA interview
AAPA Says Investment is Needed in Infrastructure
By: Ian Goold
Caption: AIN spoke to Andrew Herdman, director general of the Asia Pacific Airlines Association, ahead of the Singapore Airshow.
Word Count: 1076
With lower oil prices helping carriers to increase profitability, Asian airlines saw a modest recovery in 2015, while passengers continued to benefit from “affordable airfares,” according to Andrew Herdman, director general of the 16-strong Asia Pacific Airlines Association (AAPA)*. “This region hosts some of the most-fiercely competitive markets and some of the most innovative airlines. Up to a dozen airlines compete on some international routes in Asia.”

Herdman said that although the Asia Pacific is well established as the industry’s largest market, with the highest share of traffic and passengers, various “innovative” approaches by the region’s airlines had led to a diversity of product and service offerings and an intensely competitive market.

With yet-to-be-released December traffic figures expected to be in line with earlier 2015 trends, including solid growth in passenger numbers, Herdman reported contrasting cargo markets that “remain relatively weak” and reflected on the slowdown in global trade activity.

Preliminary traffic (revenue passenger-miles/kilometre [RPM/K]) figures for January-November show that 31 Asian airlines (including AAPA non-members) carried 252 million international passengers, up 8.1 percent from 2014’s equivalent period.

Demand remained strong despite overall weakness in Asian currencies and moderation in emerging market economies, according to AAPA. Growth in air cargo (freight ton/metric ton-miles/kilometres) fell to 1.8 percent.

“Air passenger demand remains strong, supported by affordable airfares resulting from persistently low oil prices,” observed Herdman. “Less encouragingly, air cargo is suffering from market weakness in major trading economies, signs of inventory ‘overhang,’ and excess capacity.”

The AAPA executive said that airline business strategies are responding to changes in market demand and consumer preferences. “Overall, the region’s airlines are focused on responding appropriately to evolving patterns of market demand, while making efforts to increase operational efficiency and boost profitability,” he added.

The performance follows “consistently strong” growth in air-travel demand in recent years, with record numbers of business and leisure passengers. “The Asia Pacific region has recorded faster-than-average growth and this is expected to continue, in line with economic and social development,” Herdman told AIN. Nevertheless, airline profitability remains challenging: “For 2014, Asia Pacific airlines in aggregate reported only a break-even result for the year.”

In fact, the director general’s report to the annual AAPA presidents’ meeting late last year disclosed that “combined AAPA and non-AAPA airlines” incurred a $1 billion loss on revenue of $176 billion in 2014. Operating about 6,300 aircraft, they carried 1,100 million passengers–about 70 percent domestic travellers–and 20 million metric tons (equivalent to 22 million U.S. (2,000-lb) tons) of cargo; globally, these volumes represented 31 percent of passenger traffic and 38 percent of cargo traffic, respectively.

Slightly higher growth in passenger traffic (RPM/Ks) than in traveler numbers shows that average distances flown had increased. Herdman attributes this to robust all-round demand, with greater affordability arising from lower fuel prices that stimulated business on medium- and long-haul services. In late 2015, jet fuel prices were “averaging $67 per barrel, compared to $113 last year, reflecting plentiful supply,” he told AAPA presidents.

Another factor is continuing social and economic development, with tourism a key contributor, said Herdman. “Rising incomes and a fast-growing middle class–all key ingredients for growth in demand–are seen in the wider Asia Pacific region. By all measures, [it] is already the global leader in passenger- and freight-traffic volumes. The world’s 10 busiest international routes are in Asia Pacific.”

As to the significance of low-cost carriers (LCCs) for the region’s full-service operators, Herdman said: “The emergence and growth of LCCs has had a significant impact, particularly on short-haul domestic and regional routes. Full-service operators have responded by streamlining cost structures, sometimes establishing low-cost subsidiary airlines,” according to the AAPA director general.

Over time, he also has seen increasing convergence between different operating strategies, with airlines adapting to different market circumstances. “As LCCs have expanded into regional markets, they have started using [various] distribution channels, and cooperating with other airlines using interline feeds for additional revenue optimization.” Some LCCs have expanded into medium- and long-haul markets using larger widebody aircraft, often offering two classes of service and underfloor cargo capacity, he added.

Expanding route networks allows LCCs to use connecting services, opening new revenue opportunities and operational challenges. “The traditional distinctions between differing airline business models have become increasingly blurred,” notes Herdman. “[But] despite the rapid growth of new-entrant airlines, the established network airlines continue to capture the lion’s share of [worldwide] industry revenues.”

Widebody LCC Aircraft

The introduction of LCC widebody aircraft able to carry belly freight increases market capacity, with inevitable consequences for cargo traffic and profitability in the region. “Cargo operators have been experiencing difficult market conditions for the past several years. Since the global financial crisis, international trade has grown no faster than GDP, in marked contrast to the previous two decades when trade typically expanded at twice the rate of global GDP growth,” according to Herdman.

Consequently, the industry has been characterized by “relatively weak demand, and highly competitive shipping rates. With the overall volume of cargo not growing as much as had been expected, and with the share carried by passenger aircraft increasing, there is an oversupply in capacity, particularly for dedicated freighter aircraft which have seen falling values and lower utilization.”

Looking at the region’s forecast 5-6 percent continuing annual growth and with the region projected to order around 40 percent of all new aircraft over the next 20 years, AAPA is concerned that adequate provision be made to accommodate the expansion. “The growth in traffic demand is creating infrastructure challenges, and even the best-managed airports are showing signs of congestion today, notably during peak hours. It is critically important that the associated aviation infrastructure, including airports, runways, terminal capacity and air-navigation services, keeps pace.

“Failure to do so can quickly lead to congestion and degraded service levels for the travelling public in operational delays and other inefficiencies. Governments have an important role to play in ensuring that proper planning processes are in place and co-ordinating effective collaboration among stakeholders, including airlines and other service providers,” concluded Herdman.

[Footnote/Box]

*AAPA member carriers: Air Astana, All Nippon Airways, Asiana Airlines, Bangkok Airways, Cathay Pacific Airways, China Airlines, Dragonair, EVA Airways, Garuda Indonesia, Japan Airlines, Korean Air Lines, Malaysia Airlines, Philippine Airlines, Royal Brunei Airlines, Singapore Airlines, and Thai Airways International.