KUALA LUMPUR (Aug 25): More airlines in Asia-Pacific may tap offshore funding markets as the region’s aviation industry expands, with stronger operators potentially benefitting from improved access to capital, according to S&P Global Ratings.

Lower interest rates could further encourage airlines to issue offshore bonds, though access to those markets remains sensitive to investor sentiment toward emerging markets and currency movements, S&P said in a report titled "Asia-Pacific Airlines: High Costs Won't Divert Growth Ambitions" released on Tuesday.

Philippine Airlines’ US$350 million (RM1.4 billion) bond debut in July, issued in two tranches to help fund fleet expansion, highlights the potential for airlines in the region to diversify their funding sources.

"We believe stronger airline fundamentals and the region's growth potential will stimulate banks' lending exposure to the sector," the US-based credit ratings agency said. National flag carriers with meaningful government ownership may have an advantage, given their scale, prominence and longstanding banking relationships, it added.

Still, S&P said airlines would benefit from maintaining a balanced funding mix spanning bank loans, aircraft leases, domestic capital markets and offshore capital markets.

The ratings agency expects Asia-Pacific airlines’ profitability to deteriorate significantly from the second quarter of 2026 as elevated jet fuel prices —  which spiked above US$240 per barrel by the end of March — squeeze margins and cash flow. Some carriers could post losses.

Jet fuel prices have eased in recent months, but geopolitical risks remain a concern. Even if the Strait of Hormuz fully reopens, fuel supply flows may take time to normalise, potentially keeping prices elevated through the rest of the year, S&P said.

Low-cost carriers are likely to bear more of the pressure than full-service airlines because they have less pricing power and fuel accounts for a larger share of their costs.

S&P estimates that average earnings before interest, taxes, depreciation and amortisation (Ebitda) margins for full-service carriers fell about 9% year-on-year (y-o-y) in the quarter ended June, compared with a roughly 15% decline for low-cost carriers. Fuel represented nearly 40% of costs for budget airlines, versus about 33% for full-service carriers.

Asia-Pacific low-cost carriers started from a weaker position, with average Ebitda margins of about 16% to 17% in fiscal 2024 and 2025, compared with roughly 20% for full-service airlines, it added.

S&P’s analysis covers 22 publicly listed airlines, representing close to 85% of the region’s airline market capitalisation, including AirAsia Group Bhd (KL:AAGB), Capital A Bhd (KL:CAPITALA), Singapore Airlines Ltd (SIA), Qantas Airways Ltd and Cathay Pacific Airways Ltd.

S&P expects margins to recover more meaningfully from the fourth quarter as seasonal demand strengthens. It forecasts Brent crude at US$80 a barrel in 2027, down from US$110 this year.

Fuel hedging provides only limited protection for many airlines in the region, S&P said. Almost half of the carriers in S&P’s sample do not hedge fuel at all, while those that do hedge about 30% of their requirements on average, typically for 12 to 18 months and primarily against crude oil.

Less than 10% hedge directly against jet fuel prices, leaving many airlines exposed to the widening spread between crude and jet fuel in 2026.

Most carriers have not materially changed their hedging policies following the escalation of the Middle East conflict, S&P said.

Thai Airways International PCL, All Nippon Airways Co Ltd, Japan Airlines Co Ltd and Cebu Pacific Inc are among those that have increased hedging, while India's IndiGo is exploring the strategy.

Currency depreciation is adding to the pressure. Asia-Pacific currencies have weakened sharply against the US dollar since the start of the Middle East conflict, creating particular risks for airlines focused on domestic routes.

S&P said such carriers generate most of their revenue in local currencies while paying for fuel, aircraft maintenance and other major expenses in dollars or dollar-linked currencies. Airlines that lease aircraft may also face currency mismatches on their borrowings, while carriers purchasing aircraft face largely dollar-denominated capital spending.

S&P said the currency movement impact will depend on an airline's aircraft delivery schedule and payment timings. While international operations provide some natural foreign-exchange hedging, it pointed out that most airlines in the region do not extensively hedge currencies.

Asia-Pacific airlines are nevertheless entering the downturn with stronger balance sheets after several years of deleveraging.

S&P said passenger demand should remain resilient, supported by expanding middle classes and economic growth in China and India. The ratings agency expects airlines to maintain their growth plans despite near-term pressure, partly because giving up aircraft orders could leave carriers at a disadvantage amid lengthy delivery times.

Passenger traffic in Asia-Pacific fell about 1% to 2% y-o-y in May and June, though S&P said the decline may partly reflect capacity cuts. Passenger yields rose an estimated 10% to 15% y-o-y as of June.

Load factors have remained relatively stable and held up better than in other regions in June, helped by capacity reductions. Airlines may also be able to maintain higher fares to offset elevated fuel costs, supporting their financial buffers, S&P said.

Carriers have increasingly rationalised networks by cutting unprofitable routes, particularly short-haul services facing competition from lower-cost rail alternatives in parts of China.

At the same time, long-haul airlines such as SIA and Qantas have opportunistically expanded routes and services that were previously dominated by the Gulf carriers.

Other measures include reducing non-essential costs and retiring older aircraft to lower fixed lease expenses.

Going forward, S&P expects the combination of resilient air traffic demand, route adjustments and government intervention to support airlines. The ratings agency has taken negative rating actions against only five of the 25 global airlines it rates, and expects most Asia-Pacific carriers to withstand 12 to 18 months of operational weakness stemming from the Middle East conflict.

"Airlines are also keeping more cash on their balance sheet since the Covid-19 pandemic. The total cash balance among Asia-Pacific airlines has more than doubled since fiscal 2019. We believe this will provide more liquidity and financial buffer in times of volatile operating conditions," it said.

The region is expected to remain the fastest-growing aviation market globally, with almost 5,700 aircraft on order and more than US$300 billion in capital commitments.

"We expect the region to continue contributing more than 30% of industry air traffic over the next few years," said S&P, citing International Air Transport Association projections that revenue passenger kilometres (RPK) in Asia-Pacific will grow 5.1% this year, the second-highest growth rate after Africa.

Capacity in the region should also grow modestly and surpass pre-pandemic levels.

About 35% of aircraft orders placed with Boeing Co and Airbus SE as of April came from Asia-Pacific, the largest share among global regions. Indian and Southeast Asian carriers, particularly low-cost airlines, account for much of the demand.

The main risk to the outlook is a sustained oil price surge above US$100 a barrel as geopolitical conflicts worsen. Such a scenario could derail the recovery, deepen cost pressures and force some airlines to preserve liquidity by cutting spending, S&P said.