The region's carriers are once again grappling with an economic slowdown, but are they better prepared than four years ago?
ANDREW DOYLE / SINGAPORE
The onset of Asia's financial crisis in mid-1997 exploded the myth that the prospect of seemingly inexorable underlying traffic growth could insulate the region's major airlines from the effects of recession.
There is no doubt that the carriers that bore the brunt of that upheaval are entering the latest downturn in better shape, but it may be too early to judge whether or not any long-term lessons have been learned.
A lingering consequence of the crisis has been that demand for new aircraft has failed to pick up significantly since a mood of cautious optimism returned to the Asian market in early 1999. The immediate health of the bottom line continues to take precedence over the drive for market share. This would seem to indicate that Asia's airlines have become more adept at avoiding the kind of exuberant over-ordering that brought many of the region's carriers to their knees during the recent crisis.
Asian carriers remain affected by the strong dollar, which tends to drive down demand for international travel and push up costs, while fuel prices, in US dollar terms, are far higher than they were in 1997. Cargo traffic in the region began to fall sharply last October, and in some parts passenger numbers began to fall in January.
According to Jardine Fleming airline analyst Peter Negline, most Asian airlines have taken steps to ensure that they can handle the fallout from any downfall. "It is true that the sector is a lot stronger," Negline says, adding that the downturn "does not at this point look as though it is going to be as bad" as the last one. The region's airlines in general have achieved "very strong revenue growth" over the two years since the financial crisis receded, and he describes 1999's performance as "good" and last year's as "excellent".
The Association of Asia Pacific Airlines (AAPA)says its member carriers saw passenger traffic rise by more than 10% in 2000 - a growth rate stronger than during the run up to the last financial crisis.
"The best answer is to look at the results," says AAPA director general Richard Stirland, noting the impressive results recently delivered by Japan Airlines and All Nippon Airways despite a sluggish Japanese economy. Japan's cargo market has gone into decline but passenger traffic seems to be holding up for the time being.
Negline cautions that seat capacity growth is steepening again which "some people see as a concern". Asian carriers increased available seats by 2.3% in 2000, and forecast that the increase for 2001 will be nearly double at 4.1%.
In contrast, available freight capacity was up 10.6% in 2000 in terms of tonnage but will increase by a more modest 7.3% this year, Negline believes, in the face of falling demand.
Currency issues
The strong dollar remains a concern, though many Asian currencies not pegged to the dollar are worth less, relative to the US currency, than they were before the crisis. "Hopefully currencies will depreciate at a moderate rate," says Negline.
According to Negline, Asian airlines have changed their behaviour. While they remain keenly competitive, they have ceased to engage in "mindless chasing of market share at any price" until "there was no more demand to create".
HSBC analyst Mark Webb is impressed by Cathay's efforts to cut costs and believes that Qantas is also in good shape. "Qantas has done a continually good job, and Cathay has done a good job cost-cutting and outsourcing," he says.
Negline agrees that Cathay Pacific "really has taken some very hard medicine and got itself into excellent shape".
Singapore Airlines (SIA), generally regarded as a bellwether among Asian airlines, saw its financial performance suffer markedly during the half year to March, mainly due to softening in cargo demand and high fuel prices. Operating profit during the period was 14.6% lower than the same period a year ago.
"Cargo was the first to show signs of weakness with the slowdown of the global economy," says SIA deputy chairman and chief executive (CEO) Cheong Choong Kong. He says the airline's full year result was, however, "credible, especially compared with those that some of our competitors have announced".
SIA sees continuing problems ahead for cargo but is optimistic that passenger yields will hold up, subject to economic developments in the USA and elsewhere.
But some industry observers believe that SIA has simply benefited from the weakness of the Singapore dollar against the US dollar, which increased its overseas sales revenues but reduced a large proportion of its Singapore dollar-denominated costs. It also benefited from neither being exposed to foreign debt nor having any domestic flight operations.
