The airline industry is already a ferociously competitive one but the battle for passengers and cargo will become even more intense this year.
The upside for carriers is that profits are tipped to rise, but earning the extra bucks will require nimble pricing and slide-rule precise planning, particularly in the ultra-aggressive region of South-east Asia.
Carriers like Singapore Airlines (SIA) and Thai Airways are fighting on two fronts - against budget carriers on short-haul routes and from Middle East giants like Emirates on the long-haul flights to Europe and the United States. But none will exactly be crying poor. A rebound in the cargo market and strong passenger demand are expected to deliver profits of US$9 billion (S$12 billion) for Asia-Pacific airlines in 2018, up from an expected bottom line of US$8.3 billion last year.
"These are good times for the global air transport industry. The demand for air cargo is at its strongest level in over a decade, said Mr Alexandre de Juniac, chief executive of the International Air Transport Association (Iata). "Airlines are achieving sustainable levels of profitability. It's still, however, a tough business, and we are being challenged on the cost front by rising fuel, labour and infrastructure expenses."
Iata projects that the world's airlines will clock a record profit of US$38.4 billion this year with healthy demand, greater efficiency and reduced interest payments on debt offsetting an increase in costs.
All regions are expected to post improved profits, with the North American carriers leading the pack at US$16.4 billion. Europe's airlines are in second place with an anticipated US$11.5 billion in earnings, boosted by economic recovery in their home markets as well as some consolidation in the region.
Iata has also lifted its 2017 global profitability forecast. It now expects profits of US$34.5 billion for 2017, against its forecast of US$31.4 billion announced in June last year.
It notes that the industry has leveraged on this period of positive cash flow to pay out dividends as well as to pare debt, which has brought down interest payments. As a result, net margins will edge up from 4.6 per cent last year to 4.7 per cent in 2018 despite operating margins being squeezed by rising costs. At 9.4 per cent, the return on invested capital will exceed the industry's average cost of capital of 7.4 per cent.
In line with stronger GDP, the world's airlines are expected to carry 4.3 billion passengers in 2018, up from a projected 4.1 billion last year.
Meanwhile, "the cargo business continues to benefit from a strong cyclical upturn in volumes, with some recovery in yields", Iata noted, adding: "The boost to cargo volumes in 2017 was a result of companies needing to re-stock inventories quickly to meet unexpectedly strong demand."
This has been a boon for Asia Pacific carriers, which account for nearly 40 per cent of global cargo capacity. While the momentum may moderate this year, e-commerce will likely help underpin global cargo growth. After languishing in the doldrums in recent years, cargo volumes are slated to expand from 59.9 million tonnes in 2017 to 62.5 million tonnes this year.
Fuel - once the biggest expense for airlines - is expected to account for roughly 20 per cent of the industry's costs in 2018, the report showed, noting that jet fuel expenses are expected to rise by 12.5 per cent to US$73.8 per barrel.
Mr Andrew Herdman, director-general of the Association of Asia Pacific Airlines, expects airfares in Asia, which remain "very affordable", may need to be increased in line with higher oil prices.
Labour, which have now leapt ahead to be the biggest expense for airlines, will comprise about 31 per cent of total expenses this year.
The operating environment in South-east Asia looks to be more challenging than that of the wider Asia Pacific market.
While there will be growth in passenger and cargo demand, Iata chief economist Brian Pearce warns that intense competition will continue to put pressure on passenger yields. "There is significant capacity being added within the region but competition on sixth freedom or connecting markets has eased a little with cutbacks in capacity plans from the Gulf," he said.
The Middle Eastern carriers are poised to double profits to US$600 million this year due to a 7 per cent growth in demand and a scaling back of capacity injection.
"Broadly speaking, South-east Asian airlines' operating profits and profit margins are expected to be lower year on year in 2018, if fuel prices remain at current levels or rise further," said Ms Corrine Png, chief executive of transport research firm Crucial Perspective.
With the exception of Singapore Airlines - which has hedged 47 per cent of its fuel needs up until the 2022 financial year - most other South-east Asian carriers have limited or no fuel hedging, she added.
Foreign exchange rate fluctuations are another potential headwind, especially as certain operating costs for airlines are denominated in US dollars.
Performance for individual markets in South-east Asia will also vary, Ms Png said. "For Thailand, Indonesia, Myanmar, Cambodia, Laos (and) Malaysia, the airline industry's capacity growth is moderate and we should expect a more favourable earnings outlook for the airlines based in these countries."
AirAsia could be one of the airlines that will benefit from the more favourable supply environment. "On the other hand," said Ms Png, "the airline capacity growth in the other Asean markets is more aggressive, namely Singapore, Vietnam, the Philippines and Brunei".
"The airlines based in these markets - SIA, VietJet, Cebu Air - could face greater pressure to discount more to fill up excess capacity."
In particular, South-east Asian carriers are facing fierce competition on long-haul routes to North America and Europe from the Gulf trio and key Chinese carriers. This puts downward pressure on yields.
The challenging operating environment has prompted carriers such as SIA, Malaysia Airlines, Cathay Pacific and Thai Airways to undergo transformation or restructuring efforts that could boost efficiencies and reduce costs.
