Stormy Passage For Asian Airlines
Asia's airlines will try anything to keep going. Garuda Indonesia, the country's flagship, has slashed 10% of its 16,000-worker payroll and cut its fleet by half, to 40 planes. Shanghai's China Eastern Airlines on Apr. 2 sold off 13 Boeing MD-82 planes to reduce its massive debt. And Korea's Asiana Airlines Inc., which has scrapped its once ambitious expansion plans, is so desperate it has hired a Korean opera star and 65-piece orchestra to lure outbound customers to ticket counters in Cheju, a southern tourist spot.
As they come off one of their worst years ever, when profits dropped an estimated 80%, the region's once proud carriers are trying to fight their way back to health. From Kuala Lumpur to Seoul, carriers are slashing their fleets, payrolls, routes, and foreign debt. The region's publicly listed airlines are still loaded down with $57 billion in debt and leasing obligations, figures Warburg Dillon Read, and this doesn't include distressed companies such as Garuda, Asiana, and Philippine Airlines (PAL). Making the job even more difficult are rising fuel costs and opposition to layoffs and fare hikes from Asian governments worried about a social backlash. Yet if done right, these restructurings could create a tougher, more focused industry.
NEEDED BREAK. Harassed executives are getting at least one break. Thanks to a recovery in Asian financial markets, business and tourist travel has picked up since September. In the first quarter, traffic surged by 7% over the same period last year. That compares to flat growth in 1998. The rebound has been especially strong in hard-hit countries such as Korea, where traffic plunged by around 20% last year. Stronger Pacific travel in February and March, 1999, was one reason United Airlines Inc. beat analyst estimates, with $187 million in first-quarter earnings. "We're starting to believe this is not a temporary phenomenon," says UAL Corp. President James E. Goodwin.
The recovery should start to show up in the bottom lines of Asian airlines as well. Carriers are now filling about 70% of their flights without the profit-draining discounts and free hotel stays they offered at the height of the crisis, when 63% of seats were filled. The Manila-based Assn. of Asia Pacific Airlines expects traffic growth of at least 7% across the region this year and next. Merrill Lynch & Co. figures that Hong Kong's Cathay Pacific Airways Ltd. will post earnings of $136 million this year, from a $70 million loss in 1998. Next year, Merrill expects earnings to double. Across Asia, "a real recovery is in the offing," says John M. Casey, a Singapore-based aviation analyst with Dresdner Kleinwort Benson.
Too bad the recovery won't be enough for everyone. Most Asian carriers were overstaffed and inefficient even during the good times, so the cutting and pain must continue even as traffic picks up. In the coming months, a shakeout looms as red ink and competition take their toll. Several weak local carriers in China, for example, could disappear. The country's 30-odd airlines posted combined losses of $361 million last year, owing to a vicious fare war and worsening excess capacity.
Asia's new breed of lean and mean upstarts are making recovery harder for the established players. Japan's eight-month-old Skymark Airlines Co., for example, has cut fares by up to half of what Japanese rivals charged and filled 75% of its seats, far better than the country's established carriers. Competitors such as Japan Airlines Co. and All Nippon Airways (ANA) had to mark down fares as well. But "they aren't cutting costs fast enough to cover the price declines," says HSBC Securites analyst Doug Hayashi. ANA says a loss of customers to Skymark and another local startup contributed to its $67 million loss in fiscal 1998 and an even steeper loss for the current fiscal year.
Taiwan's profitable Eva Airways Corp., founded in 1988, has been grabbing market share from PAL by adding flights from Taipei to Manila. Any new competition is especially threatening for PAL. Still struggling after its near-collapse in September, PAL has been given until June 4 by the Securities & Exchange Commission, the country's corporate watchdog, to find investors willing to pump in $200 million in equity. Otherwise, it's liquidation time. The carrier has an estimated $2.1 billion in debt and too many planes. Traffic plunged 47% last year. Last September's crippling 22-day strike by pilots over planned staff cuts was the final straw. Since the carrier went into bankruptcy, its labor force has dwindled to 8,000 workers, from 14,000 before. The SEC wants payroll to be reduced by another 5,000.
PAL's travails underscore how tough it is to wring concessions from feisty airline unions. It took years for Japan Airlines to trim salaries for pilots and cabin crews. Now, Cathay Pacific is trying to prune 10% of its staff, or about 1,400 people. It is still struggling to persuade its pilots to take an 8% pay cut. Cathay is, however, attacking expenses by shrinking its fleet. The airline has leased out or grounded all 13 of its 747-300s.
CHINESE BINGE. Other carriers are shrinking, too. To ease its severe cash-flow problems, Malaysian Airline System sold eight planes to GE Capital and then leased several back, a move that reduces costs in the short run. Meanwhile, Asiana has reduced its capacity by 15% and canceled orders for six Airbus planes.
The Chinese airlines, which binged on new craft during the boom times, have the biggest surplus of planes to shed. Mainland carriers took delivery of 30 jumbo jets in 1998, with an additional 20 due to arrive this year. As a result, they are flying well below their capacity. After Shanghai-based China Eastern Airlines added seven planes last year, boosting its fleet to 54, its passenger load dropped from 54% to just 51%. China Southern Airlines, meanwhile, boosted capacity by 11% last year at a time when revenues were up only 2.5%. The Guangzhou-based carrier is expected to post its second year of big losses. To ease its $1.86 billion debt load, China Southern is shopping spare aircraft overseas. No wonder Beijing has forbidden carriers from buying any new aircraft for at least two years.
When selling planes isn't enough, it's time to woo the foreigners. Indonesia's Garuda is attempting to restructure its estimated $400 million in offshore debt. Thai Airlines, PAL, and Taiwan's China Airlines are hunting for strategic partners that will buy stakes of up to 35%.
TRICKY POLITICS. The region's airline executives would dearly love to build on their cost-cutting efforts by raising fares to widen margins. Carriers "should be allowed to raise their domestic ticket prices or cut their domestic services" to survive, argues Richard Stirland, director general of the Assn. of Asia Pacific Airlines. But the politics of fare hikes is tricky in Asia, where many airlines have government links. Thai Airways, for example, wanted to boost fares 13.5% because it loses money on all its domestic flights, except those to the popular tourist destinations of Phuket and Chiang Mai. But the increase conflicted with the government's desire to promote tourism. So the airline backed off even though the fare hikes would have helped cut losses by $53 million. Malaysian Airline System was rebuffed by the government when it proposed its first fare hike since 1992.
Chinese authorities, by contrast, have ordered carriers to charge more. That is a relief to executives of airlines that are bleeding red ink. In a fare war last year, carriers offered discounts of up to 40% on domestic flights. Beijing banned the practice, except for 10% discounts for students and tour groups. Li Young Zhen, company secretary of China Southern, expects the ban to increase profits. Since most of China Southern's passengers are business travelers, he says, they probably won't be driven away by the higher fares. But no one expects China's airline industry to emerge from its parlous condition anytime soon. Asian tourists and businessmen may be flying again. But so many years of overexpansion and borrowing mean it is still a long haul for the region's airlines.