Asia holds the key to potential airline growth

Posted on February 25, 2016 by ATB Chartered Accountants

With the price of fuel continuing to drop, many airlines are recovering their profit margins, however, things need to change industry-wide to ensure that history doesn’t repeat itself. Since 1966, the airline industry has never actually turned over a profit, with the price of capital and infrastructure required surpassing the earnings made. More recently on a global scale however, repeated profits after the GFC have been reported.

Even with these profits though, there is a tendency for airline companies to heavily invest in new aircrafts while peak season has passed and spending their entire profit margin, if not more. The aviation research group CAPA notes that with a historical average fleet growth of 4.5%, the 2015 estimate is only at 3.9%, demonstrating a slow in this trend. With surging demand for travel to and from Asian countries, growth in revenue passenger kilometres is also set to grow by 6% in 2016, and by 7.1% in 2017, therefore increasing industry demand.

Growing concerns about global warming put a dampener on this promising time for the aviation industry. Flying is the cause of between 3-5% of global carbon dioxide emissions, with airplane contrails releasing water vapour, nitrous oxides, sulphate and soot, while bonding with oxygen to produce carbon dioxide. These emissions from the airline industry have more than doubled since 1990, leaving the global warming dilemma very bleak. Airlines have promised to stop increasing emissions by 2020, however this target is highly unlikely due to the increasing market for air travel in Asia.

For Qantas, the lower price of fuel, along with increased international flight demand and cost-cutting throughout the company has led to a record $921 million half-year gross profit. Of this, $500 million is expected to be returned to shareholders. With this large profit, Alan Joyce, CEO of Qantas, has maintained his $12 million salary while asking approximately 10,000 employees to take an 18-month wage freeze. This comes after 2000-5000 people lost their jobs at Qantas in 2014. They claim to have paid a total of $50 million in bonuses for those employees who have agreed to the pay-freeze, however it is highly unlikely that the Australian Services Union (ASU) will accept this pay-freeze given the size of the profits.