NICHOLAS IONIDES / SINGAPORE
Will 2004 shape up as the best year yet for Asia's airlines, or could bird flu cause another disaster like the SARS virus?
The Year of the Monkey has just begun in the Chinese lunar calendar and industry observers expect it will live up to its name for major Asian airlines as one with its share of ups and downs.
High oil prices, worldwide economic uncertainty, new competition from low-fare carriers and, potentially more worrying, fears that recent human deaths caused by so-called "bird flu" in several countries may cause a new SARS-like downturn, are all causing concern for the majors.
"We do expect 2004 to live up to its description as the Year of the Monkey," says Hong Kong-based JP Morgan regional aviation analyst Peter Negline. "There will be a lot of jumping all about and swinging from the branches. I suspect things will bounce around quite a bit this year."
The Centre for Asia Pacific Aviation (CAPA), an Australia-based aviation consultancy, believes that "for incumbent airlines, the agility that is characteristic of the monkey will be needed", in part given that low-fare carriers will start coming to Asia with a vengeance and further liberalisation of the region's skies is inevitable.
"The profile of the airline sector will continue to change along the lines drawn in 2003," CAPA says in a recent report. "The low-cost airline phenomenon, overlaid on a more liberalised marketplace, will have a major influence both as an agent of change and as a growth element in itself. The domino effect of new airline entry and of liberalisation, prompted notably by China and India, could sweep change across the region remarkably quickly."
More immediately, bird flu is causing concern and another problem that could affect air travel demand to, and within, the region for several months this year. "On 1 January, who was talking about bird flu? Nobody. You cannot rule out the possibility that bird flu may decimate the industry for several months this year as SARS did for part of 2003," says Negline. "I'm very hopeful it won't happen, but we are by no means out of jail on this one yet."
If the worst fears are realised, 2004 could be similar to part of 2003, when Asian carriers faced their "worst ever crisis" - as it was described by Association of Asia Pacific Airlines (AAPA) - due to the SARS virus outbreak between March and July.
Passenger demand returned far faster than expected following the containment of the SARS outbreak, however, leading many industry observers to predict good things for 2004. But that was before bird flu started spreading in parts of Asia. Analysts are careful not to cause unnecessary fears, but say the potential threat is not one that can be taken lightly.
Ian Thomas of CAPA says there are positive indications that bird flu is better contained than SARS was in the early days of the outbreak last year, and there has been a "more aggressive approach" by Asian governments in dealing with it. But, he says, one can only be hopeful that it will not spread much more and in turn have an impact on airlines.
"This time around it has been pretty well contained in Asia so far. Various control issues have been put in place," he says, but at the moment it's still a wait and see."
Provided bird flu does not spread much further, however, most observers expect the major Asian carriers to have a positive 2004, with growth forecast in both passenger and cargo traffic.
Regional revival
That could signal a revival of the bullish expansion period of the early 1990s that led many of the region's airlines to be dubbed the world's "tigers". But the carriers will need to adapt to change this year, despite almost universally strong economic growth forecasts for Asian countries, by restructuring operations and cutting costs.
CAPA says 2004 "will be a year of massive opportunity for Asia's airlines, airports and the tourism industries. Indeed, it could, and should, be the best year ever."
The consultancy adds: "Asia-Pacific airlines have a solid launching pad for 2004, following the well-managed recovery in international passenger markets in the second half of 2003."
The AAPA, which represents 17 international carriers in the region, but none from China, reported a cumulative drop for its members in international revenue passenger kilometres (RPK) in 2003, due largely to SARS, although it expects a return to growth this year.
The International Air Transport Association also expects growth in 2004. It reported that Far East member airlines suffered a 9.4% overall drop in international RPKs in 2003, although there was a healthy return to growth in the final months of the year.
IATA predicts global passenger traffic will bounce back by 7-8% overall in terms of international RPKs in 2004, "with Asia-Pacific leading all regions".
When non-IATA carriers are included, however, traffic growth may be much stronger in Asia, as several new low-fare airlines are being prepared for launch in the region, promising to give the majors a run for their money.
Barring a few notable exceptions such as the highly successful Malaysian carrier AirAsia and Virgin Blue in Australia, low-fare airlines have yet to take off in the Asia-Pacific region in the same dramatic way they did in Europe or the USA. But this is set to change, with new carriers being established in Indonesia, Singapore, Thailand and other markets.
Sceptics say low-fare airlines cannot be as successful in Asia as they have been in Europe, given that there is a lack of cheaper-to-serve secondary airports and that restrictive bilateral air services regimes remain in some markets to protect state-owned national carriers.
But the general view is that low-fare airlines will ultimately be successful in Asia, even if they have to have a different model from that which has generally been adopted by their counterparts in Europe and the USA.
"Low-cost action will be hijacking the headlines this year," predicts Negline, adding that "I think you will see a reaction" by the major carriers to the new low-fare operators, such as additional cost-cutting measures and fare discounting.
"Some may overreact, but none of the incumbents should adopt a head-in-the-sand attitude and hope they will simply go away," says JPMorgan's Negline.
