For some the bottle is always half empty, to others it's half full. But to proclaim the virtues of a bottle with just the dregs lining the bottom to a crowd of thirsty people is just plain ridiculous.
Airline executives and industry chiefs may desperately be trying to disguise it, but from whichever angle you look at it, this year is a bad vintage for Asian carriers. And for some it spells disaster. As the Asian economic crisis sweeps across the region, traffic, load factors, yields and Asia's comfortable high growth legacy are crumbling in its wake.
And while analysts' estimates of the length of the crisis may vary, they are united in their opinion that things will get worse before they get better. IATA estimates that the current Asian crisis could impact regional airlines' operating profits by as much as US$2 billion in 1998, with average annual passenger growth rates now put at 4.4 per cent, down from previous forecasts of 7.7 per cent. Cargo traffic growth estimates have been cut from 9 to 6.5 per cent.
Uncharted territory
Desperate times call for desperate measures. But this is uncharted territory for Asian airlines and many are failing to respond effectively. 'We've got a group of managers who have known nothing else but expansion and a growth market and who are totally unprepared for a negative growth process,' explains Peter Harbison, managing director of the Centre for Asia Pacific Aviation.
Accustomed to being regaled with tales of strong growth, the Promised Land of the aviation industry has turned into the scrap heap, and Asian airlines are unsure which way to turn. Now that growth has dropped away, deficiencies are being exposed, like 'the receding tide exposing rocks', says Richard Stirland, director general of the Association of Asia Pacific Airlines (AAPA).
Airlines may be clumsily embracing long overdue cost-cutting measures but many still seem oblivious of the extremity of the measures needed and the speed with which they should be implemented. Stirland urges airlines instead to make 'brutal decisions, look with a fresh mind at all routes and see where the traffic is'.
Carriers' knee-jerk reaction has been to slow down aircraft orders and introduce a hiring freeze. Their second step will be to scale down and outsource certain activities while in the longer term, Asian carriers will rethink their partnership strategies and hunt for European and US strategic alliance partners, says one European airline executive.
For the immediate future, however, airlines seem to be looking down a number of blind alleys in their efforts to find a path out of the crisis. They will find it difficult to raise equity in today's market and are not an attractive prospect for money lenders. Governments, meanwhile, a traditional source of handouts, are laden down with their entire countries' woes and are being discouraged from bailing airlines out.
Many carriers are left with little option but 'to sell shares to other airlines or sell US dollar-based assets and capture profits in US dollars,' says Chin Lim of investment bank Morgan Stanley. Sale-leasebacks are becoming an increasingly popular option.
As a short-term remedy, many airlines are already cutting back capacity, shutting down services, deferring aircraft orders and options and even talking of outright cancellations of orders.
But many carriers are skirting around downsizing their workforce. Job cutting remains a crucially sensitive issue in Asia. 'Asian culture and values involve not laying people off, but that's been in a growth environment and that luxury has disappeared completely,' says Harbison.
Some carriers, however, are grasping the nettle. EVA Air is to reduce staff numbers by up to 1,000 and introduce a partial freeze on hiring, says Daniel Wu Jiang-Ming, EVA's senior vice president corporate planning division.
Philippine Airlines, one of the hardest hit by the crisis, is to cut its 'bloated' workforce of 14,000 to 'ensure the company's survival,' according to president Jose Antonio Garcia. The airline means to reduce costs by 40 per cent and payroll is one of its biggest expenses, says Stirland.
Unpaid leave
While Japan Airlines is reducing its employee numbers from 22,000 to 17,000 this year, it points out that this is part of an 'ongoing restructuring' and a spokesperson says it 'hasn't reached a decision yet' on whether to reduce numbers further.
Asiana Airlines may proudly proclaim that it will not cut back on staff numbers but the airline has told all employees, excluding its executives and pilots, they should take one month's obligatory unpaid leave within the next 12 months.
Bold staff cutting moves by Cathay Pacific stand out in sharp contrast, however, to most Asian airlines' circumspect approach. On 19 January, Cathay made 760 of its staff redundant, on top of 550 jobs losses due to July's move to the new Chek Lap Kok airport. Cathay has introduced a hiring freeze, has a B-scale for pilots who joined Cathay after 1993, and is looking at overseas bases to lower crew expenses.
'Cathay has bitten the bullet a lot earlier but others will have to follow,' predicts Stirland. Stirland accuses many Asian carriers of still 'burying their heads in the sand' over staff expenses, pointing out that regional staff productivity is 30-40 per cent lower than US levels.
Cathay managing director David Turnbull sees the airline's bold moves as a prerequisite in the face of events such as last December's 60 per cent fall in revenue on services to Japan, formerly one of Cathay's most lucrative markets. 'We can't just sit here and wait for the market to turn around and save us. The layoffs are for us to be at our best possible size and financial strength to capture growth when it returns. Last year was a very bad year and 1998 shows little sign of improvement. Just six months ago I would never have thought we would be forced to resort to such painful measures as these,' says Turnbull.
