IATA: Forex losses to force airlines to cut flights

MANILA, Philippines — The largest association of international carriers has warned that airlines may be forced to lower flight volumes should foreign exchange losses mount, a scenario that could halt the recovery of travel and tourism worldwide.

However, domestic carriers told The STAR they would keep on reinstating pre-pandemic routes and introduce new links to increase aircraft utilization and spread their fixed costs.

The International Air Transport Association (IATA) estimates that the aviation industry stands to lose at least $1.9 billion in funds due to currency depreciation in the forex turmoil.

“The mechanism by which this occurs is that tickets are sold by local travel agents or directly by the airline, accumulating sales that it then seeks to repatriate. Even the waiting period on such repatriation represents a significant risk to airlines’ earnings as the local currency might continue to depreciate,” IATA said.

According to IATA, airlines suffering from forex losses could then be pushed to cut their number of flights, putting the recovery of the travel industry at risk. Flag carrier Emirates has even called off multiple trips bound for Nigeria due to trapped funds pegged at more than $500 million.

“The risk here is not only to airlines finances, but ultimately to the countries’ connectivity should airlines decide to reduce service,” IATA warned.

Budget carrier Cebu Pacific is also reeling from the impact of a depreciating peso, especially as up to 70 percent of its expenses are denominated in US dollar.

In its financial statement, Cebu Pacific operator Cebu Air Inc. reported that its forex losses have more than doubled to P3.86 billion as of September from P1.83 billion a year ago, reflecting the severity of the impact of the peso’s decline to airline operations.

In particular, Cebu Air said the peso was trading at 58.63 to $1 at the end of September when it was hovering at just 51 at the start of 2022. As such, the Gokongwei-led airline surrendered all hopes of turning in profit this year, with its net loss at P12.05 billion as of the third quarter.

Contrary to IATA, Cebu Pacific said that it counters the impact of forex fluctuations by scaling up its flight frequency to bring down fixed costs. In the process, the budget carrier raises its aircraft utilization, trims the price per seat and, at the end of it, lowers airfare for passengers.

“A weak peso may result into higher forex losses and increased liabilities since 60 to 70 percent of our expenses are denominated in the dollar,” Cebu Pacific told The STAR.

“As we increase flights, this brings cost per seat lower as we spread fixed costs – both peso and dollar-denominated costs – across seats. Every time we fly, our costs are spread. This ensures affordable airfares for passengers,” it explained.

AirAsia Philippines CEO Ricky Isla said the low-cost carrier settles its aircraft lease, jet fuel, maintenance fees and airport charges in dollars, exposing it to multiple risks associated with the peso’s decline.

“We are closely monitoring the power of the peso versus the dollar, which we hope will improve in the near future. Forex fluctuations may be a headwind for our faster recovery as our cash flow requires conversion to foreign currencies in which we transact some operational requirements,” Isla told The STAR.

Despite this, Isla said the only way to go is to hike flight volumes and widen revenue sources, particularly in cargo and ancillary services, to offset forex losses. Similarly, the Philippine unit of the Malaysian airline is banking on the resurgent demand for air travel to grow its revenue.

“We are confident that domestic tourism will stay dynamic in the next year as outbound travel – amid the opening of new routes of airlines and the relaxation of international travel borders – recovers to pre-pandemic levels,” Isla said.

Cebu Pacific has reinstated 100 percent of pre-pandemic routes for its domestic network, while AirAsia Philippines has reached the same level for its Manila hub.