Thai airlines are likely to face less financial turbulence in 2018 as competition eases, with the biggest challenge posed by rising costs, especially for fuel.
Slot constraints at congested Thai airports have also become a key issue, restricting the growth that Thai and foreign carriers are eager to achieve.
The coming year will bring some new market entrants with insignificant status, likely in the charter business, while certain existing major players in the low-cost carrier (LCC) segment may start to rationalise their operations after incurring heavy losses in recent times.
The year will see key players, including Thai Lion Air and Thai AirAsia X, embarking on long-awaited international expansion plans that were stalled by restrictions imposed by the International Civil Aviation Organization (ICAO) in June 2015 but lifted in October 2017.
Thailand's burgeoning tourism industry should spur traffic demand for Thai airlines. But again, several impediments like airport slot constraints are likely to curtail growth.
The domestic airline market, especially trunk routes to major cities, is reaching a saturation point and competition is decelerating.
But major LCCs like Thai AirAsia (TAA) say the domestic air travel market can be expanded with the creation of a new market segment: cross-regional connections such as linking Khon Kaen with Phuket.
SOARING COSTS
For Tassapon Bijleveld, chief executive of TAA, Thailand's biggest LCC, the management of fuel hedging and fuel burn are among the top challenges he will face in 2018.
Fuel cost makes for the single largest portion of TAA's overall costs, accounting for 30% of combined expenditure, Mr Tassapon told the Bangkok Post.
Piya Yodmani, chief executive of Nok Air, said fuel prices are likely to remain relatively high, though crude oil prices are not expected to surge significantly beyond the current US$60 (1,950 baht) a barrel.
Both executives echoed the 2018 scenario painted by the International Air Transport Association (IATA), which said the biggest challenge for airlines will be rising costs.
Oil prices are expected to average $60 a barrel for Brent crude in 2018, up 10.7% from $54.20 in 2017. Jet fuel prices are forecast to rise even more quickly to $73.80 a barrel, up 12.5% from $65.60 in 2017.
IATA said airlines with low levels of hedging, in the US and China for example, are likely to feel the impact of the fuel price increase more immediately than those with higher average hedging ratios, such as European carriers.
The fuel bill is expected to be 20.5% of total costs in 2018 (up from 18.8% in 2017). Labour costs have accelerated rapidly and are now a larger expense item than fuel (a forecast 30.9% in 2018).
Overall unit costs are expected to grow by 4.3% in 2018 (a significant acceleration on the 1.7% increase in 2017). This figure will outpace an expected 3.5% increase in unit revenue.
IATA director-general Alexandre de Juniac said many of the longer-term challenges global airlines face are in the hands of governments.
He said governments need to raise their game: implement global standards on security, find a reasonable level of taxation, deliver smarter regulations and build cost-efficient infrastructure to accommodate growing demand.
The benefits of aviation are compelling: 2.7 million direct jobs and critical support for 3.5% of global economic activity. "And the industry is ready to partner with governments to reinforce the foundations for global connectivity that are vital to modern life," Mr de Juniac said.
OPTIMISTIC OUTLOOK
Despite all the odds, global carriers expect profits to soar in 2018 to $38.4 billion, up from $34.5 billion projected for 2017.
Within Asia-Pacific, a robust rise in cargo movement and strong travel demand are expected to boost profits of airlines in the region to $9 billion. That amount is 8.4% higher than 2017's projected net profit of $8.3 billion.
Such a growth projection is consistent with the upward outlook in profitability for airlines around the world, which are expected to see an 11.3% rise in net profit in 2018 as a result of improving economies and healthy travel demand.
Asia-Pacific airlines' contribution to overall 2018 profits is forecast at 23.4%, with the bulk coming from North America, whose airlines are forecast to record a combined net profit of $16.4 billion, followed by $11.5 billion by European carriers.
The strong cyclical rise in cargo markets has been a particular boon for Asia-Pacific, whose carriers account for 37% of global cargo capacity, Mr de Juniac said.
Anticipated growth in cargo movement demand of 7% would outpace the announced capacity increase of 6.8%.
Passenger market conditions vary across the region. Domestic markets have strengthened in China, India and Japan.
New low-cost entrants in Asean are intensifying competition and putting a cap on profitability. But there has been a pause in competitive pressures from the "super connectors" on long-haul routes as they face various challenges in their home markets.
"We are eight years into this air travel cycle, but we see no reason to expect that cyclical pattern will repeat itself," said IATA chief economist Brian Pearce, referring to a trend which would usually indicate that a major downturn is due.
2018 is forecast to be the fourth straight year of sustainable profits for the global airline industry, with a return on invested capital of 9.4%, exceeding the industry's average cost of capital (7.4%).
"These are good times for the global air transport industry," Mr De Juniac said.
The positive outlook is the result of solid airline safety performance; a clear strategy that is delivering results on environmental performance; higher-than-ever traveller figures; a decade-plus high in air cargo demand; growing employment; and the opening of new routes.
"It's still, however, a tough business, and we are being challenged on the cost front by rising fuel, labour and infrastructure expenses," Mr De Juniac said.
He said the $38.4 billion in profits the global airline industry is anticipated to make in 2018 is still $10 billion shy of Apple's 2016 profit.
"Per passenger, airlines on average will make less than $9," he said. "And the net margin of 4.7% has been hard-won."
The highlights of 2018's expected performance include:
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A slight decline in operating margin to 8.1% from 8.3% in 2017.
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An improvement in net margin to 4.7% from 4.6% in 2017.
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A rise in overall revenue to $824 billion from $754 billion in 2017.
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A rise in passenger numbers to 4.3 billion from 4.1 billion in 2017.
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A rise in cargo carried to 62.5 million tonnes from 59.9 million in 2017.
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Slower growth for both passenger volume, at 6% compared with 7.5% growth in 2017, and cargo volume, at 4.5% versus 9.3% in 2017.
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Average net profit per departing passenger of $8.90, up from $8.45 in 2017.
For most airlines, the financial performance does not match the value they create, Mr de Juniac said.
But airlines, collectively, have been in the black since 2010.
"Over the last three years, airlines have made an aggregate industry profit in excess of our cost of capital -- something that has never happened before," Mr De Juniac said. "For any other business, that's normal. For the airline industry, it's an extraordinary achievement! And hopefully, we are on the way to normalising it."
