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Freight Is Keeping Asia's Airlines Flying

Minoru Fukada, chief buyer for Jusco supermarket, felt his blood run cold when he looked in his store's freezer six weeks ago. The Japanese retailer's flagship outlet in Hong Kong had run out of ice. Why the run on frozen water? It turns out that Hong Kong's Japanese community, fearful of severe acute respiratory syndrome (SARS), was imbibing their favorite beverages at home instead of visiting local bars and karaoke parlors. And just any old ice won't do for Jusco's finicky customers -- it has to be ice from their homeland.

Meanwhile, Jusco's next scheduled shipment was slowly making its way from Japan by sea. Only a rush order by air could prevent a meltdown. But this was at the height of the SARS outbreak, and Hong Kong's airlines had cut flights by more than 40%. Passenger aircraft were parked all over Asia's deserted airports.

Just when all seemed lost, two days after Fukada made his chilling discovery, 200 kilograms of pristine block ice rolled into his stores -- along with such other necessities as fish paste, fermented soybeans, and fresh seaweed. "It was business as usual," says Fukada.

OUT OF MOTHBALLS. It's no secret that Asian airlines are losing millions of dollars a day as SARS creates some of the worst operating conditions in memory. Finances at Hong Kong's flagship carrier, Cathay Pacific (CPCAY), looked so grim at one point that Mizuho Bank refused the airline's a $100 million loan request for working capital. "The head office was worried about about long-term cash flow if the crisis continued," says a loan officer.

Such worries may be unfounded. Even as revenues plummet and passengers flee, airlines have kept their cargo operations in full swing or even ramped them up. Indeed, flights with high cargo volumes -- and no passengers -- aren't uncommon, and all-cargo planes, previously on reserve, have been pressed into service.

Overall, both Cathay and Dragonair showed no decline in cargo shipments month-over-month March through May. Dragon's dedicated cargo unit (planes carrying cargo only), rose 11% in April from the previous month.

TOFU CRUMBLE. Semiconductor distributor Marubun/Arrow also got a shock from its customers in April. Orders jumped 30% as companies like TDK (TDK), Texas Instruments (TXN), and Fujitsu (FJTSY) feared a complete supply breakdown, with no end in sight to the SARS outbreak or airline cutbacks. Also, Marubun/Arrow's suppliers have spread semiconductor production chains all over Asia. They manufacture in China, test and assemble in Singapore or the Philippines, and then bounce the chips back to China for packaging and final shipment.

Normally, about one-third of final shipping is rush orders, sent by air. No planes might have meant no chips, but those intra-Asian routes were just the flights air carriers targeted for more cargo planes, since that's where passenger traffic took the biggest hit. "We're still getting shipments in before the customer-request date," a distributor in Marubun/Arrow's Hong Kong office says.

Still, people are eager to see passenger flights take wing again. Just ask Jusco's Fukada, who says too much of his tofu gets broken up on the rough-and-ready all-cargo hauls. Shipments on the underside of passenger planes receive a lighter touch, he says.

SUMMER BLAHS. Fukada may have to live with broken tofu for a while yet. Anything near pre-SARS operation levels for airlines is still a long way off, even with the recent lifting of the World Health Organization's travel advisory on Taiwan and everywhere in China but Beijing. Flights are slowly being added, but "we don't expect the recovery, when it comes, to be either quick or strong," says Ian Shiu, Cathay's general manager for revenue management.

Dragonair is even worse off. Travelers remain wary of many mainland cities, the airline's primary destination. A return to normal passenger activity isn't forecast before autumn, long after the summer holiday season. Until then, cargo will be pulling more than its weight in keeping Asian airlines aloft. By Tim LeeMaster in Hong Kong

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