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Aviation History
1998
1998 - 0024.PDF
PAUL LEWIS/SINGAPORE KEVIN O'TOOLE/LONDON FOR THE WORLD AIRLINE industry, 1998 begins much as 1997 ended, with two issues on top of the agenda: the fall-out from Asia's economic woes and the next step in the industry's increasingly rapid consol idation. Both issues should make 1998 a busy one for airline strategists everywhere. As 1997 progressed, it became clear thatwhat started as a banking and currency crisis in Asia was rapidly beginning to turn into a full-blown economic rout. Airline profits, traffic and share prices are already in free-fall diroughout much of South-East Asia, driven down by excessive debt, currency devaluation and a general eco nomic turmoil. More of the same is expected in the first half of 1998. The latest 1996/7 figures from the Assoc iation of Asia Pacific Airlines (AAPA) showed a 24% dip in profits from its members. That was before the impact of me latest round of financial crises and the smoke haze which hung over die region for months. When the figures come out for the year to March 1998, expect a further fall. The situation is grim in South Korea, with flag carrier Korean Air Lines expected to lose a record won 1.2 trillion (S700 million), while a dark cloud is hanging over Asiana. Outside Korea, airlines such as Cathay Pacific, Malaysia Airlines and perhaps even Singapore Airlines (SIA) are being scrutinised closely for signs of financial difficulty, while the hoped-for turn arounds of Garuda Indonesia and Philippines Airlines are clearly on hold. With Asian currencies down by anything up to 40-50% against the US dollar, pressure is mounting on airlines trying to fund debt repay ments, finance fleet replacements and pay for fuel. At the same time, yet more capacity is due to flow into die region. At the latest count, AAPA carriers had some 300 aircraft on order, mostly large widebodies, with around half due to be delivered over the next two years. More Asian carriers in 1998 are expected to try to defer orders and options, sell and lease back aircraft to raise immediate capital and dis pose of older equipment as intra-Asian traffic continues to contract. What is less clear is what reverberations a continuing slowdown in Asia may have else where. The worst-case scenario is mat this local difficulty will be the trigger for the start of a global downturn. As yet, that seems unlikely, although economists have been trimming growth forecasts for die USA ahead of clearer evidence on a slowdown in transpacific trade. The US airline industry ended 1997 still cau tiously optimistic that the impact would be lim ited given the strength of the domestic economy, which has been a powerhouse with three years of solid growth. A more immediate concern is that European and US major airlines will begin diverting new aircraft, originally intended for Asia, to other parts of their networks. In particular, there are fears for the North Atlantic, where an influx of new capacity could potentially spark a damag ing fares war. There are already concerns that, despite 1997's record load factors on transat lantic routes, profits may be suffering from air line efforts to fill their aircraft. So far, South-East Asia's difficulties have yet to show up in any visible slowing in world traffic growth. Passenger numbers on the key interna tional scheduled services continued to grow at a healthy 7% worldwide in 1997, according to the preliminary figures from the International Air Transport Association, and predictions suggest that the rate will stay at close to that figure until the end of the decade. It is worth bearing in mind, however, that the projections assume continued above-average growth of around 8% in Asia, which may still have to be revised. While airline analysts keep a watchful eye on the world economy in 1998, managements at the major carriers will continue to press on with the next phases in the their global alliance plans. The UK-US open-skies bilateral and Ameri can Airlines/British Airways alliance should at last be pushed through in the first half of the year, albeit after some tough haggling with the European Commission's competition commis sioner. That deal, which potentially ties up Aerolineas Argentinas, Finnair and Iberia, will begin to give some clearer shape to the new order in Europe. Lufthansa and United Airlines are also tipped to round off the Star Alliance with at least two more partners. SIA is a clear candi date, following its deal with Lufthansa, raising questions over Thai's position in Star. SIA is in turn due to bed down its alliance with Air New Zealand and Ansett, raising the tempo for fur ther such alliances in South-East Asia. Others such as Cathay are expected to have to follow soon with decisions on which alliances to join. The prospect of a new Japanese-US bilateral, on the way to open skies, should open the way towards the signing of some pending alliance deals. The smart money has Japan Airlines link ing with American/BA, All Nippon Airways with Star and third player Japan Air System with KLM/Northwest Airlines. Equally intriguing is die position of Air France as it emerges from years of restructuring, now showing profits and in hot pursuit of an alliance partner, with Continental and Delta Air Lines in the frame. In North America, there are stirrings towards consolidation. Continental has made it clear that it would consider an approach, and Northwest, among others, has been in talks. Nothing has happened yet, but it would only take one deal to put the whole sector in play. Finally, 1998 is likely to be a make-or-break year for the low-cost airline sectors in Europe and the USA. It will be interesting to see how the remaining players emerge from lean winter mondis and whether they win legal protection from the competition of network majors. 22 FLIGHT INTERNATIONAL 7 - 13 January 1998
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