Brent Hannon/KUALA LUMPUR
Concerns over the state of the once-unstoppable Asia-Pacific airline market were underlined again as the Association of Asia Pacific Airlines (AAPA) met in Kuala Lumpur in mid-November for the 41st assembly of presidents.
The latest figures show a 25% drop in collective operating profits over the 1996/7 financial year. In part, the fall has been caused by higher fuel prices and fare discounting, but much of the blame lies with the financial instability continuing to grip the region.
With South-East-Asian markets continuing to soften over the last few months, there has been little to lift the gloom for many of the 18 airlines which make up the AAPA (formerly the Orient Airline Association). Singapore Airlines (SIA) chief executive Dr Cheong Choong Kong describes the cause as the "economic and physical haze" now hanging over the region.
Financial crisis
The smoke haze which blanketed much of South-East Asia dampened leisure travel, while the financial crisis has affected economies in Hong Kong, Indonesia, Japan, Malaysia, South Korea, the Philippines, Taiwan, and Thailand. Many stock markets and currencies in Asia have lost 30-40% of their value in the past five months, and falling stock markets. In Asia, these can have a surprisingly direct impact on consumption.
So far, Hong Kong and Cathay Pacific have been hit the worst. "Loads have fallen very dramatically," says Cathay managing director David Turnbull. In mid-November, Cathay launched a $3.5 million advertising campaign promoting steep discounts in air fares and hotel rooms across South-East Asia. This promotion attracted 30,000 bookings in the first five days.
Turnbull admits that such efforts will not make money for Cathay, but stresses that the aim is not to start a damaging price war. "This is not an attempt to slash air rates, and it is not an attempt to grab market share," he says. "It's to kick-start tourism to Hong Kong."
Nevertheless, Japan Airlines (JAL), China Airlines (CAL) and EVA Airways all cut their fares to Hong Kong, and others may follow. Fumio Hattori, JAL senior vice-president for Asia, says that JAL's discounts are not a response to Cathay, but to market conditions.
As one CAL executive remarks, the airline has had "a lot of lot of empty seats" since Hong Kong's handover to China on 30 June and "-a seat is a perishable commodity". CAL is offering two tickets for the price of one to match Cathay's promotion, which ends on 15 February.
Travel from Japan to Hong Kong is down by 65% since the handover, not helped by the Hong Kong exchange rate remaining pegged to the US dollar, while the value of other Asian currencies has plummeted. "Many Japanese have seen Hong Kong, and are in no hurry to visit again," says JAL president Akira Kondo.
Senior airline executives are still saying that the downturn will not affect current aircraft-acquisition programmes, but a softening in the key long-haul markets could affect their ability to pay for a new 600-seat aircraft. "We are sticking with our programme, because most of these are replacement aircraft," says Dato Wan Malek, managing director of Malaysia Airlines.
Cheong says that SIA is still shopping for long-range Airbus A340s or Boeing 777s. "These are short-term problems," he says. "We hold the view that Asia will be vibrant. Nothing we see today will deter us."
Turnbull sounds a less re-assuring note, saying that Cathay has no further orders beyond 1999, at which time the airline will examine its fleet needs. He issues a warning on over-capacity, noting that many aircraft have been ordered, just as the downturn arrives.
Cheong says that SIA remains committed to a new high-capacity aircraft, however, pointing to the need to cope with airport congestion and to lower operating costs. Cathay will wait until the new aircraft are ready in 2002 or 2003 before making a decision. "They'll be expensive beasts," Turnbull says. He expects financing costs to be high, because, in the event of a default, banks will have a "-limited number of people to dump these aircraft on".
The airlines are pinning their hopes on still-buoyant long-haul markets. AAPA executives pointed repeatedly to the robust economies of Europe and the USA. "It is not a global recession; it is a period of reduced growth and uncertainty in Asia. America is booming," says Cheong.
'Tumultuous' situation
AAPA director-general Richard Stirland admits that the situation is "tumultuous", but points out that the airlines still managed a profit, albeit a reduced one.
Only three of the 18 AAPA members shared an operating loss (Royal Brunei Airlines, Garuda Indonesia and Philippine Airlines) and three managed to post gains (Qantas and the two Taiwanese carriers, CAL and EVA Air).
The final tally from AAPA airlines was a combined operating profit of $2.4 billion in the year to the end of March, some $800 million down on the previous 1995/6 total and marking an end to the region's steady rise in profitability since emerging from the downturn at the start of the 1990s. While the results are not disasterous on the face of it, Stirland says: "For many who are used to uninterrupted growth and steadily increasing profitability-the results for 1997 and the forecast for 1998 must come as a nasty shock."
Source: Flight International
