Headwinds, high rent and new ground

In the first of a two-part series, the Post examines how the aviation, retail and telecoms sectors fared in 2012 and what fortune awaits them in 2013

PUBLISHED : Monday, 31 December, 2012, 12:00am
UPDATED : Monday, 31 December, 2012, 4:58am


Soaring fuel prices and sluggish demand in the United States and the euro zone sapped the performance of global airlines in 2012, which face more headwinds in the new year.

High fuel prices, which have averaged nearly US$130 per barrel for the past two years, have become a "fact of life" for the airline business, says Tony Tyler, director-general and chief executive of the International Air Transport Association, an airline trade group with more than 230 members worldwide.

Factor in high fuel costs combined with slow passenger growth and stagnant cargo demand in 2012, resulting in thinner profit margins for global airlines, and forecasts from Iata are that once final accounting is done, the industry is likely to have generated total earnings for the year of US$6.7 billion at a net margin of just 1 per cent.

Next year, the operating environment will be slightly better, partially due to ongoing restructuring and consolidation in the industry. Forecasts are that net profit will grow to US$8.4 billion, more than last predicted although still short of the US$8.8 billion last year.

Home-grown carrier Cathay Pacific Airways did not escape unscathed last year, and is banking on higher cargo demand for a better 2013.

Its recovery from likely margin losses in 2012 will depend on a rebound in air cargo, which has been hit hard over the past two years. Early signs are positive, with an uptick in cargo demand recorded for October and November, when Cathay said its freighter service was running at near capacity, thanks to the Thanksgiving and Christmas holiday peak.

But cargo director Nick Rhodes was sceptical about a full recovery in the sector in the second half of next year. Cathay will take delivery of two B747-8 freighters in April and July. It will then park two more freighters to balance the additional capacity. "Since the payload of the 'dash 8' is 25 tonnes more than the old aircraft, capacity will slightly increase," Rhodes said.

Prospects for mainland carriers are somewhat rosier.

After the 18th Communist Party congress in November, traffic growth accelerated to double-digit expansion, driven by pent-up demand, said Davin Wu, transport analyst at Credit Suisse. Government officials had delayed trips in the lead-up to the congress meeting in the first week of November.

"Outbound markets should remain a key growth driver in 2013. The United Kingdom is the latest country to relax visa policies for Chinese visitors," Wu said.

The continued appreciation of the yuan will also boost mainland carriers' earnings. Every 1 per cent increase in the yuan, which will trim the dollar-denominated debt from the balance sheet of the mainland carriers, will translate into a 17 per cent increase in earnings for the mainland carriers.



The mainland's ongoing economic recovery will boost consumer purchasing power in 2013 and drive growth in Hong Kong's retail sales, which slowed in 2012 as a result of declining mainland spending in the city following two years of strong growth.

"The market was really bad from April to September. The situation began getting better from the end of October, but is still far from a full recovery," said Ricky Ng, general manager of TSL Jewellery.

TSL is one of the key jewellery chains in Hong Kong with 19 shops in the city and two in Macau.

Growth in retail sales in the city fell to 9.9 per cent from January to October, compared with a 25 per cent expansion the previous year, according to government data. Retailers of jewellery, watches and high-end gifts felt the greatest pain during the year, complaining of lower traffic and fewer big-spenders in their shops despite a more than 20 per cent increase in mainland visitors.

Lower-ticket products such as cosmetics, apparel and electronic devices enjoyed better retail growth.

HSBC economist Donna Kwok said mainland consumers' purchasing power would strengthen gradually as the country's economy had shown signs of improvement in recent months.

"The stabilisation of the mainland property market is another bright spot, as Chinese household confidence and thus consumption is also starting to be boosted via the associated wealth effect," she added.

But TSL's Ng was cautious about retail prospects in the new year and expected only "moderate growth" in sales over the coming Lunar New Year. "I cannot say I am confident about business in 2013. Improved economic statistics have not translated to the consumer level," he said.

In the year ahead, he said, TSL would continue to open new shops in the city, although they would be smaller. "Still, high rental and shortage of experienced staff are the major challenges for us."

The Hong Kong Retail Management Association forecasts that retail sales will grow 5 per cent to 10 per cent next year. "We are hopeful that the performance of the industry will improve and we will enjoy modest growth in 2013," association chairwoman Caroline Mak said.



Mainland telecommunications companies such as China Mobile, China Unicom and China Telecom will continue to chase internet business in the new year to fend off rising competition in their traditional markets.

Gone, too, were the days when they could rely on basic value-added services such as music downloads and e-books as their bread and butter, analysts said.

The new year will therefore mark the start of an era in the industry, one dominated by mobile internet services, which is best illustrated by China Mobile's decision to set up an internet venture, an area in which it has not excelled to date, according to analysts.

"It seems to me a better way would have been to acquire other internet companies or to invest in external good-quality assets," said Huang Meng, an analyst at market research firm Analysys International.

Independent telecommunications analyst Xiang Ligang said China Mobile had no advantages in the internet sector. "It does not have the talents [for the business]. Its working style doesn't fit that of an internet company either."

Huang said telecommunications operators would also try to turn existing 2G network subscribers into users of high-speed 3G mobile services in 2013. "Mobile-phone subscriber numbers in China topped 1 billion this year [2012] and there is not much room for recruiting new users. Operators will try to increase the percentage of high-value users," he said.

Providers have been plagued by huge subsidies they paid to attract 3G subscribers and have seen profit growth taper off. While China Telecom and China Unicom finally began to see returns on their investments, the situation was more uncertain for China Mobile.

"China Mobile is very strong in terms of number of users, but it has a problem [in its network] and we are not super-optimistic about the popularity of its 3G services," Huang said.

China Mobile's 3G network is based on the home-grown proprietary technology called TD-SCDMA.

Although its two rivals have teamed up with Apple to offer iPhone, China Mobile, which had 703 million subscribers at the end of October, has yet to reach an agreement with the US firm. The iPhone has to be equipped with a chip designed just for China Mobile's network.