RICHARD PINKMAN BALI

Dealing with the unprecedented difficulties, Asia's airlines wonder how to work their way out of the current crisis. Meanwhile industry experts debate the appropriate prescription, with some saying a radical overhaul of the sector is necessary

The setting was beautiful, but the business conditions were ugly. Those were just about the only two points on which everyone agreed as Asia's airline chief executives met on the Indonesian island of Bali late last year. Everything else related to the future of the regional industry was vigorously debated at the most recent gathering of the Association of Asia Pacific Airlines (AAPA).

How long the present downturn would last and what segments of the market would be the first to rebound received ample time for discussion. For many, however, the most important question is whether the current downturn will signal the beginning of a new era in Asian aviation. Specifically, the issue is whether Asia might, for the first time, have to face such facts of life as consolidation, bankruptcy and the death of erstwhile flag carriers? At the heart of this debate is a question no smaller than whether Asia's economy and airline industry are fundamentally different from those of the rest of the world.

Assessing the damage

Few were prepared to offer any hard opinions on when the business climate would turn. AAPA director general Richard Stirland would say only that the carriers would "feel the effects into 2002 and - who knows - perhaps beyond".

Cathay Pacific chief executive David Turnbull was dismissive of attempts to predict a recovery date. When might the situation begin to improve? "February 4th," he pronounced facetiously. "Who knows? A year? Eighteen months?"

Intra-regional service, it was agreed, could well be the driver for short-term recovery. Stirland indicated that passenger growth since 11 September has been higher than unit traffic growth, revealing that consumers are once more flying, but not on long-haul flights.

The traffic figures certainly back up this market outlook. Services to Europe and North America remain weak, with the shaken US market definitely the hardest hit. As Turnbull says of the bottom-line impact: "The bigger the exposure to the USA, the bigger the damage."

Among the major concerns is whether the effects of 11 September and the ensuing collapse of carriers in Europe and Australia will have a domino effect in Asia. Experts are divided on the question, as well as on the issue of whether such a restructuring would ultimately produce as much good as harm.

Peter Harbison, managing director of the Sydney-based consultancy Centre for Asia Pacific Aviation, believes the situation has irreversibly changed for Asia's airlines. He believes that they are not merely facing another cyclical downturn, but rather the initial stage of the region's overdue restructuring.

On this view, the current problems are sufficiently dire that they will finally reveal the inherent unsustainability of neighbouring hubs offering the same full complement of international and regional services.

The worsening conditions, he says, will widen the gap in fortunes between the airline winners and losers, or what he terms the "haves" and "have-nots". As the have-nots continue to shed money on a major scale, their government patrons will realise that complete support of increasingly inviable airlines is not something they can afford for ever. Therefore, the struggling carriers - mostly state-controlled and less constrained by market realities in happier times - will soon have to make one of two choices. They will either accept a limited role in Asia's transport scene - basically restricting themselves to regional flying, leaving prestigious intercontinental flying to the winners - or agree to a vastly changed ownership structure, something that could see them taken over by a foreign airline.

State aid

However, state involvement has certainly not decreased thus far. Cathay Pacific chief operating officer Philip Chen is not alone when he observes that many of the region's governments have, in fact, responded to the events of 11 September by increasing funding for their national carriers. This trend, he warns, puts privately controlled carriers such as Cathay at a distinct disadvantage. "This tilts the playing field against airlines without access to similar government subsidies and support," he says.

Chen further notes that the difference in funds available between even the strongest airlines and the weakest governments is extreme. Among other dangers, this could result in a failing state-owned carrier running a basically sound private airline out the market.

Like Harbison, Chen feels this state intervention has resulted in the presence of too many full-service airlines in the region; a situation which runs contrary to the laws of economics and which ultimately benefits no one. "The active interference in the airlines is reversing evolution, ensuring the survival of airlines that should have folded and [been] replaced," he warns.

Other voices, however, doubt that whole-scale changes are inevitable or necessary. Stirland is one who feels that, aside from minor tweaking, the arena needs little change. He does concede that some partial integration with European or US carriers - such as the British Airways strategic tie with Qantas - might be necessary, but he insists that, by and large, the regional industry can continue as it is at present.

