Aviation earnings to get boost from low oil prices

Tan Son Nhat International Airport in HCM City. Rising numbers of air passengers are expected to boost air travel companies’ earnings in the remaining days of 2018.

Brent crude on November 26 gained nearly 2% to trade at near US$60 a barrel, having lost nearly 30.5% from its one-year high of US$86.29 a barrel made on October 3.

US benchmark West Texas Intermediate (WTI) was up 1.5% to US$51.17 a barrel on November 26. It has shed 33 percent from its year-high of US$76.41 a barrel early last month.

Oil prices had previously gained significantly in the one and a half months to October on worries the US sanctions on Iran would cause a shortage on the global market.

In fact, oil production has not declined at all. According to Reuters, the US, Russia and Saudi Arabia in October produced total 33 million barrels per day – a record high – accounting for a third of global output.

Fuel accounts for 30-40% of total costs for aviation firms, thus, a sharp drop in oil prices would lead to lower fuel expenses and boost airlines’ profit margins.

In the third quarter of 2018, when oil prices were on the rise, Vietnamese aviation companies posted lower quarterly profits despite their revenues improving from a year earlier.

National flag carrier Vietnam Airlines (UPCoM: HVN) recorded its margin profit fell to 12.2% from 18.8%.

Its post-tax profit dropped 68% year-on-year to VND458 billion (US$20.3 million) in the last quarter. After nine months, Vietnam Airlines’ post-tax profit lost 13% year-on-year to VND1.71 trillion.

According to Vietnam Airlines, the company in the past quarter suffered from higher fuel expenses (37.5% higher) and rising exchange rate (a 2% increase), while the performance of some member companies was also affected by the increase of oil prices.

In a report, the Viet Capital Securities Corporation (VCSC) said the decline of oil prices would benefit the earnings of budget carrier Vietjet (HoSE: VJC).

In the first nine months of the year, core business revenue rose by half but post-tax profit added only 15.5% year-on-year because of higher fuel expenses.

In addition to lower oil prices, which are expected to boost aviation firms’ earnings in the fourth quarter, Vietjet’s use of new-generation airplanes would help the company save 16% of fuel consumption.

Meanwhile, the increase of air passengers is expected to help those firms achieve higher earnings from their core businesses.

Vietnam leads Asia in terms of air passenger growth for the last five years with its annual growth rate estimated at 28.9%, twice that of the following country.

According to Phu Hung Securities JSC (PHS), services and additional product sales would temporarily help aviation firms offset their costs caused by purchasing oil at their high prices in October.

PHS forecasts that Vietnam Airlines would keep its passenger growth rate at 12%, level with the growth of the whole sector, and increase sales of additional products and services to support business performance.

Meanwhile, Vietjet’s earnings are expected to grow after the company launched new routes to Japan, the Republic of Korea and Taiwan to meet the travel demand of Vietnamese people.

According to the Airports Corporation of Vietnam (ACV), the number of air travellers in the first half of 2018 rose 14% year on year to over 50 million and is expected to beat last full-year’s figure of more than 90 million.