Asiana's ads did not name the target of this latest round of vitriol, but they didn't need to. Korea's second carrier has spent most of its eight-year history locked in combat with its larger, established rival, Korean Air. It has been a battle for traffic rights and a contest for consumer loyalty.
The latest slogans show that, far from being over, the skirmishes continue unabated. Indeed, Korean Air fought back with a complaint to Korea's Fair Trade Commission, and as a result Asiana was advised not to continue the ad campaign.
Opposition from Korean Air has failed to dent Asiana's meteoric expansion. The company entered the world's top 50 airlines in 1994, and last year a 30 per cent revenue increase gave it a turnover of US$1.3 billion. Its fleet of 39 aircraft operates to 42 destinations, and last year it added Europe and Australia to its network, which already encompasses the US and much of Asia.
Park doesn't intend to stop there. Eleven new routes are likely to be launched in 1996. The fleet is expected to reach 71 jets in four years' time and two major orders are in the pipeline. But Park's ambitions are by no means restricted to size. 'We want to be the best airline, within this century.'
The only drawback is that Asiana has so far failed to turn growth into substantial profits. Establishing a major, world-class airline was bound to be expensive and the fact that Asiana accumulated losses of $292 million in its first five full years hardly came as a surprise. The carrier achieved its first net profit, of $37 million, in 1994 and estimates that its 1995 net profit was about the same or 3 per cent of turnover. Further expansion means that profits are likely to remain at this level for the next few years, but Park hopes to have recouped the losses by around 2000. The privately owned carrier's long-term plan includes a public stock offering, but this will have to await improved profitability. 'Without a good financial result we cannot achieve being the best airline in the world,' Park acknowledges.
Cut-throat competition is having its greatest effect in this area. Fare wars lead to low yields and operating losses of around $20 million a year in the domestic market, which accounts for 17 per cent of Asiana's turnover. Yet opportunities to expand in higher yield international markets are frustrated by government route allocation policies designed to protect Korean Air. 'If they have free competition for pricing, they must change their policy for route licensing,' he says.
Absurdly low fares
Korea's domestic market is now fully deregulated, and fares simply have to be filed, with no government approvals necessary. Asiana operates 550 flights a week on 19 domestic routes serving 12 cities, and may add three new routes this year. With a market totalling 21 million passengers a year there should be rich pickings for two carriers, but fares have reached absurdly low levels. 'The fare for our shortest leg is $17, for the 30-minute flight from Kwangju to Cheju,' says Park. 'And Korean Air cut it by 5 per cent!'
It was this latest round of discounting that prompted Asiana's no-nonsense adverts. The carrier prides itself on its young fleet, with an average age of 3.8 years, and its inflight service standards, and wanted to make the point. 'We must advertise our real status. We have the youngest fleet in the world,' says Park. 'We couldn't advertise this at the beginning with only one or two aircraft, or even 10 aircraft. Now we have 39 aircraft, which is big enough. This is the right time.' Korean Air says its fleet age averages eight years, well below the international average but well above Asiana's 3.8 years. Asiana withdrew its ads following Korean Air's complaint to the Fair Trade Commission, but it had made its point.
These domestic skirmishes are leading Asiana to intensify its campaign for better international rights. Currently new routes are allocated between the carriers at the government's whim, while dual-tracking on existing routes is only allowed when traffic levels exceed around 200,000 passengers a year.
This leaves Asiana somewhat hidebound. In some markets, there is little problem. In the US market, an open bilateral and a lack of restrictions from Seoul leave Asiana free to compete, which it does by serving Los Angeles, San Francisco, New York, Honolulu, Saipan, and the recently added destinations of Seattle and Guam. The carrier operates 58 weekly flights to 10 destinations in Japan, again with few restrictions. Asiana enjoys mixed fortunes in southeast Asia, where it operates 25 weekly flights to Bangkok, Hong Kong, Ho Chi Minh City, Manila and Singapore.
Beyond that, it is becoming a matter of picking crumbs left from the rich man's table. Last November's entry into the European and Australian markets was undoubtedly an important step for Asiana, but in each case the carrier only has a small foothold. Park says the two weekly flights to Brussels via Vienna are almost full, but 'it is a thin market compared to London, Paris and Frankfurt.' The carrier only obtained rights to Vienna because Korean Air stopped flying there. In Australia, Asiana is restricted to three weekly services to Sydney via Cairns.
Park insists that the present policy should be scrapped in favour of free competition for all. 'This policy for allocation is to avoid competition. We want free competition.' If bilaterals only allow a single carrier, Asiana wants favourable treatment. 'They must give us some priority for new routes,' he complains. 'The existing carrier dominates the old routes. Otherwise, how can the second carrier survive? We like to have competition, but the existing carrier doesn't want competition.'
The government decides
'We must have a choice. In the airline business your route is your product. We cannot decide our product. The government decides what our product is. If we have a choice between London, Frankfurt and Paris, for example, we must decide by ourselves.' But Korean Air, which believes the present system favours Asiana too much, is bound to fight any moves to relax the route allocation regime.
Meanwhile, Asiana's international expansion plans for this year remain the art of the possible. The carrier began three weekly flights to Macao in February. In China, Park hopes to add Xi'an and convert the Asiana/China Southern charter flights to Guangzhou to scheduled services. Delhi is a distinct possibility; Korean Air flies to Bombay. Istanbul and Tashkent are available, and Park says he may combine either Vienna or Tashkent with the Turkish city. Also under consideration are Vladivostok in Russia, Fukushima in Japan, and Dhaka in Bangladesh.