To accurately gauge the regional industry, he says, one should look at the situation a year ago, before the current market distortions. Then there were three carriers - Philippine Airlines, Garuda and Malaysia Airlines (MAS) - that could have been called unsustainable. Yet he is quick to add there is no core reason why they could not be viable. The underlying fundamentals of the markets they serve - especially Jakarta and Manila - are promising. Like much of the region, he says, these cities represent large and growing populations and economic centres that genuinely require extensive air service.

He puts the blame for past failure firmly down to poor management at such carriers, rather than to any fundamental barriers to success. "Reasonable strategies are the key to viability," he says. "To serve Buenos Aires from Kuala Lumpur or Los Angeles from Bali is perhaps not financially sensible."

At heart, many like Stirland, believe that Asia is simply a special case. They explain that the region is unique, due to its geography and to its stage of economic development. They therefore also argue that it is of little value to apply universal rules formulated in the mature Western economies.

The theme of Asia's difference from the rest of the world was echoed throughout the AAPA conference, beginning with the opening session when the organisation noted that the global response to 11 September resulted in "a call for immediate action; action that may not be appropriate for this part of the world".

Local issues

Stirland is among those keen to stress that rules established in the West do not necessarily hold sway in Asia. In particular, he argues that the region's geography will prevent the type of hub and carrier consolidation for which Harbison calls.

"If you compare the Asia-Pacific situation with Europe, you see big differences," he notes. "Except for Kuala Lumpur and Singapore, the hubs are separated by considerable physical boundaries. This is totally distinct from Europe and the USA, where you can travel between hubs by ground transportation and on small regional aircraft."

Stirland also believes that geography precludes the emergence in Asia of the low-fare competition that has irrevocably altered the landscape, first in the US market and now in Europe. "The success of the low-cost carriers has largely been in the short-haul sector, with small aircraft flying to secondary airports under a single regulatory regime," he says. "I don't see people flying from Manila to Hong Kong on an A320."

Martin Craigs, president of the Hong Kong-based Asia Aerospace Forum, makes a similar point about the Asian consumer, arguing that passenger preferences are also different from those in the West. "It's wrong to assume that the US consumer experience transfers to Asia," he says. "Asian passengers are not as solely focused on price, but rather are more brand and quality focused."

However, the most important difference between Asia and the rest of the world, Stirland contends, can be put down to market maturity. "Airlines in the final analysis are a reflection of their economies. In the USA and Europe, you have static population growth and GDP growth is driven only by economic activity, "he says. "Here, we are experiencing continued population growth, the explosion of the middle class, plus a freeing of economic activity throughout the region." He predicts these factors will continue to fuel annual rates of high single-digit economic growth.

It is perhaps difficult for some to look past the current global economic malaise, but Stirland is confident that the "latent promise of China" and the huge potential of the region will see a return to the boom times before too much longer. He also believes that, unlike the mature economies of the West, Asia will continue to post impressive gains years into the future.

"One can see growth going on almost indefinitely," he says, adding that this and the continuing development of regional tourism spell a bright future for Asia's carriers.

While most join Stirland in being bullish on Asia's future, not everyone believes that the region's aviation sector is immune to the pressures that affect the rest of the world.

For example, some regional industry experts argue that low-cost carriers will have a future in the region, even if they will perhaps not proliferate to the same degree as they have in the USA and Europe. There is particular scope, they argue, for low-cost competitors to make life uncomfortable for flag carriers with larger domestic markets, such as Taiwan or Indonesia.

Global forces

Chen at Cathay is among those who acknowledge that "the airline business is global" and that Asia does not have any unique protection from global forces. "Economic theories and free competition should not have regional boundaries," he says. Other less likely candidates also support the viewpoint.

Christine Tsung, chief executive of Taiwan's state-owned China Airlines, believes that the region should not be looked at through a different lens. "Asia should not be immune from global trends," she says. "Whatever works in the West should work here." Tsung further adds that if the Asian carriers are unable to lower their costs and expand their revenue, they will have to face reality and let bankruptcies occur.

