News Analysis: Analysts divided over earning outlook of Asian airlines despite fall in jet fuel prices

SINGAPORE (Xinhua) - While jet fuel prices may have declined year-to-date, analysts here have remained divided over the earning prospects of Asian airlines due to uncertain trend of premium travel and intensified competition in the region.

Airlines of the region are enjoying a number of favorable factors in recent months. For example, jet fuel prices have fallen about 7 percent year-to-date, benefiting aviation players such as Singapore Airlines which enjoys 24 percent increase in its pre-tax profit to every 5 percent drop in jet fuel cost.

Credit Suisse Research has pointed out that passenger volume has continued to rise regionally and there is anticipation on some recovery in premium traffic, citing observations that "bankers are now traveling as the Asian initial public offering pipeline begins to clear and corporate travel appears to be in the up."

Despite the recent volatility of equity markets, economic uncertainty in the region has diminished and personal wealth levels are actually better than this time last year.

As business volume and confidence increase which themselves are reflected in stock market activity, so does appetite for premium- or higher-priced-fares of air travel.

Credit Suisse said Cathay Pacific and Singapore Airlines, which generate around 40 percent of its passenger revenue from premium classes, will stand to gain most from the likely improvement in premium traffic.

The slowdown in corporate travel which typically accounts for two-thirds of premium demand has had a negative impact on performance of these two carriers in the last two years.

But CIMB Research is not bullish on the earning prospects of most Asian airlines.

It said cargo performance was poor for both Cathay and Singapore Airlines, with the year-on-year decline in freight traffic in May more than the cargo capacity reductions, while passenger yield and performance were largely weak with some exceptions.

The research house added that competition in the sector is indeed intensifying across the region.

China's lifting of the six-year ban on new independent airlines could also result in more competition for the Big 3 Chinese airlines, namely Air China, China Eastern Airlines and China Southern Airlines, in future years.

Lion Air is also planning a new Thai joint venture, and Vietnam' s VietJet Air is reportedly to be doing the same, thus creating more heat for the Thai and Vietnam incumbents.

Meanwhile, US authorities are set to upgrade the Philippines' safety status back to Category 1 by November 2013, heralding a better outlook for all Philippine carriers but also opening more players in the sector of the region.

Malaysia's AirAsia is one of the very few airlines that CIMB Research prefers at this juncture. As a low-cost carrier behemoth that could dominate Asian skies, AirAsia has hubs in Malaysia,

Thailand, Indonesia, Japan, the Philippines and India. While it faces competition from Lion Air's Malindo in Malaysia, CIMB Research believed AirAsia should be able to manage the competition with ease.

The research house also cited Air China for its expansion into North America, which will drive its international business. It added among the Big 3 Chinese incumbents, Air China is also most well positioned to capitalize on any improvement in air cargo demand.