China represents a boom market with high yields. Last year, the first full year with freedom to travel between the two countries, saw 400,000 Koreans travelling to China. Currently 1 million Koreans visit Japan every year, but the Chinese market will exceed Japan's in two to three years' time, says Park. Yields are high because Asiana's flights to Beijing and Shanghai are in cooperation with Air China and China Eastern respectively, tying up the competition. However both Asiana and Korean Air paid a price: flights to the lucrative destination of Taiwan ceased when Korea established diplomatic ties with Beijing, and resumption does not appear to be on the horizon.
Despite the competitive pressures, Asiana can expect continuing growth. Since overseas travel restrictions were removed in 1988, Koreans have become enthusiastic travellers, with 3.8 million Koreans travelling abroad last year and over 9 million, or 20 per cent of the population, expected to travel in 2000. Incoming traffic reached 3.7 million in 1995 and is expected to grow at 5-6 per cent a year.
Following 30 per cent revenue growth last year, Park has budgeted for a 26 per cent increase in 1996, but is pushing for more than 30 per cent, which would take revenues to over $1.7 billion. Growth is likely to slow to 12-13 per cent a year over the next 10 years, however.
Six aircraft a year
Park says Asiana will need six new aircraft a year for the next 10 years to cope with growth. The carrier intends to keep its fleet young, preferably below Singapore Airlines' five-year average, to it will replace its narrowbodies, and perhaps some widebodies, during this period. Asiana currently operates 20 Boeing 737s, 11 B767s and eight B747s, including two pure freighters and four Combis. This year the carrier will take delivery of two B737s, two B767s and two B747s, including its first B767 freighter. By the end of 2000 Asiana plans to have 27 B737s, 28 B767s and 16 B747s.
Two new orders are anticipated soon. First, Asiana is expected to begin its narrowbodied aircraft replacement programme by ordering around 18 Boeing 737-800s or Airbus A321s. Later, the carrier will choose between the Airbus A330/340 and Boeing 777 for its requirement to replace Boeing 767s and provide capacity for growth. Hitherto, time pressure has led Asiana towards leasing, and the carrier currently has 21 aircraft on operating lease, mainly B737s. But a greater proportion of the fleet will be purchased in the future.
Inevitably, this will require further support from Asiana's shareholders, which have paid in $300 million of capital so far. The Kumho construction, engineering and petrochemicals group owns 76 per cent, with the Korea Development Bank owning 17 per cent and the Korea Long Term Credit Bank 5 per cent.
Asiana's heavy investment in state-of-the-art technology is not restricted to the fleet. Last August saw the opening of a $58 million new training facility with simulators for each of the three types it operates. Asiana has already spent $27 million on a maintenance base capable of handling the Boeing 737 and 767; this opened in 1991.
The young fleet forms the first leg of Asiana's competitive strategy; the second is service. The company's name was chosen to emphasise the carrier's Asian origins, with the theme: 'The jewel of Asia.' But Park stresses that Asiana has developed its own distinctive product, which reflects Korean hospitality and a combination of eastern and western values. All cabin crew members are university graduates.
As it matures, Asiana is beginning to put in place the competitive weapons used by all major carriers - alliances, CRS, yield management and a frequent flyer programme.
The carrier's only major alliance is with Northwest. The US major buys seats on Asiana's flights from Seoul to New York, Los Angeles, San Francisco, Honolulu and Saipan, and Asiana buys seats on Northwest's flights from Detroit to Seoul. The carriers are talking about expanding the deal to include Seattle and Guam. The pair also link their frequent flyer programmes, share airport facilities and exchange ground handling and catering services.
Recent expansion has led Asiana to exploring links with Sabena and Austrian Airlines, neither of which fly to Seoul themselves. The carrier started codesharing with Austrian in March, and Park says this is likely to be extended to encompass a block space agreement. He also says he is talking with Qantas. Further ahead, if he obtains rights to London, Park would like to explore codesharing with British Airways, with which there is a relationship already - Asiana bought BA's reservations system and the two carriers have agreed to combine with EVA Air of Taiwan to develop a new air cargo computer system. The remaining alliances are with Air China and China Eastern; the routes to Beijing and Shanghai are operated on a revenue pooling basis.
Cooperation
As well as enabling Asiana to control the quality of its meals, the opening of Asiana's catering facilities in Seoul a year ago has led it to cooperate more with overseas carriers. Customers include All Nippon Airways, BA, China Eastern, KLM, Northwest and Vasp.
On the marketing and distribution side, Asiana is also showing signs of maturity. The carrier says its CRS joint venture with Abacus has 40.4 per cent of the Korean travel agent market, with 1,850 terminals installed at 1,470 locations. The target is a 44 per cent share by the end of the year.
The Asiana Business Club (ABC) frequent flyer programme now has 1.8 million members and links with Northwest and Alaska Air as well as major hotel chains and car rental companies. More airlines are likely to be invited to join. Park says Asiana is the first airline to have a bonus programme for children. In line with its core objective of raising yields, Asiana installed a Pros yield management system last November.
The task of creating a basic airline infrastructure now complete, Sam Koo Park's major priorities are to continue to build the airline while improving profitability. Negotiations with government will form an important part of the process for some time to come, but the carrier has in place all it needs to enable it to compete effectively where it is allowed to. Park's objective for Asiana - to be the best airline in the world - sounds ambitious. But it's a great way to motivate the company's 5,600 strong workforce, and maybe it's achievable.
Source: Airline Business