Promotions
Cathay is also introducing a series of promotions in an attempt to lure more passengers. But Albert Chan, KLM sales and marketing manager, Hong Kong and Southern China, insists that offers such as Cathay's Hong Kong-London/Heathrow fare of HK$4,600 (US$594) return, with a partner's ticket and three nights London accommodation thrown in free, are 'just not sustainable - the price is far too low'.
Cathay maintains that it may reduce staff numbers and fares but says it won't cut back on service standards, proud of its motto of offering 'service straight from the heart'. That heart must be bleeding. While it benefited last year from the surge in tourists to Hong Kong prior to the handover, Cathay is now the victim of a severe slump in tourists who see Hong Kong as just another Chinese city. The situation has been worsened by scandals revealing that the Japanese - Hong Kong's prime tourist target - are being overcharged for hotel accommodation, and the outbreak of bird flu. Hong Kong's escalating mortgage and interest payments have translated into meagre outbound traffic, adding to the airline's tale of woes. Cathay relies on business class traffic for 50 per cent of its revenue and profits, and faces the additional risk of a move by cash-strapped business class passengers into economy. One analyst also points out that Cathay is also spending HK$8 billion (US$1 billion) on new facilities at CLK.
Despite the problems piling up on its doorstep, Cathay has no plans to reduce the number of destinations in its network. 'We'd like to grab more market share while others are cutting back', a spokesman says. Indeed, it is introducing a twice weekly service this year to Istanbul and increasing frequencies to London, Los Angeles, Sydney and Auckland.
Although the carrier has delayed 25 aircraft options, it means to continue with this year's deliveries of four Boeing 777-300s, five Airbus A340-330s and one A330-300 and next year's planned delivery of three B777-300s.
Japan Airlines and Singapore Airlines have also resolved not to revise their respective fleet expansion plans. JAL may have reduced frequencies from Tokyo to Hong Kong and from Nagoya to Manila and Singapore, but it means to introduce twice weekly flights from Osaka and Nagoya to Tianjin, China in April. An exporter of tourists, JAL is focusing its efforts on stimulating traffic growth out of Japan and offering a special package for tour operators at 25 per cent below last year's prices to stimulate demand.
Compared with the financial turmoil faced by many of the region's airlines, Singapore Airlines is also in a relatively strong position. Michael Tan, SIA's commercial director, maintains that the airline will take delivery of all 42 aircraft on order as well as 48 options, pointing out that 'manufacturers need 18-20 months notice for any deferred deliveries'. In 1999, there 'may be some deferrals but not cancellations,' says Tan. The airline also means to pursue the sale-leasebacks started last year by selling three B747-400s, one B747-300 Combi and two A310s.
Growth arena
SIA has revised its route strategy, conceding that 'our growth arena is not in Asia', and means to reduce capacity to Korea, Bangkok, Kuala Lumpur and Jakarta from March, while increasing frequencies to Europe, the US and Australia from April.
Like Cathay, Tan asserts that SIA will not cut back on service levels. 'It's very easy to cut back in the short term but our image would drop and our image is founded on quality'. But, with its zero net debt, SIA can afford to be more confident than most of its Asian counterparts.
Nevertheless, the 54 per cent government-owned airline is still reviewing whether to increase its foreign ownership which is at its maximum ceiling of 27 per cent. 'Of course we would like to see the restrictions on ownership liberalised. The great majority of airlines are being privatised', says Tan.
Indeed, increased foreign ownership may be the silver lining in the Asian storm cloud. While the crisis may spell doom for many of the region's airlines, it signals opportunity for many European and US carriers interested in a stake or a partnership with an Asian airline. 'The relatively low value of Asian airlines is exactly what European and US airlines want at the moment. This crisis is likely to accelerate a process of consolidation and partnerships within the next year that would normally have taken 10 years or more,' says Harbison.
Privatisation moves are already underway in the region. The Thai finance ministry's 93 per cent stake in Thai Airways International is to be reduced to 49 per cent or less. Thai posted a first-quarter loss of $574 million as it wrote off foreign exchange losses.
Taiwan's China Airlines, meanwhile, is also considering privatisation. Hsu Li-teh, chairman of the carrier's holding company, is calling for the China Aviation Development Foundation to sell its 71 per cent stake to the private sector. The search for new owners is to help restore public confidence following CAL's disastrous air crash on 16 February, in which 203 people died. The airline has 'no plans to sell off assets yet' and may 'adjust the fleet expansion plan after the reason of the accident is defined', a spokesperson says.
Foreign airlines' interest, however, is focusing on South Korea's two airlines, Asiana Airlines and Korean Air. American Airlines 'has expressed considerable interest in a stake in Asiana', says Harbison. According to a document obtained by Air Transport Intelligence, its owners are negotiating the sale of a 30 per cent stake to several foreign carriers, including British Airways. ATI says the airline will report a 1997 loss of nearly $300 million.
