Edging through the famously chaotic traffic of downtown Manila at the end of November, it was hard not to be struck by a certain irony in choosing the Philippines to host this year's assembly of Asia-Pacific airline presidents.
The country's flag carrier was, after all, the first major casualty of the economic crisis - although it has since limped back into the air - and was also one of a few notable absentees at an assembly overshadowed by the region's economic woes. The spirit of the Filipino flag carrier nevertheless hovered over its fellow members of the Association of Asia-Pacific Airlines (AAPA) as its colourful chairman and part owner - the Filipino tycoon Lucio Tan - hovered above the Manila gridlock in his private helicopter, running between ultimately unsuccessful meetings with Cathay Pacific and Northwest Airlines, both in town to discuss a rescue package.
If Tan fails to find a rescuer the AAPA could find itself with its headquarters in a nation without a member airline, a further irony not lost on general director Richard Stirland. Philippine Airlines was not alone. Others, such as the struggling Air Niugini and Garuda Indonesia, were equally notable by their absence. "A sign of the times," comments Stirland.
There is no doubt that this 42nd assembly marks a low point for the region. A recurring theme of the assembly was whether there is still worse to come. The encouraging news, such as there is, comes from early signs that the economic crisis has indeed reached bottom. Economists tentatively forecast a return to growth in the region this year, albeit well below the double digit figures that the Asian tigers had come to expect.
Such cautious optimism appears to be reflected in the region's passenger traffic figures. After more than a year of steady decline, the September returns, released during the assembly, finally moved back into the black with a rise of 4%. Load factors too edged back up. The movement may be small, but only six months before the market was in free-fall with traffic plummeting by close to double figures.
It is perhaps understandable that the airlines are far from ready to relax. Even if the collapse has genuinely halted, there is still much ground to make up before the numbers return to the level "before the fall" in mid-1997. And even allowing for a rally in the final quarter, year-end AAPA traffic returns are likely to show an fall of at least 3% for the full year in 1998.
Stirland also cautions that the September figures are not necessarily indicative of an underlying resumption of demand, but come partially as a result of damage limitation measures already carried out by the airlines. Most have already switched their capacity, pulling off the most badly damaged routes within Asia and targeting safer long-haul destinations in Europe and the USA.
Also, while aircraft capacity is finally starting to come down - aided by the traumatic cut-backs in the Philippines as well as severe pruning in Malaysia, South Korea and elsewhere - the overall fall in seats offered has so far been slower and less decisive than the traffic collapse.
Asian carriers arguably find themselves with less room for manoeuvre than their US counterparts, which have a sizeable fleet of ageing narrowbodies and widebody classics in reserve ready to retire if markets turn down. Asia as a whole has the world's largest and newest widebody fleet - few of which are yet ready for the desert. The AAPA members alone have over 850 widebodies with average fleet ages typically between around five and eight years.
One of the more controversial positions put at the assembly came from Jean-Louis Morisot, financial analyst with Goldman Sachs in Singapore, arguing against the need for any more new aircraft in the region.
Cathay Pacific's chief operating officer Philip Chen, fresh from the chill market of Hong Kong, agrees that signs of recovery are still patchy. "I'm reluctant to say that the tide has now turned. 1999 will be another challenging year," he says, although private comments from the bearish Cathay executives suggest that his comments may be understated. More than one summed up the outlook for this year with a single word: "horrible".
Although Hong Kong itself has seen some growth in passengers transferring through the new hub, Cathay is still beset by the damage done to yields from a local currency pegged against the US dollar amid a sea of devaluations. "People ask about the gains from the currency devaluation in Asia and we ask, 'what devaluation'?" says Chen.
Singapore Airlines (SIA) echoes the sentiments. "The last few months have seen an improvement in the load factors, but the yield is very bad," says chief executive Dr Cheong Kong. "Its a brave man who says that the worst is over."
The AAPA's grim annual report gives some indication of the extent of the damage done by the currency devaluations which heralded the Asian crisis. Yields were down by nearly 10% over the 1997/8 financial year to March, and overall revenues fell, despite a modest rise in traffic. Although operating margins stayed remarkably level, swingeing financial charges wiped out the good work, leaving the AAPA members with a collective net loss of $843 million.
Stirland adds that this is only half the picture. The current 1998/9 year will reveal the true scale of the profits collapse over the last 12 months.
Yet not all is gloom. There appears to be some still hesitant but rising expectations that the giant Japanese economy may be stirring from recession.
"We seem to have hit the bottom," says Koji Yamashita, executive vice-president marketing at All Nippon Airways (ANA), suggesting that the government's latest economic plan could start to bring the first signs of recovery by mid year - perhaps even in time for the next AAPA assembly in Tokyo in November.
Air New Zealand managing director Jim McCrea, watching from the relatively safe haven of Australasia, adds his vote of confidence for the longer term. "We're very confident in the recovery of Asia," he says, reporting that ANZ is currently in a holding pattern, but is keen to grow again in the region as it recovers. Australasian tourism is already back to pre-crisis levels, he adds.
Longer-range forecasts from the International Air Transport Association (IATA) suggest that the region as a whole should be back averaging 5-6% traffic growth over the next five years on international routes alongside a more selective recovery on some of the domestic markets. IATA director general Pierre Jeanniot believes that even these forecasts may be a little low, coming in reaction to the overconfident predictions of the recent past. "I still believe the same growth potential is there. It's just slipped a little," he says.
That many of the region's economies remain little chastened by the crisis was clear from the Philippines itself, with politicians talking confidently of renewed growth. Delegates needed only to step outside onto the streets of Manila to see that Asia's boomtown atmosphere is not yet dead, with its attendant long-term problems but also its clear growth potential.
