Five years of adversity created a real team spirit at South Korea's second carrier, Asiana Airlines. Now the economic tide is turning, and that same spirit is proving to be a source of strength
Visitors to the Asiana Airlines headquarters in Seoul are soon struck by the framed posters throughout the staff offices proclaiming the target of 25-20. They provide a constant reminder to staff of the corporate goal of achieving annual revenue of 2.5 trillion won ($2.1 billion) and profits of 200 billion won. Such posters are common enough in South Korean companies, designed to foster a sense of focus and teamwork, but Asiana's are interesting for a couple of reasons.
First, such financial ambitions go to illustrate the extent of the airline's turnaround since 1998 and the dark days of Asia's financial meltdown, when Asiana appeared to fly close to the edge. Second, the staff insist that they really do believe in the the target posted on their office walls. Having been together through the incredible ups and downs of the past five years, it seems that Asiana has achieved the tight-knit family spirit for which South Korean business so often aims.
The carrier was only established in 1988 by the giant Kumho Group as South Korea's second national airline after Korean Air (KAL). Over the past 14 years it has firmly established itself as a player in the international market, with a fleet of 64 aircraft serving dozens of cities in four continents and a reputation for quality service.
Its growth was phenomenal until 1997, when a severe economic downturn hit much of Asia. Its effect on South Korea was debilitating. The won devalued enormously against the US dollar, increasing fixed costs as interest rates soared and traffic levels plunged. As a consequence, Asiana - which until then had only known good times - was forced to consolidate heavily to ensure its survival.
Coming of age
Then, after making it through the worst of the Asian downturn, and with its status in the country growing (partly because of the poor safety record posted by larger rival KAL), the industry was hit by the 11 September attacks. This latest set-back once again forced Asiana to rationalise its operations.
But today, says president and chief executive Park Chan-Bup, Asiana is over the worst and is in a strong position for growth once more. The year ahead will mark a "coming of age" for the carrier, which in June announced that it would soon join the Star Alliance. Park sees this move as a symbol of how far Asiana has come. It is now established in the big league - not bad for an airline launched in late-1988 operating domestic flights between Seoul and Busan and Gwangju.
"We are now in a much better situation than even before the economic crisis and 11 September," says Park. "Obviously, after the economic crisis in Korea, we had the immediate restructuring process. We cut the fleet from 50 to 42 aircraft in 1998. We were able to build employee consensus to share the pain during the economic crisis in South Korea."
Under this "pain-sharing programme", every employee took one month of leave without pay, allowing the carrier to avoid mass lay-offs. Park says this left everyone striving towards common goals, after realising that massive growth could not be sustained forever.
"We were focusing on expansion until then," he says. "Every year, the number of employees was increased. But after the economic crisis, this had to stop." The carrier was at the time fighting to stay in business. In addition to cutting the fleet, it cancelled firm aircraft orders, deferred deliveries of others, cut loss-making long-haul routes and began a sweeping programme of selling and leasing back aircraft to raise cash.
The programme rapidly produced results. After huge losses in 1997 and 1998, Asiana stormed back to profitability in 1999, having successfully launched an initial public offering. The following year and 2001 proved difficult, however, as trouble returned to the South Korean economy. In 2001, Asiana suffered net losses of 272 billion won on revenues of 2.2 trillion won.
But Park says the experience of the 1997-98 downturn left the carrier well prepared to face the troubles that followed the September attacks. Asiana has since recovered strongly with solid first-half profits, and is confident for the remainder of the year.
Park says the airline moved quickly after 11 September. It reduced the number of employees per aircraft by 9% to a "lean" 6,800, cut frequencies on long-haul routes and deferred deliveries of two firm aircraft orders. Cash was raised via a securities issue and a 110 billion-won low-interest, eight-year government loan, while the state also helped with tax exemptions and insurance guarantees.
Equally important, Asiana pursued new ties with other international carriers. This helped bring forward its decision to join a multilateral alliance. Asiana had long been studying whether to join oneworld or Star, and took a decision early this year. Until now it has had roughly equal links with both alliances: ties with American Airlines and Qantas Airways on the one hand, and with All Nippon Airways and Singapore Airlines on the other.
Asiana formally announced its intention to join Star at a meeting of the alliance's chief executives in Shanghai this June, when it said it would take up full membership within six to 12 months. Park says Asiana is targeting January for full membership and he expects the enhanced feed of traffic by its fellow Star members to add more than $30 million to the carrier's revenues in the first year alone.
Fresh approach
"We hope everything can be done by the end of this year so that we can start by January 2003," he says. "At the latest, a couple of extra months may be needed, but 1 January is our internal target. It depends on the partner situation."
Park says the downturns of the past five years forced Asiana to take a fresh look at how it should be growing in the years ahead. It will now focus growth plans on Asian services and focus less on long-haul flights, he says, using Star's combined global network to help it offer wider overall coverage.
