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Author: Tan KW   |   Latest post: Sat, 19 Jan 2019, 03:43 PM


Stringent regulatory framework and higher taxation cost could further drag airline's profitability

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GENEVA: Airline’s profitability could be further exacerbated by stringent regulatory framework and higher taxation cost in addition to volatility in fuel prices and higher labour cost.


The International Air Transport Association (IATA) chief economist Brian Pearce said airlines should be putting more pressure on aviation regulators to ensure the supply cost (airport charges or landing fees) is efficient.


“A very well-designed route network that offers more connecting time, establish strong and world’s recognised brand in multiple countries with competitive air fares and lower operating costs are vital to create successful airline in order to be consistently profitable,” he told NST Business.


Pearce said governments would gain substantially from the good performance from the airline sector, citing that airlines and their customers are forecast to generate US$136 billion in tax revenues in 2019.


However, he said the value that aviation generates is not well understood in many countries, as the industry’s commercial activities remain highly constrained by bilateral and other regulations.


“Regulation is far from ‘smart’, leading to unnecessarily high costs. Visa requirements also discourage inbound tourism and business travel,” he said.


Pearce said the recent downturn in fuel prices would cushion some impact of higher operating cost, allowing airlines to adjust their capacity and flight schedules to more profitable routes.


He said IATA forecast the airlines fuel bill will rise to US$200 billion in 2019, representing 24.2 per cent of average operating costs.


He attributed the rise was due to the delaying effect of hedging with average price for Brent crude oil price at about US$65 per barrel.


Pearce further said there are lot of uncertainties next year 2019 due to trade dispute between US and China, weakness of equity market, particularly emerging markets as it has suffered from capital outflows that caused instability for the region economy involving the foreign exchange rate volatility.


For long-term profitability, he said airlines can also consider venturing into other ancillary revenue including the maintenance, repair and overhaul (MRO) facility.


“Involvement in other parts of air transport supply chain typically is more profitable than the airlines sector. But it really depends on whether the management of the airlines think that they have got the skills to effectively manage their business in a different industry,” he said.


Pearce said on average, airlines have been cutting back on unprofitable routes and more careful about adding new services if the services would not get higher load factor.


He pointed out that global airlines are banking on fuel efficient aircraft orders to get the right fleet to serve their routes network.


“At the moment, most airlines have large aircraft orderbooks. They are waiting in long queue for new wide-body and narrow-body aircrafts including the A350 and B787 or NEO or MAX version single-aisle aircraft, allowing airlines can profitably serve smaller markets,” he said.


Pearce said airlines are more cautioned to keep high load factor with the utilisation of smaller aircraft to serve some cities, while the longer range aircraft enable airlines to be successful at selected ultra-long-haul destination such as Perth-London routes.


“However, some markets need the Airbus A380 because a lot of passengers flying to the destinations like the Emirates which serve as the big cities connection.


“Qantas have found that its service for Perth-London route very successful because passengers typically would prefer to travel direct rather than connecting.


“Potentially, this new ultra-long haul services can be successful but it depends on the market. And only selected airlines can do it,” he said.


He said airlines are constantly testing the market with the opening and closing routes, in order to see passengers’ appetite or demand for selected destinations.


“Airlines should offer good services with competitive air fares as passengers want to connect directly. For instance, passengers travelling from Asian cities to European cities would prefer a direct flight instead of connecting to the Gulf region,” he said.


He added that strategic alliance among airlines is still relevant as it enables airlines to provide customers with wider range of destinations and frequencies through their airlines partners.



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