Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Businessweek Archives

Asia: The Airlines That Fell To Earth (Int'l Edition)

International -- Asian Business: AIRLINES


Asia's carriers default on loans and slash payrolls

The sky was the limit when Philippine Airlines Inc. placed a $2.5 billion order for a fleet of new jets in 1995. PAL was ready to become a highflier in Asia's booming airline industry. But look at PAL today. Whipped by Asia's financial crisis, it lost $250 million in its most recent fiscal year and was forced to suspend payments on its $2.1 billion in debt. Angry pilots are on strike over layoffs. To survive, PAL has decided it must shrink drastically. It has just fired one-third of its 14,000 employees and plans to cut its fleet from 54 planes to 14. Says President Jose Antonio Garcia: "There's no way we could keep the airline the way it was."

Neither can any other airline in Asia. After spending billions to build fleets for the Pacific Century, PAL and most other carriers are in crisis. They are canceling or postponing orders for dozens of Boeing Co. and Airbus Industrie jets, dropping marginal routes, and slashing expenses in the wake of plummeting business and vacation travel. After surging more than 10% annually for the past decade--double the global growth rate--traffic on Asian routes is likely to contract at least 10% this year. Fares are plummeting as well as carriers scramble to fill seats.HIGH RISK. It adds up to what will likely be a radical shakeout in Asia's skies. Declining revenue, combined with the free fall in Asian currencies, will make it even more difficult for carriers to pay their foreign debts. And Asian governments can no longer afford to subsidize them. Flag carriers such as PAL, Thai International, and Garuda Indonesia are likely to shrink in size or sell major stakes to foreigners. Private carriers, such as South Korea's Asiana Airlines Inc., may fold. Whatever happens, it'll surely be more bad news for Boeing and Airbus.

The plight of Asiana is especially grim. Hard hit by the weak Korean won and a falloff in passengers, Asiana has $2.8 billion in net debt--nearly three times its 1997 revenue. Last year, it told Airbus it couldn't to take delivery of 16 jets it ordered. Meanwhile, its main rival, Korean Air, is plunging ahead with a risky $2 billion order for 27 new Boeing 737 planes, even though it lost $280 million last year. "A cash injection from outside appears to be the only solution for Asiana," says Samsung Securities Co. analyst Sonia Song, who figures it has a 50-50 chance of bankruptcy. Asiana director Ghil Byung Wui confirms that "we are talking to foreign investors for a major equity sale." But with Asiana's perilous finances, it will be a tough sell.

In Indonesia, the shakeout already has begun. Sempati Air, which was controlled by former President Suharto's youngest son, Tommy, has gone bust. And a new management team at flag carrier Garuda wants to reschedule its foreign debts, sell half the airline's 57-plane fleet, and find a foreign partner.

For sheer scale, nothing compares with Japan's mess. Japan Airlines Co., which lost $692 million in the year ended Mar. 31, is weighed down by $3.8 billion in debt--almost nine times its equity, according to HSBC's James Capel. Analysts fear that JAL, after expanding recklessly in the late 1980s into hotels, golf courses, and travel agencies, will collapse if it doesn't start selling assets. And except for ending chauffeured limousine service for pilots, JAL hasn't done much to trim its bloated cost structure, which is 50% higher than that of U.S. rivals, who won the ability to offer 90 more flights under a new Japan-U.S. pact. Already, JAL has had to slash economy fares to match steep discounts by Northwest Airlines, American Airlines, and Delta Air Lines.

But even if managements want to implement painful remedies, they face another problem--increasingly combative unions. All Nippon Airways Co., which lost $20 million in 1997 and expects to lose twice as much this year, hopes to reduce costs by $880 million by March, 2001. For one, base pay of senior ANA pilots is $166,000, vs. $112,000 for U.S. pilots. But when ANA tried to cut pay by 15%, pilots refused to fly long-haul flights for two weeks. They are threatening to strike again.

PAL's devastating pilot strike may have even killed the carrier's best hope for recovery: selling a major stake to Northwest. PAL Chairman Lucio C. Tan and Northwest Co-Chairman Gary L. Wilson apparently were close to a deal when the strike erupted in early June. Northwest won't comment but acknowledges it has been talking to PAL.

Even Asia's best airlines, such as Hong Kong's Cathay Pacific Airways Ltd., are reeling. In the past year, it has let go nearly 1,400 workers, almost 10% of its staff. And in July, Cathay must make an expensive move to Hong Kong's colossal new airport, where landing fees are 50% higher. After a 55% earnings drop in 1997, Cathay could report a loss this year, analysts say.

The downturn is hurting aircraft manufacturers and creditors, too. Malaysian Airline System has delayed delivery of many of the 25 jets it ordered from Boeing in early 1996 as part of a $4 billion deal, while Asiana has postponed delivery of two Boeing 747s and three Boeing 767s scheduled for 1998. After being in denial earlier this year, Boeing now says the crisis will cost it 150 orders over five years. The company insists it is still bullish on Asia, but "we are concerned about the troubles that have plagued the Asia economies," says Ronald B. Woodard, president of Boeing Commercial Airplane Group.JOLT. Airbus is more sanguine. That's because it has already delivered most of the A330s and A340s Asian carriers ordered during their pre-bust binge, claims John Leahy, senior vice-president for sales. Over the next 20 years, Leahy still thinks Asia will account for 13,600 new-plane orders worth $1.2 trillion.

Right now, that seems optimistic. PAL wants to return the keys on four A340s to one leasing company and to return four more to an Airbus leasing unit. "We're telling them: `You're better off taking them back because we cannot pay you,"' says PAL's Garcia. Indeed, so many Asian airlines are downsizing that the aircraft-leasing industry may also be in for a jolt. Thanks to strong demand elsewhere, prices for used aircraft have dropped only slightly. But "the real effect will be felt when the Airbuses from Garuda and PAL go back to the manufacturers or banks," says Association of Asia Pacific Airlines chief Richard T. Stirland.

Sometime in the next decade, survivors of this shakeout surely will soar again. Whether they'll ever be the swashbuckling customers Airbus and Boeing are counting on is another question.By Mark L. Clifford in Hong Kong, with Brian Bremner in Tokyo, Hugh Filman in Manila, and bureau reportsReturn to top

blog comments powered by Disqus