Asia's airline profit squeeze in the sky

Update: 2018-01-12

Even as rising prosperity across Asia has led to a huge increase in air travel, its most renowned airlines -- including Singapore Airlines and Cathay Pacific Airways -- have faced turbulence.

They have been hammered by budget carriers such as AirAsia at the low end of the market, while Persian Gulf airlines like Emirates Airline and Qatar Airways have eaten into their business for premium long-haul flights. At the same time, Chinese airlines are becoming more competitive on both ends of the spectrum.

While this intense competition is great for Asia's air travelers, it is leading to lower ticket prices and massive over-investment that signals more pain in the future.

Sixteen years after AirAsia brought the budget airline model to the region, flag carriers like Singapore Airlines are finally beginning to adopt some of its practices, as their European and American counterparts have already done. Cathay Pacific, which embarked on a restructuring after an annual loss in 2016, is also planning to squeeze its economy class customers.

The common threat for these Asian flag carriers is declining ticket prices. Passenger yield -- the revenue an airline receives for flying one passenger a kilometer -- fell for airlines in the Asia-Pacific region for three years in a row from 2014 to 2016, according to the International Air Transport Association, or IATA.

Remarkably, this has been happening in the region where passenger demand growth is the fastest in the world. Fueled by rising tourism and business travel, passenger traffic growth for Asia-Pacific airlines is estimated to have increased 10% in 2017, the third straight year of double-digit growth, IATA says.

Chinese airlines have been pushing hard into long-haul flights, with Air China and Hainan Airlines adding new U.S. routes. In particular, Cathay is losing ground to Hong Kong Airlines. In response, Cathay is expanding its global network by adding more ultralong-haul flights.

Analysts say it makes better sense for Cathay to enhance its advantages on long-haul markets and business travel, rather than compete with budget carriers on short-haul routes.

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