Analysis for Global

CAPA India Outlook 2012/13: Critical uncertainty prevails. Possible Air India shutdown

Indian aviation is facing its most uncertain phase in more than a decade. After reporting an estimated record loss of just over USD2 billion[1] in the 12 months ended 31-Mar-2012, India’s airlines are facing an equally challenging year ahead. Weak balance sheets, increasing costs, regulatory uncertainty, a sluggish Indian economy and a difficult global environment will continue to pile the pressure on airlines, especially the poorer performing carriers. However, this may in turn create market opportunities to exploit for those that are better positioned. Some of the key highlights of the CAPA India Outlook 2012/13, to be released on 31-May-2012, include:

- Indian domestic capacity growth of 7-8% in FY2012/13, traffic to grow 8-10%

- India’s airlines expected to post a combined loss of USD1.3-1.4 billion

- Jet Airways to prosper; major aircraft order expected

- Kingfisher Airlines revival dependent on foreign airline investment

New routes to China to flourish in the next few years

China's leading airports are on the cusp of strong international growth, with several new routes to be launched in the coming 12 to 24 months. Growth will be driven by foreign and local needs: countries will have greater needs to further link with China while locally there will be an increasing propensity to travel among the Chinese population as incomes rise, while high-speed rail expansion will push Chinese airlines to grow internationally, at the same time providing feed opportunities for foreign carriers at the main Chinese gateways.

But growth is not only expected at the main Chinese hubs. Second tier airports can also look forward to increasing air services as the Government supports expansion from these hubs and as the LCC revolution takes hold in North Asia. New carriers across the region will be looking for new route opportunities, fuelling rapid growth at non-congested Chinese gateways. China's own second tier airlines are also looking to expand abroad, mainly within the Asia Pacific region, which will spur development at the provincial capitals across China's vast interior and economic zones.

Australia leads the way in partly removing LAGs ban, but why is it not happening globally?

One of the greatest irritations to air travellers is the ban on liquids, aerosols and gels (LAGs) that has been in place since shortly after the thwarted 2006 attempt to explode liquid bombs on board a series of aircraft departing the UK on trans-Atlantic routes. Now Australia is set to end the 100ml limit but only in a halfway measure that will permit LAGs over 100ml in sealed bags purchased within the airport and initially only in international transit lounges.

Effective 01-Jul-2012, airports plan to end for only transfer passengers the 100ml limit for LAGs carried on board flights following the adoption of new security equipment deemed able to detect liquid explosives. Only liquids bought in sealed bags at other airports' duty free shops will be exempt from the limit initially, with plans for the exemption to be extended from Apr-2013, when it is lifted in the US and Europe. Australia will reportedly be the first country globally to lift the LAGs ban. Australia's transfer security screening is separate from main terminal screening, making the changed rule relatively easy to implement. The Federal Government is contributing AUD28.5 million (USD29.5 million) to help airports phase in the new technology.

Asia Pacific airports move up the ranks in 2011, with Beijing this year to overtake Atlanta

The rankings of the world’s busiest airports for 2011 show key developments and lasting changes in global aviation, although the world’s busiest airport by total passenger movements, Atlanta Hartsfield-Jackson International Airport, continued to hold off Beijing, the world’s second busiest airport, in 2011, according to Airports Council International (ACI). It is, however, expected that Beijing, driven by exponential GDP growth, will overtake Atlanta in 2012, ending the airport's 14-year reign in the top spot.

While Beijing Capital is the dominant airport in China, it is on track to become be the world’s busiest hub by the end of this decade, leaving London and even ambitious Dubai in its wake. And new developments will ensure the city of Beijing has an airport in the top spot: its new airport at Daxing, south of Beijing, could have up to nine runways and ultimate capacity to handle around 370,000 passengers per day, or a staggering 135 million passengers p/a. This would increase capacity at Beijing area airports to around 220 million p/a – almost a quarter of a billion passengers.

Beware the minefield of 2012 – It will be a terminal year for some airlines

Global outlook for 2012:

• A year of uncertainty and challenges  in prospect, with risks galore;
• Fuel costs harm profitability across the industry, also threat the viability of some models; meanwhile high oil prices restrain demand;
• Europe’s economic problems and bank lending caution will suppress demand – and encourage European airlines to relocate capacity outside the region;
• Middle East and Asian airlines continue to spread their wings globally, rapidly shifting the balance of power;
• Across the world, pressures to merge will intensify;
• There is potential for rising protectionism, even trade wars, in stagnant markets such as Europe and the US;
• Employees’ “concession fatigue” provokes industrial unrest as cutbacks continue;
• Asia, the Middle East and Latin America continue to grow, but profitability declines as yield profiles are diluted and structural change accelerates.

Fuel costs create uncertainty for continued profitability of Latin American carriers

Latin American carriers entered 2012 with mixed fortunes as two of its major players, Brazil’s Gol and TAM, posted losses for 2011 and started the year off reining in their capacity to bolster a yield recovery that started in 2H2011. A USD52 million loss at LAN’s Colombian subsidiary also pressured LAN’s overall profits as the group’s net income fell 24%. Both Copa and Aeromexico turned strong performances last year, and remain confident of continuing their positive momentum in 2012 as the economies of Panama and Mexico continue to grow. But similar to many previous occasions, fuel costs are ushering in a level of uncertainty surrounding Latin America this year.

Middle East regional carriers have profitable outlook for 2012

IATA’s latest 2012 industry forecast has airlines in the Middle East as the big winners, with the annual profit forecast for the region's airlines revised from USD300 million to USD500 million. It does come with a caveat though: a spike in oil prices could turn the forecast profit into a USD200 million loss for the region’s airlines.

In 2011, airlines in the Middle East reported a combined annual profit of approximately USD1 billion, according to IATA’s estimate. Despite the regional disruptions and spiralling price of oil, passengers in the region kept flying and Middle Eastern carriers increasingly developed their links with the rest of the world.

As they have been for years, financial results for Middle Eastern carriers were unevenly spread across the region.