That shift in focus from developing new long-haul services to boosting shorter-haul services within Asia actually began in 1997, but is now being stepped up. Park says it has already paid off - Asiana was more "insulated" from the post-September downturn as it had a more limited exposure to the depressed US and European travel markets than many other carriers.
Passenger revenues for US services now account for around 20% of total passenger revenues, while those for European services account for just 1% and Oceania flights 4%.
Around 50% of passenger revenues come from "highly profitable short-haul international routes", says Park. China services account for 13% of revenues, Japanese services 18% and South-East Asian services 18%. Domestic flights account for 26%.
"Competing with our competitor in Korea, our disadvantage was the destinations we have been serving - we have fewer destinations and frequencies. By joining the global alliance, we can offer more destinations, more connections and more flights," Park says.
Core business
Not all its future plans have to do with Star, however. The airline is busy with a major programme of raising cash via the sale of stakes in non-core assets. "I hope this process can be completed this year. We are planning to focus on our own core business, rather than on the other related businesses," says Park.
The main assets in which it is seeking to sell stakes are ground-handling company Asiana Airport Services and its in-house catering division. Park says that the catering unit will be spun off as a separate company once talks are finalised with a foreign partner that he does not identify. A memorandum of understanding has already been inked with an international consortium for the sale of the ground-handling company, but a firm deal has yet to be signed.
Asiana earlier this year sold its stake in Incheon International Foreign Airport Terminal to the Korean Institute for Military Studies in its first asset disposal. It says smaller airport-related units on the selling block include stakes in Asiana Airport Development, Asiana Support Facilities and Korea City Terminal.
Park says Asiana decided to sell non-core assets in the wake of the downturn that followed 11 September, as it needed to focus more on improving its core business of domestic and international passenger and cargo operations. Passenger services account for around 70% of the carrier's operating revenues while cargo accounts for the remainder.
Asiana used freed-up capacity from long-haul route cancellations over the past five years to expand services to nearby China - where it now serves 14 points and will focus on future expansion efforts - and Japan, where it serves 13 cities. Park says the carrier's strategy for the next five years will be to continue boosting intra-Asian services, where yields are much stronger than those for long-haul passenger operations.
"Our strategy is to make more flights intra-Asia rather than long-hauls. We'll make some long-hauls if needed, but in the intra-Asia market we will focus on improving the density of routes, and we will expand with a couple more new destinations in China and other short-hauls in Asia," Park says.
On the cargo side, Park says the airline is happy that freight operations now account for around 30% of total operating revenues, and over time "we will add a couple more routes and a few more aircraft" to maintain that level.
Asiana will expand its dedicated cargo fleet of five Boeing 747-400 freighters and one Boeing 767-300 freighter with two more 747-400Fs that are on firm order and by converting four 747-400 Combis into dedicated freighters by 2009.
Its passenger fleet includes 58 aircraft and Park says this "will gradually expand while the replacement of older aircraft is properly continued". He adds any necessary aircraft acquisitions beyond those already committed to will probably be done via operating leases, rather than through direct purchases.
Asiana has eight remaining firm orders for Airbus A321s that are due for delivery through 2006 and which will replace older Boeing 737s. It also has outstanding firm orders for six Boeing 777s and six Airbus A330s due for delivery through 2008 and which will be used to replace older 767s.
Change in policy
Fourteen years on, Asiana remains much smaller than home rival KAL, a founding member of the SkyTeam Alliance, but is no longer at such a big disadvantage as in its early days. At that time, the government maintained an aviation policy under which only one South Korean carrier could operate on a given international route unless traffic reached a certain level.
It also had trouble winning access at airports, such as Seoul's old Gimpo International Airport, formerly known as Kimpo and now a domestic facility. Now many of the problems are behind it - the government maintains a liberal air services policy, while a grand new international airport opened in March 2001 to serve Seoul.
Park says the new Incheon International Airport will benefit the airline in the years ahead as it is a growing hub for North-East Asia. It also allows for 24h flight operations, which Park says will give Asiana more flexibility in scheduling and allow it to improve the utilisation of its aircraft.
Asiana's share of the market for international travel in and out of South Korea in the first half of this year stood at 22%, compared with KAL's 40%, but is expected to exceed 25% by 2010, Park says. Domestic traffic is growing much more slowly, but Park expects the carrier's domestic market share to hit 38% by 2010, compared with 36% now.
With Asiana looking at growth once again after five years of intense instability, is the carrier setting out to challenge KAL as South Korea's dominant airline? Park answers this with a smile. "Our goal is to become the number one carrier in terms of quality and safety, and to be profitable," he says. "In terms of size, we are not aiming to be the biggest airline in the world, or even in South Korea. It has no meaning for us."
REPORT BY NICHOLAS IONIDES IN SEOUL
Source: Airline Business
