Philippine Airlines, Thai International and Garuda are being hindered by too much political interference, and unwelcome clumsy deregulation policies, from cashing in on the potential of Asia-Pacific growth. Tom Ballantyne reports. There are problem children in every family, says a middle management official of troubled Manila-based national flag carrier Philippine Airlines, adding that in the context of the effervescent Asia-Pacific airline industry there is no doubt PAL has lost its way.

With a net loss of US$34.7 million in the six months to September 1995 and a loss for 1994/95 of $65.6 million, the carrier - under its fifth management team in five years - continues to be wracked by board room bickering and internal strife.

It is not alone. In Bangkok, Thai International is struggling to sustain the profitability of its passenger business and saw an 18 per cent fall in income to $76.6 million in the nine months to June 1995. Although Thai has reported a net profit of 3.24 billion baht ($130 million) for the full year to September 1995, the carrier has been bruised by foreign exchange losses and is relying on cargo earnings to stay in the black. President Thamnoon Wanglee bemoans his airline's fall from grace. 'Sadly, we have to acknowledge that we have lost our place in the top 10 (in terms of service), and we are well behind in a field that even includes six new competitors,' he told his executives at a crisis meeting.

Indonesia's Garuda is another struggling with future directions, forced to slash international services as it tussles with falling profitability and an uncertain road towards planned privatisation. Recent financial figures for Garuda are difficult to come by: the carrier reported a profit of 350.6 billion rupiah ($154.5 million) in calendar 1994 but sources suggest 1995 was not a good year. Senior vice president commercial Kussuyono says that Garuda has to improve in areas ranging from personnel - including management - to organisational structure, before a sell-off can be achieved.

These airlines are anomalies in a region where business should be booming and future prospects are more than rosy, invalids apparently unable to come to terms with the rich opportunities surrounding them.

According to figures from the Orient Airlines Association, the region's 16 leading carriers boasted joint annual revenue of around $45 billion in 1994/95 and chalked up $1.3 billion in net earnings, a 308.5 per cent increase over the previous year. So why are a handful flirting with financial disaster? In a market that boasts phenomenal growth rates and is set to provide more than 50 per cent of the world's airline business by 2010, what are PAL, Thai International and Garuda doing wrong?

The reasons are both simple and complex, and while circumstances differ, there are common threads which are affecting the three carriers' ability to operate successfully in an increasingly competitive marketplace:

1 They are government-owned or substantially government influenced.

2 All three are facing competitive uncertainty as their national authorities consider extensive deregulation.

3 There are serious internal divisions as various factions fight for power and influence within each carrier.

4 Each carrier has the obligation to operate unprofitable domestic services in the public interest.

Add to this management shortcomings, bureaucratic interference and a failure to keep pace with quick-witted, tough, and commercially minded competitors, and you have a potentially fatal mixture.

But Sydney-based aviation analyst Peter Harbison of BDW Aviation, says the carriers' troubles are hardly surprising given that they are facing a lethal triangle of privatisation issues, rapid deregulation and new local start-ups on their routes. 'They are trying to do everything at once and it simply can't happen that way.' Deregulation is appropriate, says Harbison, but there must be a gradual evolution of the market in which the airlines operate.

In short, poor government regulatory policy, coupled with political influence peddling over management, have had a debilitating effect. The troubled carriers all have government appointees on their boards with a questionable knowledge of airline operations; directorships which have been handed out as plums to faithful bureaucrats and influential political friends. They are also susceptible to the influence of politicians and powerbrokers, making decision-making an almost impossible process.

Joseph Lim, an analyst with Nomura Research Institute in Singapore, says government interference is 'one of the obvious factors' affecting the performance of these carriers, though he doesn't believe privatisation is necessarily the answer. 'Singapore Airlines is still very much government owned,' he says. 'The main difference is that government leaves all the decision making in the hands of professional management; it is professional management and a hands-off policy which allows SIA to be the success it is.'

BDW's Harbison suggests management competency is a factor but adds that it is difficult to be competent when various government officials are attempting to influence your every move. The bureaucracies of transport, industry and trade or foreign affairs, and even the Prime Minister's department, typically all have different agendas. 'All those conflicts between different departments, which tend to have different influences, work against the ability to deal with the reality of a highly competitive airline market,' he says.

Thai's dilemma is a military one. Its smooth commercial operation has been hindered for years by infighting between the Thai air force (which traditionally provided the head of the airline) and civilian factions. After a two-year period from 1992, in which civilian executives gained the upper hand, air force officers last year manoeuvred themselves back into power.

Air Chief Marshal M R Siripong Thongyai was confirmed as chairman in December by a board which at the same time invited 10 'dignitaries' to become honorary advisers, six of them senior air force officers. That is significant because the roots of Thai's current troubles lie in the previous period of domination by the air force. A report conducted last year by HG Asia Investment Research suggested the air force was not as good at 'resisting the blandishments of aircraft and engine manufacturers to adopt new brands' as a professional civilian management would be.

The result is an airline which operates 15 aircraft types powered by 12 different engines and a massive economic burden in terms of operating costs. Maintenance, says one former Thai executive, is a 'nightmare', suggesting problems will only be solved when the airline is fully privatised and purged of political and military influence. Although the government concedes there is a need to privatise fully, only 7 per cent of shares are in public hands with the remainder held by the Ministry of Finance. Full privatisation will be difficult until the carrier improves its financial performance. Shares priced at 60 Baht in the initial public offering in 1992 are now worth around 45 Baht. 'Our main competitors are private. Ours is a state enterprise, so there's a lot of bureaucracy. You cannot manage Thai International the way Singapore Airlines or Cathay Pacific are managed,' says Mahidol Chantrangkurn, permanent secretary of the Ministry of Transport.

