While demand remains strong for Asia-Pacific airlines, yield improvement still lags behind fuel price rises, according to the Association of Asia Pacific Airlines (AAPA) director general Andrew Herdman.

Passenger traffic has been growing “above trend” in recent years, and this has continued in 2018, Herdman said at the 62nd Assembly of Presidents in Jeju, Korea.

Traffic numbers are very robust and are being maintained,” Herdman said during the AAPA’s annual assembly.

Asia-Pacific airlines have achieved 8% growth in international passengers this year, with capacity well-balanced and load factors rising, Herdman noted. The increase is evenly balanced between short- and long-haul, and between economy and premium.

However, fuel prices have also been rising significantly. Last year, yields were down as airlines were not able to fully pass the fuel increase to customers. Oil prices have continued to rise this year and while fares are “edging up,” they still generally lag behind the cost increase, Herdman said.

This trend has been “biting airlines,” with margins under pressure. This has caused some smaller carriers—mainly in Europe—to exit the market, Herdman said.

Recent financial results for Asia-Pacific airlines reflect the fact it has been “very difficult to pass on the full cost impact.” So, carriers in this region have generally seen margins decrease and profits weaken. Overall, Asia-Pacific airlines are still expected to achieve a substantial average profit, but it is “clear that it will be lower than in recent years,” Herdman said.

However, financial health varies between individual markets. Herdman pointed out that the market with the highest growth rate — India — also has the weakest airline profitability.

Consumer confidence remains high globally, and this is helping drive travel demand, Herdman said. However, there are “cracks starting to appear” in consumer confidence in a few emerging markets in Asia. This is caused by currency weakness, questions about government economic policies, and concerns about the spillover effect from trade disputes.

Although it could be affected by other factors, rising fares are unlikely to dent consumer confidence, Herdman said. “The initial planning assumption would be a continuation of [demand] growth.”

On the cargo side, traffic growth rates are “moderating,” Herdman said. Traffic was up by 4.8% for the first eight months of 2018, slightly below capacity growth levels. However, Herdman noted that this year’s increase is on top of a significant surge in cargo traffic last year.

The cargo industry is closely watching the “political rhetoric on trade disputes ratcheting up,” Herdman said. In the short term, increased tariffs have not affected enough goods to dent air cargo volumes. In some markets, the knowledge of impending tariffs has driven up cargo traffic as buyers increase shipments ahead of deadlines. This is particularly true on some trade routes from China.

The outlook for cargo traffic remains “fairly robust” for the next several months, Herdman predicts. However, the question will be whether trade disputes escalate, and whether the uncertainty affects supply chain decisions.

Adrian Schofield, adrian.schofield@informa.com