Both of the countries' airlines are certainly suffering considerable financial pain and desperate for any external assistance. Asiana has put its fleet up for sale and will entertain any offers it receives. The airline has 'temporarily' stopped flying from Seoul to Macau, Frankfurt, Brussels, Vienna and Hawaii and reduced frequencies to the US, amid overall load factors some 10 points lower than last year. Other measures taken by the airline include sale-leasebacks for four B767-300s and one B737-500, and the deferral of four A321s due for delivery in 1999. The airline will also 'focus more on cargo', a spokesperson says, as it struggles to emerge from its financial debacle.
Korean Air, meanwhile, will report a loss of at least 250 billion won (US$153 million) in 1998, with the won's fall exacerbating the airline's US$5.5 billion debt, according to a report by ING Barings. The airline is suffering from being located in one of the worst hit regions in Asia, and from the fact that 70-80 per cent of its passengers are Korean. 'The general situation of the Korean economy is so bad that you just can't tell people to travel,' says a spokesman. The airline was forced to raise fares by some 19 per cent in January, with load factors down 10-15 per cent on last year. Korean has been compelled to cancel flights from Seoul to Nagasaki and Kumamoto in Japan and to Guam, Saipan and Macau, as well as reducing frequencies to Sapporo, Honolulu, Hong Kong and Zurich.
Korean may pursue sale-leasebacks after making US$178 million last year from sale-leasebacks with a B747-400 and four A300s. The airline still intends to continue, however, with its ambitious fleet expansion strategy, including orders for three B777s, three A330-200s and two A330-300s. Like other Korean companies that emphasised expansion at the expense of profits, Korean has already amassed large debts by building the largest fleet in east Asia outside Japan. No staff cuts are planned.
Ironically, some of the worst hit airlines seem the slowest to react. Despite the fact that Philippine Airlines was losing money when others were making theirs, the airline is still pursuing its $3.2 billion aircraft modernisation programme, launched two years ago. However Larry Dickenson, Boeing's senior vice president international sales Asia/Pacific, concedes that Boeing is 'in discussion with PAL for a delivery schedule more in tune with their needs'. PAL has deferred three A320s due to be delivered later this year.
Capacity cuts
Other airlines are again resorting to capacity cuts as a way out of the crisis. EVA Air has put on hold its order for five B747-400s in 1999/2000, says Daniel Wu Jiang-Ming, senior vice president corporate planning division. The airline will not cancel any routes but may reduce some frequencies and 'will focus more on cargo in the future, stating our long-term aim of generating 50 per cent of total revenue from air freight services, up from the current level of 33 per cent', he says.
All Nippon Airways, meanwhile, is restructuring its network to 'achieve competitiveness in the harsh market'. The airline is starting services from Narita to Honolulu and to Tianjin, Shenyang and Xiamen and increasing frequencies to New York, Los Angeles and Washington DC and London though suspending its Narita-Brisbane-Sydney service from July. In 1999, ANA will add 10 aircraft to it fleet and retire six. Planned investment up to fiscal year 2001 will now be cut by 20 per cent and staff numbers reduced by 1,000 by 2001. The airline has also readjusted its financial forecast for the year ending 31 March. Operating revenues have been reduced from 929.1 billion yen (US$7.4 billion) to 910.3 billion yen, and the airline now predicts a net loss of 3.2 billion yen, as opposed to previous targeted profits of 2.3 billion yen.
Facing US dollar denominated debt of close to $3 billion which is becoming increasingly expensive to support, Malaysia Airlines is planning to sell four DC-10s and an A300 and considering selling six B737-500s and leasing back three. Other survival measures include delaying by five years orders for 19 Boeing aircraft valued at more than $3 billion. With no long-haul routes to cushion them, three Malaysian regional airlines have closed.
Garuda Indonesia, probably the worst hit by the crisis, is resorting to selling assets in a desperate bid to avoid bankruptcy. The airline is in the process of selling its hotels, though it no longer intends to sell its ground handling business. Garuda plans to phase out five A300B4s, five DC-10s and six B747-200s, cancel aircraft orders and delay options. The airline insists it 'will not lay off staff' but instead says it 'will transfer employees to new business units with their new targets'.
Garuda may yet be among those that find a helping hand in the guise of the government. Unlike other companies which may be left to go bankrupt, airlines are such high-profile businesses that governments will inevitably step in to ensure the survival of their flag carrier, Stirland says. Harbison agrees, pointing out that 'you can't back away from how psychologically, nationally and strategically countries need to have national carriers'.
Even so, a capital injection does not address the fundamental long-term issues. 'IMFis the medicine for the Asian flu, but what is needed is a vaccine to apply regionally so that this doesn't happen again', says Boeing's Dickenson.
Asia's dragons may once have breathed fire and the market will return, but in the meantime they will need tough measures to ensure that the flames of success are not extinguished for good.
Source: Airline Business