PAL is, officially at least, majority controlled by a non-government shareholder, tobacco tycoon Lucio Tan. However, a three-year battle has been raging at the airline during which the government has sought to wrest control from Tan, the majority owner of PR Holdings which owns 67 per cent of PAL. The Filipino government also owns shares in the holding vehicle as well as a direct 33 per cent stake in PAL and has been rejecting Tan's right to act on its behalf. President Fidel Ramos made it known he wanted to see Tan ousted and the government retake control.

The tussle seemed to have finally ended in January, when a compromise was reached under which PR Holdings will be dissolved and the shares reissued as stock in the airline itself. Tan will also take up an entire private offering of new shares worth $191 million. The government will not participate in the capital increase, allowing Tan to gain as much as 66.5 per cent of the airline. However, the deal could yet be scuppered if the other private participants in PR Holdings, Ayala Corp and tycoon Antonio Cojuango, decided to subscribe to new shares.

PAL's own corporate communications office has complained the carrier has been 'hobbled by corporate squabbles, saddled by a bloated workforce and crippled by huge financial losses.' With the feud over, PAL plans to go ahead with a desperately needed $3 billion fleet renewal with the assistance of a $500 million loan. Losses were $34.7 million for the first six months of the financial year ending in March, following a loss of $65.6 million in 1994.

Tan's senior managers complain that deregulation of the domestic industry has seen a successful local competitor, GrandAir International, emerge while PAL itself is compelled to fly unprofitable domestic 'missionary' routes. Manila has so far resisted PAL's demands for a 50 per cent increase in fares.

A recent bilateral deal with the US also angered PAL, which claims the agreement amounts to a sell-out. The airline wanted a 10-year deferral on open skies but the government gave US cargo carriers virtually unlimited access, stalling a plan by PAL to increase its own cargo operations.

Garuda's reputed fall in profitability appears to be borne out by the airline's actions. In October it slashed routes, temporarily halting services to Berlin, Munich, Vienna and Madrid and reducing frequencies to 32 other destinations. Aircraft purchases were revised after the government suspended a $660 million financing mandate for six Airbus A330s. Garuda also decided to buy only seven B737-400s instead of 16 and two B747-400s instead of nine.

Privatisation is intended to take place this year - talks with KLM last year led to a wider commercial relationship but no equity deal - but plans are currently on hold. 'The intention to privatise is still there but we have to make ourselves more attractive first,' says one official privately. Garuda president Soepandi has told parliament that rationalisation is aimed at boosting efficiency and that the planned aircraft purchases would be 'too heavy a burden for the airline to bear'.

In the midst of this Garuda also faces competition from local startup Sempati (part-owned by Indonesian president Suharto's son) on both domestic and international routes. While Sempati is allowed to attack the cream, Garuda is forced to operate unprofitable domestic sectors 'in the public interest'.

Incredibly, the government has even invited foreign airlines to apply for rights to fly on Indonesian domestic sectors. Garuda management won't complain publicly because they are there at the government's pleasure: Soepandi's predecessor at the helm of Garuda, Wage Mulyono, departed suddenly last year after disagreements with government over interference in aircraft procurement, route distribution and aircraft sales.

Douglas Jukes, a partner and industry analyst at KPMG in Sydney says these carriers are attempting 'to be a bit of everything' and have difficulty finding their rightful place in the market. 'There appears to be inefficiency and difficulty in cost-cutting. Their equipment is poor and they may not even have the option of buying new equipment because government is not prepared to put up the capital.'

Some analysts also blame the World Bank, which they say encourages governments to launch rash infrastructure development programmes and deregulation agendas. 'They come in and say we'll lend you all the money you need if you do everything at once, but the complexities of growing markets and developing airlines make that the wrong thing to do,' comments one Jakarta-based consultant. 'The fact is that successful airlines are private airlines,' he says.

It would, however, be unfair to suggest these are the only carriers having difficulty in the region. The problems of Japan's airlines over recent years are well documented, though they were mainly brought on by the recession. In Port Moresby, tiny Air Nuigini was heading for bankruptcy in February, according to acting chairman Mike Bromley (shortly before he was unceremoniously sacked by the carrier's government owners). Air Nuigini too has suffered from a government policy which kept domestic air fares artificially low, although from January 1 it was cleared to up prices by 10 per cent. India's government-owned airlines too are in dire financial and operational straits, again a victim of politics and bad policy.

There is little doubt that a combination of factors is affecting the performance of Asia's problem children. Most suffer bloated staff levels or operate in social systems under which it is extremely difficult to replace personnel.

They have been sluggish in reacting to the competitive pressures of the 1990s through rationalisation and restructuring and their efforts to trim operating costs have been inadequate. They have also made insufficient progress in computer systems development, giving rivals a competitive edge.

In the main they have either ageing or diverse fleets with high maintenance costs and poor reliability. They have also been slow to improve service and have lost customers to rivals offering better comfort levels.

Both PAL and Thai have taken steps to turn performance around. Thai has forged major alliances with Lufthansa and United which should help route rationalisation and bring cost savings. Pending government approval, it also plans to spend $3.2 billion on a five-year aircraft purchase plan. Wanglee says the aim is to get back on top within three years but warns: 'Thai must change dramatically as a whole if it is to survive and prosper as a world-class airline. The greatest obstacle to change is accepting the need for it.'

PAL has ordered 24 new Airbus jets - A340s, A330s and A320s - worth more than $1 billion for delivery over three years, and a B747-400 Combi.

However, political interference and poor regulatory policy are the principle culprits in restraining these airlines' proper development and burdening them with added problems that divert their attention from the main game. Until they are equipped with competent managers with the freedom to make commercial, not political, decisions it is unlikely that any recovery will be permanent.

Source: Airline Business