One industry source points out that SIA achieved only a modest 9% return on assets at group level in the year to March despite having achieved a record profit, and continues to suffer from the unusual problem of being "over capitalised".
Regional rivals - such as Malaysia Airlines (MAS), Thai Airways International and Garuda - have continued to struggle financially, are burdened by massive debts and have made limited attempts to restructure. "I don't get the feeling that anyone has taken a strategic view of what sort of model they are going for," says the source.
Alleged fare dumping by MAS to preserve market share is being blamed by some international carriers for their decision to shut down operations at Malaysia's flagship Kuala Lumpur International Airport (KLIA). This includes British Airways and its affiliate Qantas, as well as Lufthansa, All Nippon Airways and Aeroflot. Northwest Airlines plans to leave later this year.
Missed opportunity
Some observers believe that MAS should have negotiated itself membership of a global alliance to establish KLIAas a strong hub capable of holding its own against regional rivals such as Singapore's Changi Airport. This opportunity has now been missed, they argue.
The Malaysian flag-carrier is about to finally unveil a new restructuring plan aimed at achieving a return to profitability within two years. "We have identified the problems, as well as our options and solutions," says recently appointed MAS chairman Azizan Zainul Abidin.
The cash-strapped airline has lost money for the last four years, and majority control is back in the hands of the government after the finance ministry acquired a 29% stake held by aviation holding company Naluri.
MAS managing director Mohamad Nor Mohamad Yusof says there is an "obvious and urgent need to de-gear the company's funding structure", referring to its accumulated debt of more than $2.5 billion.
Efforts by Thai Airways International to restructure itself remain mired in politics, with the government having recently appointed a new board. Long-delayed plans to partially float the airline are still on hold pending a review of its operations.
New Thai prime minister Thaksin Shinawatra recently gave the carrier a public dressing down, accusing the airline of "coasting on its reputation" and "lacking effective plans for the future".
AAPA's Stirland sees some cause for optimism with regard to Garuda, however, which has made progress despite having to deal with a worsening economic and political situation in Indonesia. "I think Garuda has actually done quite a good job," says Stirland. "They have certainly got a much better management structure and a much more accountable system," he adds.
Philippine Airlines (PAL) also seems to have turned the corner under new CEO Avelino Zapanta. It has returned to profitability and repaid at least a fraction of its massive debt. PAL was one of the airlines hardest hit by the financial crisis, which arrived shortly after the carrier ordered new Airbus and Boeing aircraft to completely renew its fleet.
Shut down
PAL was actually forced to shut down for 10 days before restarting with a vastly reduced network and aircraft fleet. In the past two years, the carrier has raised its fleet size by 12 aircraft to 34. It has also restarted flights to four more international destinations, bringing the total to 16, while managing to cut its workforce to a mere 7,000 from a peak of double that figure.
In Taiwan, China Airlines and EVA Air have acted swiftly to reduce the downturn's impact by taking a cautious approach to new aircraft purchases and by focusing on profitable routes. They are also keeping a tight grip on employee numbers. Neither is particularly exposed to the cargo downturn, however, as a relatively large proportion of each one's sales are derived from this sector of the market.
Korean Air Lines and Asiana, both badly hit during the 1997-99 crisis, have posted big net losses as they grapple with foreign exchange losses caused by the weakness of the won. Yet Stirland reckons that the pair are "actually quite well positioned". The dollar's strength against the won boosts their substantial US-derived revenues, though they have to cope with their relative "over-reliance" on freight.
Stirland believes Asia's carriers will manage to weather any knock-on effects of the US downturn due to several external factors. European economies, he points out, are in relatively good shape, and "most visitor traffic to Asia comes from Europe, not the States". He says outbound passenger traffic from Japan, key to health of the Asian air market in general, is equally holding up well.
Global alliances are also expected to help Asian airlines navigate the downturn. "They bring in traffic that otherwise would not be there and allow capacity to be managed in a more rational way," says Stirland.
Source: Flight International
