LOWER FARES AND HIGHER COSTS, THE TOXIC MIX, SHOWING IN SOME REGIONS – ESPECIALLY INDIA

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By TESTCustomwebLP TESTCustomwebLP January 28, 2011 17:17

LOWER FARES AND HIGHER COSTS, THE TOXIC MIX, SHOWING IN SOME REGIONS – ESPECIALLY INDIA

Improving business travel on the back of the recovering global economy helped United Continental and US Airways top Wall Street profit estimates this week sending both airline stocks about 7% higher. As we all know there is room for improvement, especially if capacity can be kept in line.

Meanwhile the Association of Asia Pacific Airlines (AAPA) said regional airlines carried 185 million international passengers in 2010, up 13% from 2009. International air cargo demand grew by 24.2% in freight tonne kilometres year-on-year, following declines of 10% and 7% in 2009 and 2008 respectively. At this point we need to remember the massive growth potential for air cargo within the borders of China, so growth figures for air cargo in the APAC region will increase heavily through to 2020 particularly for those carriers favoured by Beijing.

But for aviation, and therefore for investors, 2011 is fraught with dangers; a myriad of potential traps. In India ticket prices are falling, through government action more than anything else, and capacity there is still a worry. Within the EU the bureaucrats still hinder consolidation where they can. The decision to prevent the merger of Greece’s two main carriers on Wednesday, although for the right reasons, does create a terrible burden for two airlines operating the same routes from a country which has had its economy completely collapse over the past year. We could at this point argue the benefits to Ireland if Aer Lingus and Ryanair were a fully merged airline, but we will leave that for now.

So with the going a bit bumpy in 2011, what can airlines to do avoid the red ink?

Hedging remains a course of action that can help minimize the impact of volatile fuel prices on operating costs. Airlines have different hedging strategies available to them, including the use of both over-the-counter and exchange-traded derivatives. But as we have seen, get it wrong and red is the only thing that will grace an annual report.

Getting shot of old aircraft that cost more to maintain and run is the real option open to airlines in 2011. The “do they, don’t they” argument can only carry on for so long before the MD and 757 fleets fail and, as every lessor will tell you, the longer airlines wait the more likely they are to come to the leasing table. Moreover there is a growing need in the Americas to update aging regional aircraft with seating below 50, be it through up sizing or replacement turboprops, decisions need to be made.

The real news this week though has been the alarming number of airlines cutting fares and the number of airlines announcing increases in their cost bases through staffing agreements. On the main this problem is confined to the Indian market but we have seen a few airlines in the APAC region in general cutting fares, which means a bubble is developing in India and the wider APAC market that we should all take note of and worry about. Forget about the 2010 results and start to worry about the rise of overcapacity showing in regions of the globe. At this time the US market looks to be strongest.

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By TESTCustomwebLP TESTCustomwebLP January 28, 2011 17:17
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