Asian Airlines: The Winged And The Wounded
When aircraft suppliers set up their displays at the 1998 Singapore air show, during the height of the Asia crisis, the atmosphere was doom and gloom. Asian carriers were too busy trying to stay aloft to think about upgrades or expansion. But this year at the six-day Asian Aerospace 2000, airline executives arrived with checkbooks open and pens poised. Hong Kong Dragon Airlines inked its biggest single order ever, for 10 planes from Airbus Industrie. Singapore Airlines Ltd. and Malaysian Airline System (MAS) expressed interest in buying more than 100 new planes between them. "The mood is definitely more upbeat," says beaming Airbus Senior Vice-President John J. Leahy. "I've had more discussions in one day than I did at the entire show two years ago."
With regional traffic growing in double digits and Asian economies clearly on the mend, the outlook for many airlines has improved dramatically. But that isn't the case for everyone. As some airlines emerge leaner and stronger from the industry's worst downturn in two decades, others are still struggling for altitude (table). And as the recovery continues, the gap between the highfliers and the laggards is set to grow. Faltering national flag carriers have been forced to cut routes, giving up market share to regional heavyweights like Cathay Pacific Airways and Singapore Airlines. These strong carriers are now set to capitalize on their competitive edge, thanks to new aircraft and additional revenues generated by alliances with other carriers.
Some airlines, of course, never made it through the downturn at all. The casualty list includes Asia-Pacific Airlines and Saeaga Airlines, both of Malaysia, and Indonesia's Sempati Air, controlled by Hutomo Mandala Putra, son of ex-President Suharto. Philippine Airlines (PAL), on the brink of liquidation last year, was saved only by a last-minute $200 million rescue package by tycoon Lucio Tan, who took control of the airline. Other underachievers, including Taiwan's beleaguered China Airlines (CAL) and Korean Air Lines Co., have made only half-hearted attempts to bring down their costs. But they can ill afford to cut corners now for fear of making their poor safety records worse, analysts say.
SAVING THE FLAG. Of course, many of the flying wounded are flag carriers that will survive as a matter of national pride for their protective governments. Manila's decision to ban flights by CAL between Manila and Kaohsiung earlier this year was widely seen as a move to defend ailing flag carrier PAL.
The airlines that did streamline and cut costs, however, are soaring again. Cathay Pacific slashed its payrolls by more than 1,000 people, downsized its fleet, and consolidated its far-flung operations under one roof at Hong Kong's new Chek Lap Kok airport. "There were very, very dramatic changes at Cathay," says Merrill Lynch & Co. aviation analyst Wendy Wong. She forecasts that after reporting a loss of $70 million in 1998--its first in more than 20 years--Cathay could post a profit of more than $200 million for 1999 when it reports on Mar. 8. Singapore Airlines went a different route. It took advantage of its strong balance sheet during the downturn to purchase 49% of Richard Branson's Virgin Atlantic Airways. And this April, it will join the STAR Alliance, a ticketing and marketing tie-up led by Lufthansa and United Airlines. Singapore-based ABN Amro analyst Andrew Tan predicts Singapore Airlines' profits will hit $705 million for the year ending in March, up 16.5% from the previous year, on revenues of $5.1 billion.
The sheer growth of passenger traffic is helping the strong players. During the first 11 months of 1999, the 18 carriers belonging to the Association of Asia Pacific Airlines carried 10% more passengers than over the same period in 1998, and planes were a respectable 70% full. As a result, Airbus Industrie predicts that total airplane sales in the region in 2000 will be more than double the 84 aircraft booked in 1999. A mere 68 planes were purchased in 1998.
Boeing Co. is optimistic as well. It projects Asia traffic to grow 6.3% a year over the next decade, compared with a worldwide average of 4.7%, and believes the Asia-Pacific market for aircraft will equal Europe's by 2002. Much of the demand for long-haul, transpacific travel will be met by both Boeing's 777X and Airbus' counterpart, the A-340. Boeing has yet to book an order for the 777X. But the company has been in intense discussions with Japan Airlines, Taiwan's EVA Airways, and China Southern Airlines, which all are potential launch customers for the new plane.
Even with air traffic picking up again, gone are the days when business was so brisk that even badly run airlines could make money. Garuda Indonesia, which came close to collapse during the Asia crisis, is still working through painful restructuring of its $1.8 billion in debt. And its sales have been hurt by tourists' reluctance to visit an archipelago plagued by continued violence. CAL, while marginally profitable, is still trying to regain public confidence after 203 people died in a Taipei crash in 1998 and an additional three were killed in Hong Kong last August. Korean Air Lines' safety record isn't much better, with 240 deaths in three separate crashes since 1997. Its reputation hasn't been helped by the jailing in January of Chairman Cho Yang Ho for tax evasion.
Adding to the laggards' problems is that after more than two years of selling bargain-basement tickets, airlines are reluctant to raise prices for fear of losing market share. And while executives are starting to fill up business class once again, most of the traffic growth has come from cheap tickets at the back of the plane. Margins are also getting squeezed by jet fuel prices, which leave heavily leveraged airlines like MAS that haven't hedged against price increases particularly vulnerable. "Rising fuel prices will take the edge off performance," says Peter Negline, airline analyst at Salomon Smith Barney.
American and European carriers are heating up the competition even more as they fight for market share in the region. To strengthen their own positions, carriers such as Thai Airways International, Cathay Pacific, and Dragonair have followed Singapore Airlines' lead in joining global ticketing and frequent-flyer alliance programs. Indeed, Thai's membership in the STAR Alliance practically ensures it will find a partner to buy the 10% strategic stake it is offering as part of a plan to sell 23% of the company later this year, says Lufthansa's Chairman Jurgen Weber. The same can't be said for CAL, which doesn't belong to an alliance and hasn't found a buyer for its privatized shares.
Nonetheless, more passengers mean more revenues, and airlines are keen to put them to use. Dragonair's new purchase will nearly double the size of its fleet, and it should have little trouble filling planes now, thanks to a bilateral agreement reached with China on Feb. 3 that lifts a ceiling on the number of flights it can make into the mainland. Singapore Airlines is set to grow even faster because of its tie-up with Virgin, which will give it direct access to the carrier's much coveted transatlantic route. And Cathay Pacific's fortunes will be buoyed by China's expected accession to the World Trade Organization. Asian airlines may not all glide in unison. But for the leanest carriers, it looks like it may soon be time to soar again.