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Page added on May 30, 2008

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Asian-Pacific Airlines Are Forced to Reduce Flights

With the rise in oil prices, airlines across the Asian-Pacific region are scrambling to cut flights and increase surcharges to stanch hemorrhaging cash flow.

Fuel costs, which now typically account for as much as 40% of total operating expenses for airlines, have already jumped more than 50% since the start of the year. Analysts say the industry is facing its worst crisis since the SARS epidemic of 2003.
“If oil prices stay this high, then the entire airline industry will be fundamentally different in a year’s time,” said Damien Horth, head of Asia transport research at UBS. It will make the strong stronger and the weak weaker.” The result, he said, could be downsizing and restructuring at weak airlines.

Mr. Horth said carriers in the region with strong balance sheets and a focus on high-yielding premium traffic — such as Singapore Airlines Ltd., Hong Kong’s Cathay Pacific Airways Ltd. and Australia’s Qantas Airways Ltd. — are better positioned to weather the fuel crisis than less-competitive rivals.

But even these robust carriers are taking steps to cope with the high fuel costs. Qantas said Wednesday it will lay off staff, freeze executive pay and reduce overall capacity at home and abroad by around 5%. It earlier announced plans to raise fares and increase its use of hedging in fuel purchases.

Cathay Pacific said it might eliminate some routes, particularly on its North American service, and accelerate aircraft retirement. Merrill Lynch analyst Paul Dewberry said Tuesday Cathay Pacific will likely lose money in May and June. “A downsizing of its long-haul routes looks a necessity to stay in the black, with its ambitious U.S. expansion plan likely to be reversed,” he said.

Asian carriers also have announced plans to scale back their international networks. Korean Air Co. said it will temporarily cut flights on 12 international routes and suspend service on five routes between June and mid-July, while Taiwan’s China Airlines Ltd. said it might reduce flights or suspend service on certain routes, mostly long-haul.

Several carriers have reported that high fuel costs hurt their profitability in the first quarter, with expectations of more bad news to come. The high price of oil has been an issue for the world’s airlines for several years, and many carriers have been resorting to fuel surcharges to compensate.

Wall Street Journal; also freely available from MSNBC

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