That said, the politically appointed head of Taiwan's flag carrier - who worked for several years in the USA - believes change must be introduced cautiously. "It takes time," she warns. "Just bringing in Western culture can be too abrupt our governments must [first] open regulatorily. It will take a while before governments are ready to let their carriers fail."

Not all are ready to be convinced by such arguments. Craigs wonders if some Asian economies could thrive without the vital link that their national carrier provides to the outside world. While Belgium might be able to live without a flag carrier, he argues that the Philippines would fare considerably less well. In that case, the nation's physical isolation would be disastrous, particularly given the vital importance that tourism plays in its economy.

"I don't see any country in Asia doing without a national carrier," says Craigs, who also ponders whether state involvement is necessarily an evil in today's fragile market conditions. "Is total unrestricted competition the best thing for the industry? Should there not be a certain level of intervention?"

Harbison sees both sides. He allows that it may be politically difficult for governments to cut their flag carriers adrift given the pressures of national pride, security and tourism.

He does see, however, small steps toward change. Here he cites recent discussions between Garuda and MAS on possible intensive co-operation. Given the unease with which foreign ownership of carriers is viewed in the region, he believes a creative "Asian solution" could coalesce, providing some of the benefits of cross-border ownership without broaching the taboo topic of control.

Such developments are vital for Asia's carriers, Harbison believes; not just for their economic health, but also for their global market position. Without some form of co-ordination, he says, Asian carriers will be put at a severe disadvantage when vying for passengers with the ever-larger European and US carriers. It will be akin, he says, "to corner stores competing with conglomerates".

Obviously, the questions of whether Asia's airline sector will experience structural reform - or indeed needs it - are very much in active debate. Everyone would agree, however, that the coming year is going to be a decisive, change-filled period for the industry. Perhaps when the AAPA presidents meet again next November, this time back in the Philippines, some answers will accompany the questions.

TABLE: Asian airline financial data - five-year view

 

Units

 1996/7

1997/8

1998/9

1999/00

2000/01

Revenues:

Passenger

$ million

39,272

37,267

30,818

35,266

39,478

Freight

$ million

7,465

8,023

7,196

8,517

9,594

Other

$ million

4,506

4,351

3,761

4,367

4,761

TOTAL

$ million

 51,242

49,641

41,775

48,149

53,833

change

-3.7%

-3.1%

-15.8%

15.3%

11.8%

Operating result

 $ million

2,016

1,994

804

2,655

3497.9

margin

3.9%

4.0%

1.9%

5.5%

6.5%

Net result

$ million

965

-1,216

317

1,817

926

margin

1.9%

-2.4%

0.8%

3.8%

1.7%

Yields

¢/RTK

72.0

65.6

56.1

58.2

59.7

change

n/a

-8.9%

-14.5%

3.7%

2.6%

Unit cost

¢/ATK

45.4

41.8

35.9

37.6

39

change

n/a

-7.9%

-14.1%

4.7%

3.7%

Asian airline international traffic data - five-year view

 

 

1997

1998

1999

2000

2001L

Traffic

 RPK million

387,763

382,106

416,820

462,466

change

3.6%

-1.5%

9.1%

11.0%

1.3%

Capacity

ASK million

561,393

 557,130

576,254

617,788

change

6.0%

 -0.8%

3.4%

7.2%

9.4%

Load factor

per cent

69.1%

 68.6%

72.3%

74.9%

73.5%

change points

-1.64

 -0.49

3.75

2.53

-5.9

NOTE: Financial year to March. AAPA carriers include: All Nippon, Asiana, Cathay Pacific, China, Eva, Garuda, Japan, Korean, Malaysia, Philippine, Qantas, Royal Brunei, Singapore, Thai and Vietnam Airlines RTK = revenue tonne km; ATK = available tonne km; L = latest figures (January - September); 1 km = 1.609 miles Source: Association of Asia Pacific Airlines

 

 

 

Source: Airline Business

Topics