Max Kingsley-Jones and Kevin O'Toole/LONDON for Flight International
It is one of the ironies of the airline cycle that just as the manufacturers are gearing up to record production levels, the market runs into trouble. Last time round it was the Gulf war which heralded a dramatic and damaging descent to recession. This time, there are fears that the economic crisis in Asia could be the first sign that the boom is beginning to unravel.
What started as a financial crisis in much of South-East Asia has already begun to impact on the economies of countries such as Indonesia, Malaysia, the Philippines, South Korea and Thailand. Singapore, with its reliance on international business, is unlikely to escape the impact of the surrounding crisis and while Taiwan looks relatively secure, Hong Kong's fortunes have been on a rollercoaster since its return to China in June 1997. Japan has been battling through an economic slump and banking crisis of its own and, although airline orders may be safe, the economy looks in poor shape to rescue its southern neighbours.
Finally there is mainland China. Its economy and airline industry have largely been driven by internal growth so making it less vulnerable to the woes elsewhere in Asia, but the giant country's growth spurts have been unpredictable and other factors could yet slow its progress.
For Airbus and Boeing, which have pinned much of their growth strategy on soaring Asian demand, the economic future of the region is crucial. The carriers of South-East Asia, Japan and mainland China together hold orders for around 500, just under 20% of the 2,700-strong Airbus and Boeing order backlog. For the engine manufacturers, those orders account for some 1,200 installed turbofans and between 15% and 44% of their respective backlogs.
The International Air Transport Association (IATA) is still trying to assess what the impact of the crisis will have on world airline profits in 1998. IATA's director general Pierre Jeanniot is visiting the region at the moment to meet the airlines, but the association is tentatively anticipating that the profit of the world's airlines which has been floating around the $4-5 billion mark for the past three years, could now be closer to $3 billion in 1998.
Boeing expects to see delays or cancellations around 60 aircraft deliveries to Asian airlines (due over the next three years), mainly 747s and 777s. The US manufacturer has not scaled-back its overall delivery forecast, stresses president Harry Stonecipher, as it expects that aircraft no longer required by Asian airlines will find homes in other regions. "Demand in other parts of the world is still robust, and we are confident we can retain high production rates," he says.
CHINA UNBROKEN
Stonecipher says that Boeing has more than 300 aircraft on order which are scheduled for delivery to Asian airlines between 1998 and 2000 - "one-fifth" of total production. Most narrowbody aircraft deliveries will be to China, so far unaffected by the region's airline crisis. Widebody deliveries are most at risk and Stonecipher acknowledges that the 747 and 777 are "most vulnerable" in 1999 and 2000. Boeing does acknowledge that the downturn could affect its plans for growth versions of the 747 and 777 as Asian airlines form a large part of the potential demand for future derivatives.
Airbus is less exposed, with around 170 aircraft on backlog for the Asian carriers, of which fewer are destined for operators in the more critical areas. "We expect Asia's forecast long term growth to continue, as it is still a developing market," says John Leahy, Airbus senior vice-president commercial. "The growth line may have slipped back by one-to-two years, though," he warns.
UNPERTURBED P&W
Pratt & Whitney does not see the financial crisis as a major problem, but warns that it expects some slippage in deliveries which will see a change in its shop load in terms of hours during 1999. The US manufacturer is the most exposed of the engine makers, with its Asian orders representing around 44% of its backlog. One-third of the 662 engines on order for South-East Asian airlines are from P&W.
"We don't see it affecting us from a financial standpoint because demand continues to be strong in the USA and Europe, and the spare parts business is also strong," says P&W. "We have seen no cancellations but we will see some slippage in deliveries," it says. "There has been some re-scheduling, but we don't see that it will have a major influence in the long term".
To some extent, P&W, like the other engine makers, is buffered from the front-line effects of the crisis by its up-stream position in the manufacturing process. "We always have to settle with the airframe guys first, so in some ways we'll have to see how it sorts itself out. So far it has been something we can manage".
Around one-quarter of Rolls-Royce's backlog is with the Asian airlines, and the manufacturer is not unduly concerned citing the fact that over 90% of its order intake in 1997 was from outside the region. "We anticipate that there may be some deferrals, but we don't expect any cancellations," it says.
REDUCED GROWTH RATES
In a new report on the region, Hong Kong securities house HSBC James Capel warns that growth rates across the Asia-Pacific economy as a whole, excluding Japan, are due to halve over the next year. That in turn would see passenger growth levels halved from the 10% they have averaged over the past few years. Already it forecasts that the major players are unlikely to reveal much above 4% when the final figures are revealed, with Cathay Pacific in outright decline and Thai International and Singapore Airlines close to standstill. While Capel acknowledges that delivery delays and cancellations will be problematic, it believes that capacity growth will be reined back sharply for the foreseeable future as the airlines tackle the slump.
Less easy to call is the fate of the Chinese airline industry, which has until now largely escaped the crises. The jury is still out on whether its major airlines will remain insulated from the storm.
Capel paints a relatively optimistic picture for the country's two major listed airlines, China Southern Airlines and China Eastern, forecasting an increase in profits for both. It points out that China Eastern, based in Shanghai, can expect to benefit from the opening up of China's financial centre and the country's entry into the World Trade Organisation. This is expected to generate an increase in lucrative European and US services.
While the analysis acknowledges that gradual deregulation of the Chinese aviation market will intensify competition and push down yields, it argues that China Southern will benefit from its position as the country's largest domestic operator. Its home base in the economically strong southern Pearl River delta is also expected to continue to generate growth.
Securities house Salomon Smith Barney, by contrast, paints a comparatively pessimistic picture for both Chinese carriers, forecasting a marked fall in earnings in 1998, before recovering in 1999. A drop in inbound Asia tourism, particularly from South Korea and Japan, is expected to have an impact on China Eastern, further compounding the affect of a slowdown in the country's domestic economy.
The overall economic slowdown in China is expected to have an even bigger impact on China Southern, which derives some 80% of its income from the domestic market. Recent industry-wide load factor figures for the last quarter of 1997 already indicate a marked decline in load factors.
Both reports concede that much hinges on the strength of the Chinese yuan over the next year or two. Speculation about a pending devaluation has been rife and, as experience in the rest of Asia has shown, airlines can suffer badly when dollar costs soar. If China scales back growth, then airframe and engine makers alike could have cause to revise their forecasts in earnest.
Source: Flight International