"I think structurally there is reason to be optimistic about the future of low-cost carriers in Asia. The genie is out of the bottle, so to speak, and it's only going to mean growth from here in that segment of the market. In this region you have to take into account the huge size of the population and the rising middle class to see that there is a growing demand for air travel," Negline adds.
The backers of Singapore's planned Tiger Airways agree. The new airline will be 49%-owned by Singapore Airlines (SIA) and 11%-owned by SIA's majority shareholder, government-controlled Temasek Holdings. Indigo Partners, the aviation partnership of American investors David Bonderman and Bill Franke, will hold 24%, while Irelandia Investments, owned by the family of Ryanair founder Tony Ryan, holds the remaining 16%.
Singapore launch
Tiger plans to launch operations from Singapore's Changi airport in the second half of this year to destinations within 4h of Singapore. Like the majority of low-fare carriers, it will operate a single type of narrowbody aircraft.
Ryan had said in December, when plans for Tiger were announced, that his family's investment vehicle decided to take a stake in the new airline because "low-cost travel is taking off all over the world and I'm sure it will be successful" operating out of Singapore as well.
SIA began formally studying whether to launch a low-fare unit early last year and at one point considered converting regional subsidiary SilkAir into a no-frills operator. SIA ultimately decided against it, believing it would be too difficult to change SilkAir's cost base and model, also acknowledging that experienced foreign partners were needed given that SIA has no experience in this segment of the market.
Modelled on success
"We have been studying the growth and success of the low-cost carrier model in Europe and the USA. We have come to the conclusion that the low-cost carrier model can succeed here as well," says SIA chief executive Chew Choon Seng.
"It will open new markets and make air travel more accessible to more people. We think [Tiger] will be successful and profitable within a short period of time."
Chew and SIA's partners in the Tiger venture also reject suggestions that bilateral air service restrictions will prevent low-fare carriers from being successful in Asia. They claim that air-service agreements have developed among countries in the region in recent years to the point where many nations now have no restrictions on the number of flights or designated carriers that can operate between them. They also believe that when low-fare carriers expand markets, governments are more willing to liberalise further.
Ryan believes that "10 or 15 years from now, maybe 10% of the traffic [in Asia] will be low-cost". He adds that Southwest Airlines started operating well before the US domestic market was deregulated, while Ryanair did the same "before there was freedom of the skies in Europe".
"Freedom of the skies evolves," says Ryan, adding: "I think over time it will evolve in this region as well."
Malaysia's AirAsia is one carrier trying to prove wrong those who believe low-fare carriers can only be successful in Asia as domestic players. Late in 2003 it launched its first international services from Malaysia, while early in February a Thai unit of the same name started operating with international ambitions.
Thai AirAsia is 49%-owned by AirAsia of Malaysia and 50%-owned by a Thai conglomerate. The carrier started operations early in February with domestic services, and set 16 February as the launch date for its first international services, between Bangkok and Singapore. AirAsia has also considered a joint-venture airline in Singapore.
Also in Singapore, a new carrier called ValuAir plans to launch services in the middle of 2004, initially with two Airbus A320s leased from Singapore Aircraft Leasing Enterprise, which is part-owned by SIA. ValuAir aims to be a low-cost operator and offer competitive fares, although the airline plans to have some in-flight services available, such as hot meals.
Elsewhere in the region, no-frills carriers have started operating internationally out of Indonesia, while established no-frills operators such as Cebu Pacific in the Philippines are expanding. In Japan, a handful of airlines describe themselves as budget carriers, although the Japanese cost structure is so high that most observers believe they cannot be described as pure low-cost/low-fare airlines.
Hong Kong's Cathay Pacific Airways, meanwhile, has said it is keeping a close watch over low-fare developments in the region and will not rule out the possibility of starting one itself if necessary, while in nearby Macau, Air Macau is known to have been looking at a revamp of its operations to a no-frills model. Australia's Qantas is set to launch a low-fare domestic subsidiary this year, while Thai Airways International plans to launch a domestic low-fare unit in the coming months with local partners.
Chinese market
There have even been some developments regarding budget operations in the highly regulated mainland China market.
In January, Civil Aviation Administration of China (CAAC) minister Yang Yuan Yuan revealed that the regulator was considering applications from three groups seeking to establish "budget airlines" in the country. Just how this may work in China, where airfare pricing regulations remain, is an open question.
But the fact that China is considering allowing no-frills carriers to be established is seen as highly telling. If they can be established there, say observers, there is little to stop them from getting off the ground anywhere else in the region. As a result, no major full-service airline can ignore the changing landscape.
Incumbent "legacy carriers" seem to recognise the need for change as the operating environment evolves.
As SIA put it when unveiling its third-quarter financial results earlier this month: "The competitive landscape of the airline industry continues to evolve, with new entrants challenging mainline carriers for market share in the region. Greater competition for regional traffic and downward pressure on yields are expected. It is therefore imperative for costs to be kept under control."
A final note of warning is sounded by the CAPA in its latest report, "There can be no room for complacency, regardless of market growth, with such change in store. Any airline which has not successfully restructured its operation by the end of 2004 will be seriously at risk".
Source: Flight International
