Indian and South East Asian airlines are likely to see improved earning prospects in 2016, primarily driven by higher demand and lower fuel costs, says Fitch Ratings.
However, the rating agency said the operating environment will be challenging as there is strong competition and capacity expansion.
Noting that macroeconomic growth should help bolster demand and top-line growth for the region’s airlines, Fitch said there has been a strong domestic growth in India.
Citing data from the International Air Transport Association (IATA), the agency said revenue passenger- kilometre growth topped 19 per cent year-on-year in India over the first 10 months of 2015, which is seen 12.4 per cent in China, Russia (8.5 per cent) and Brazil (2.3 per cent).
“Higher demand, lower fuel costs and ongoing industry restructuring suggest an improving earnings outlook for the Indian and South East Asian airline sectors in 2016,” Fitch said in a report.
Passenger load factors (PLFs) in India and south-east Asia have risen steadily and improving GDP growth should continue to support it, the report noted.
Fitch said it expects real GDP growth in India and most parts of south-east Asia to accelerate next year.
“Malaysia and Singapore are exceptions, with growth forecast to slow to 4.4 per cent in the former and remain broadly flat in the latter.
“We expect emerging Asia excluding China and India to expand by 5.2 per cent in 2016, the fastest of any emerging-market region”, it added.
In the long term, Fitch said aggressive competition and capacity expansion remain key risks for the sector.
Capacity growth in south-east Asia and India has slowed in 2015 as airlines focused on profitability, but a huge order book for new aircraft remains, which could make it difficult to improve profitability for the sector, it noted.
“In India, capacity growth risk stems from new entrants such as AirAsia India and Vistara trying to gain a foothold in a growing market, with incumbents such as IndiGo and SpiceJet trying to retain their share of a growing market by expanding their fleet size”, Fitch said.
According to the report, the continued decline in global oil prices will provide a much-needed boost to airline earnings, as jet fuel costs account for around 50 per cent of a carrier’s operating expenses.