KUALA LUMPUR: Asia-Pacific airlines are strengthening their defences against industry headwinds by continuing to invest heavily in fuel-efficient aircraft, supported by long-term demand prospects, lower debt following the pandemic and a diverse funding mix, S&P Global Ratings said.

The region's airlines are likely to remain the world's fastest-expanding aviation market, with close to 5,700 aircraft on order and more than US$300 billion in capital commitments, it said.

"The airlines have deleveraged over recent years, and therefore have stronger balance sheets to absorb hits from higher fuel costs caused by the Middle East conflict and currency depreciation.

"Moreover, we expect passenger air traffic in Asia-Pacific to remain resilient, bolstered by growing middle classes in general and the upward economic trajectories of China and India in particular," it said in a report titled Asia-Pacific Airlines: High Costs Won't Divert Growth Ambitions, published on Monday.

The report, published in Singapore, was based on data from 22 publicly listed airlines which, in aggregate, account for close to 85 per cent of the market capitalisation of airlines in Asia-Pacific.

Besides expanding to accommodate passenger growth, Asia-Pacific airlines will also invest to maintain their competitiveness in a highly fragmented industry with a large number of low-cost carriers, many of them in the region, the ratings agency said.

"Those airlines in a stronger financial position will be better placed to invest to expand their market share and route connectivity. These trends can differentiate the stronger and weaker players of tomorrow.

"The average fleet age of Asia-Pacific is 10 years, younger than the global average at 15 years. Still, we believe airlines in Asia-Pacific will seek to renew their fleet to improve fuel efficiency and prepare for stricter environmental standards," the ratings agency said.

A modern fleet would also appeal to passengers and help airlines differentiate themselves, particularly full-service carriers, it added.

Moreover, giving up long-awaited aircraft deliveries from existing order books would push expansion plans further out, as new aircraft orders placed now would only be delivered well into the 2030s.

"We believe stronger airline fundamentals and the region's growth potential will stimulate banks' lending exposure to the sector. Moreover, airlines' scale, prominence and long-standing relationships support favourable access to capital, particularly for national flag carriers with meaningful government ownership," it added.

S&P Global Ratings said more airlines could seek offshore funding in tandem with the region's high growth rate, particularly those with strong operating track records.

"Should interest rates fall, it could spur greater appetite for offshore bonds. This would enable carriers to tap into a broader funding pool.

"In our view, a balance of funding mix between banks, leases, domestic and offshore capital markets will support Asia-Pacific airlines' funding needs," it said.

The ratings agency added that current headwinds, including high jet fuel costs and currency depreciation against the dollar, would weigh on Asia-Pacific airlines, particularly low-cost carriers.

"We expect more meaningful recovery from the fourth quarter onwards. Resilient demand despite higher fares will help the sector as oil prices ease.

"Still, immediate strains will take a toll on upcoming earnings reports, particularly for low-cost carriers because they have thinner profitability cushions, but nonetheless, these airlines will push through growth to remain competitive," it said.

However, it believes airlines in the region will favour temporary operational adjustments to absorb immediate shocks rather than derail their core development plans.

S&P Global Ratings also said airlines' margins could recover more significantly from the fourth quarter onwards, supported by seasonal peak demand.

The ratings agency assumes Brent prices will fall to US$80 a barrel in 2027, compared with US$110 a barrel this year.

It said close to 50 per cent of the Asia-Pacific airlines in its sample do not employ fuel hedging.

"The remainder hedge on average about 30 per cent over a short term (largely within 12 to 18 months), and mainly on crude.

"Less than 10 per cent have hedges based on jet fuel prices. This means significant exposure for most Asia-Pacific airlines due to the rise in crude price and jet fuel spreads in 2026," it said.

It also said most airlines in the region had not changed their hedging policies as a result of the Middle East conflict, although a few had increased their hedging positions, including Thai Airways, All Nippon Airways (ANA), Japan Airlines (JAL) and Cebu Pacific.

India-based low-cost carrier IndiGo is exploring fuel hedging, it added. - Bernama