Stirland is quick to scotch suggestions that the present crisis will do much, if anything, to suppress the "individuality" of Asia's airlines, routed in national pride and local cultures.
"Asia and its airlines are unique and likely to remain so regardless of alliances or any other forms of globalisation," he argues, adding that once the crisis ends "...the same old Asian problems and idiosyncrasies" will return, if indeed they ever went away.
Stirland's argument is not that Asian carriers will shy away from alliances - more than half the AAPA members are developing links with one of the global alliances with a spate of new deals over the past 18 months. His point is that the carriers will remain Asian first and global second - fuelling western suspicions that Asian participation in global alliances may be less settled than it seems.
Stirland continues: "In some parts of Asia a safety audit or a government mandated notice to passengers regarding their legal rights is still regarded as a bizarre intrusion by government, just as some of the cultural and social peculiarities of this region, or typhoons or buffaloes on the runway, would be regarded as bizarre in Europe."
Alliances and AsiaThe carriers appear to share some of his reservations, despite their recent spate of deals. Cathay confesses that it took two years of agonising before signing up with British Airways to join oneworld. SIA has long been linked with Star, but has delayed signing despite its partnership with Lufthansa. Dr Cheong does now concede that SIA is "more likely to join than not". That would bring with it access to the SIA's own Ansett/ANZ alliance, while the Singapore carrier is also cementing ties to China Airlines and leading the bidding in the privatisation of Star founder member Thai Airways.
Stirland himself muses as to whether the days when flag carriers from nations such as Vietnam and Brunei could continue to maintain fully independent transpacific services may be fading, as pressure grows to form some kind of link to more powerful allies. He concedes that the potential advantages of capacity rationalisation and marketing reach that alliances promise are increasingly difficult to ignore especially in present conditions.
But the general mood appears to be that alliances will develop slowly, based around joint marketing rather than any more fundamental relationships and still hampered by the twin constraints of regulation and national politics.
"Alliances will lift volumes but not necessarily the quality of our unit revenues, so we're stuck with reducing costs," says McCrea at ANZ. He adds that in the present climate, the more telling structural change has been New Zealand's 10-year head start on deregulation that allowed the carrier to "accommodate the upheavals in Asia in a reasonable way".
ANA underlines the point. The carrier has now signed up for the Star Alliance, although it is first working on bilateral relationships, before officially coming into the fold next October. A deal with United came on line ready for the winter schedule (ANA reports several thousand cross bookings in the first week alone) and Lufthansa is soon to follow pending bilateral delays. Yamashita confirms that ANA is eventually hoping for the kind of $200-300 million annual revenue boost posted by other Star members.
But he is also clear that the fundamental shift taking place for Japan's airline giants is not from alliances abroad but deregulation at home. The opening up of the domestic markets to fares competition and new entrants, such as the recently launched Skymark, is finally breaking through what he admits has been 40 years of "cosy regulation within the Japanese aviation industry".
The competition from new entrants is, as yet, hardly alarming - Yamashita says that Skymark's volumes with a handful of daily flights is "negligible" compared with ANA's 38 million domestic passengers a year. He adds, that what is important, however, is the sea change it has caused in attitudes.
This deregulation, together with the new US bilateral, is clearly spurring Japan's majors to show more steel in cost management. "The economy is only half the picture," says Yamashita. Despite the pain of last year's pilots' strike, ANA is still determined to press on, he says, confirming that everything is being studied, including joining its rivals in buying in low cost capacity. "We must look at costs or we have no future picture for how to survive against international competition. We cannot see any alternative," says Yamashita.
InfrastructureQantas managing director James Strong argues that internal streamlining within the airlines has only served to highlight the level of costs and inefficiencies being passed back to them by other industry players. The list covers all the usual suspects, including travel agencies and distribution companies, but judging by the debate at the assembly it is airport charging that remains at the top of the list of preoccupations.
The complaints are not new. Nor are they confined to Asia. The AAPA's European counterpart is engaged in a highly public campaign to bring some logic to charges in Europe. Remember also the direct action in Los Angeles when carriers refused to pay what they considered unfair charge increases. Asia has particular reason, however, to be concerned.
Charges at Hong Kong's new Chep Lap Kok or Japan's Narita are the highest in the world. The budding airport commercialisation now beginning to spread to the region is also starting to raise concerns. As Stirland comments, the fear is that airports will use their monopoly position to ensure that they meet profit targets and remain attractive to investors. "It's a form of gouging,"he says, with characteristic clarity.
Also, unlike the West, there are few national competition authorities ready to take up the cause on behalf of the airlines and none at a regional level. Nevertheless, the AAPA is preparing to take up the fight, ending the assembly with a resolution to push the issue of infrastructure charges with governments and airport authorities alike.
Whether the resolution actually translates into concerted action remains to be seen. Although Stirland quotes the European and North American experience, he concedes that individual Asian carriers are hardly in a strong position to mount attacks on their home airports and the national governments, which may well control both infrastructure and flag carrier. The AAPA presidents were certainly happier discussing "partnership" and "publicity" rather than anything more dramatic.
"Its just a question of keeping this issue up in front of the public," says Strong, arguing that such pressure is needed to get politicians to act. He adds that governments can be "extremely sensitive" to having their taxes clearly itemised, rather than hidden away from the public in a ticket price. "Its an education process. The consumer has to know that they are ultimately paying for it," says Dr Cheong.
What does seem certain is that Asia-Pacific's carriers still have plenty of cost cutting ahead of them before the effects of this downturn are eventually laid to rest.
Source: Airline Business
