The Battle Of The Pacific

When Andersen Consulting's Jay Rein travels to Asia from Dallas, he could easily hop a United Airlines Inc. flight for the 15-hour trip to Tokyo. Instead, he flies to Atlanta to pick up a nonstop Japan Air Lines flight, where Asian flight attendants pamper him and he sups on sushi and noodles. "When I'm going to immerse myself in a foreign culture, I like to do that from the start of the trip," says Rein, who travels to Asia once every three months.

He may soon have a lot more choices. A flock of fast-growing Asian airlines is looking to the lucrative transpacific market for their next wave of expansion. That may be good news for business travelers, but it's bad for United and Northwest Airlines Inc. The two U.S. carriers have long dominated the transpacific travel market. The threat from Asian carriers is coming just as the Japanese government wants to limit the lucrative rights of United and Northwest to pick up passengers in Japan for connecting flights into Asia.

ON THE LINE. The competition across the Pacific will only get tougher. For decades, most U.S. travelers to Asia have had to switch planes at Tokyo's Narita Airport, where Northwest, United, and Japan Air Lines hog the terminals. But now, new, longer-range aircraft such as the Boeing 747-400 are allowing Asian carriers to bypass Narita and either fly directly to the U.S. or stop over at less crowded airports. As the first step in its U.S. expansion, Hong Kong-based Cathay Pacific Airways Ltd. will begin flying daily to New York via Vancouver by next Sept. 1. Also on its agenda: United's home base of Chicago and Northwest's busy hub in Detroit

Singapore Airlines in July added three new weekly flights to San Francisco via Seoul. That gives it 10 flights a week into San Francisco, United's major jumping-off point for Pacific flights. Singapore just ordered 77 of Boeing's long-haul 777 model worth $12.7 billion. That's the largest single order in Boeing's history.

United and Northwest have a lot on the line. "The Pacific is carrying United," says Jon Ash, managing director of Global Aviation Associates in Washington. Last year, the carrier racked up a $344 million operating profit there, two-thirds of its total in 1994. At Northwest, the Pacific division was the airline's cash cow until the U.S. and Japanese recessions slashed passenger traffic in 1990. Northwest, which carries fewer first-class travelers than United, suffered losses in the Pacific for the next 2 1/2 years. But Northwest posted an $103 million operating profit in the region for 1994, according to Michael E. Levine, Northwest's executive vice-president for marketing.

The big question is whether even this market can draw enough passengers to fill all these new aircraft. "There's a risk that somewhere down the line, the new capacity will exceed demand," says David Treitel, president at airline consultants Simat Helliesen & Eichner Inc. in New York.

But United and Northwest have more than deep-pocketed competition to worry about. As part of negotiations to allow other U.S. carriers an increased presence at Japan's airports, the Japanese government wants to limit the so-called fifth freedom rights of United and Northwest. Spelled out in the 1952 bilateral air agreement between the U.S. and Japan, these rights allow only two U.S. carriers to pick up passengers in Japan and transport them to other spots in Asia. American Airlines Inc. Chairman Robert L. Crandall has called on the U.S. government to renegotiate the bilaterals because they unfairly protect United and Northwest at the expense of wannabe Asian players such as American, Delta Air Lines, and Continental Airlines.

Although Washington doesn't appear inclined to Crandall's view, the Japanese will keep pressing their claims. And the Asian carriers will keep expanding, even though United and Northwest say they aren't terribly worried right now about these new competitive threats.

But maybe they should be. Mark Miller, a Washington restaurateur and frequent flier to Asia, can't say enough good things about the service he receives on Singapore Air: "The efficiency and attention to detail are unmatched." With such rave reviews for their competitors, United and Northwest could be heading for big-time turbulence over the Pacific.

Before it's here, it's on the Bloomberg Terminal.