For many years, the traditional lore in the airline business has been that Asia-Pacific represents the most vibrant, fastest growing, most profitable element of the industry, with the brightest prospects and the greatest resilience to factors like wars and recession to which most other carriers are vulnerable.
As 1997 draws to a close, the innate strength of the Asia-Pacific market seems to be under threat. Is the Asian Miracle being exposed as an Asian Myth?
The economic problems afflicting certain countries in southeast Asia, especially Thailand, Malaysia and Indonesia, have resulted in devalued currencies, turmoil in the equity markets, and a downwards re-evaluation of economic growth forecasts.
The smog cloud which covered much of the region in late September will certainly depress tourism, and is likely to have wider effects, too - an unhealthy workforce is unlikely to drive rapid economic growth forward. In any case, the smog debacle should force governments to adopt and enforce stricter environmental policies, which could reduce growth in the short term.
Finally, Hong Kong is still adjusting after the handover to China on 30 June, with tourists, especially from Japan, staying away in droves.
Airlines in the region are already feeling the pinch. International traffic data from the Asia Pacific Airlines Association makes sorry reading. Traffic growth has slumped this year and, with capacity increasing steadily, load factors fell in five successive months to July. In the worst month, June, year-on-year revenue passenger km growth was an anaemic 1.8 per cent, yet capacity climbed 7.3 per cent. As load factors fall, yields and profits are likely to follow suit.
Many carriers have already begun to suffer from currency fluctuations and rising unit costs. Last year Korean Air lost $250 million and even Singapore Airlines' operating profit fell 14 per cent; it only increased its net profits by selling assets.
Cathay Pacific has suffered badly from what chairman Peter Sutch calls the 'post-handover hangover'. July passenger numbers slumped by nearly 20 per cent, and in September the carrier's share price fell substantially after it delivered an unprecedented profits warning.
Ansett, reeling from the continuing high cost of its Asian expansion, has put its fleet acquisition plans on hold. It will not be long before Thai Airways, Malaysia Airlines and Garuda begin to suffer from their currency devaluations, given that so many aviation costs, from aircraft to fuel, are denominated in US dollars.
If Asia's problems continue, the entire world had better watch out. Many carriers in Europe and North America are relying heavily on Asia for their growth, both now and in the future. Furthermore, the large order books for new aircraft in Asia-Pacific mean that overcapacity will develop very quickly if demand growth projections are not realised. It is very easy to imagine unwanted aircraft capacity, most of it widebodied, moving out of Asia to flood the rest of the market. Then, it could be 1991 all over again, with Asia acting as the trigger.
Tom Gallagher of CIBC Wood Gundy sums it up in a recent report: 'Lower levels of economic activity as well as excess capacity and weaker local currencies should ensure a downturn in the first quarter of 1998. Asian carriers are fundamentally sound in the long term, but in the near term results should be quite volatile.'
Many people will read these words and scoff. 'Why try to find problems that don't exist?' they will say. 'Let's just go on enjoying the boom.' This is a very short-sighted attitude; denying that problems exist will not solve them. Let's face it, boom markets have a nasty habit of turning to recession just when complacency has set in nicely.
It is more sensible to accept that there is a potential difficulty and set about limiting the damage. Clearly, the longer term market potential in Asia remains strong, but the wise will act prudently during the next six months.
Slower growth, overcapacity and increasing costs could prove to be a lethal cocktail, especially if the symptoms are not recognised until too late. To judge by previous recessions, the result is usually massive losses, severely damaged balance sheets, bankruptcies, industry consolidation, and a shortage of investment capacity.
It is vital that Asian governments promote long-term growth and stability by not panicking; instead, they must manage their economies carefully, making prudent, sensible decisions rather than nationalistic ones. Likewise, airlines in the region need to rein in capacity growth and adopt a more conservative style for a while.
Source: Airline Business
