The time has come for Asian carriers to rebuild capacity after the unprecedented cuts caused by the SARS crisis as traffic starts a gradual recovery

On 24 March, the Association of Asia Pacific Airlines (AAPA) released the January traffic statistics for its 17 member airlines. The press release that accompanied them closed with the following line: "The SARS [Severe Acute Respiratory Syndrome] incident is also a concern, and will be reflected in traffic figures for South-East Asia, although it is believed that the impact will be short term." It was the only reference to the newly identified illness in the release, which was generally upbeat about market prospects for Asia-Pacific carriers.

But in the following three weeks the tune changed dramatically, and on 14 April, AAPA reported that "the spread of SARS has created the worst-ever situation faced by the airlines of the Asia-Pacific region. People have stopped travelling, either as an individual reaction to the possibility of contracting the disease, or as a result of warnings put out by the health authorities."

Fast deterioration

The sharply contrasting tones of the two statements show just how quickly market conditions had deteriorated in Asia in the face of a new phenomenon that nobody could have prepared for. Passenger demand to, from and within Asia collapsed within weeks of the first news stories on SARS appearing in mid-March, when the mysterious virus spread rapidly from southern China to Hong Kong, Singapore and Vietnam.

The region's airlines were thrown into deep crisis at a time when they thought they were going to get through the Iraq war-sparked downturn with relatively little pain.

Of course, SARS did not only affect Asia-Pacific airlines - it also had an impact on European and US carriers, particularly those with significant Asian exposure. Notwithstanding, the following three months were particularly difficult for Asia-based operators, which saw passenger traffic fall by as much as 90%, as it did for China's majors. But by early July, when the World Health Organisation (WHO) declared SARS contained in the last-affected areas, things were starting to pick up.

July passenger traffic figures showed a firm recovery across the board, and while for the most part numbers were down on the previous year, they were well up on May and June figures. The trend is now showing continuing upward movement and, yield pressures aside, in some markets traffic is already at or above pre-SARS levels.

"In reality, it was probably not quite as diabolical as was first feared," says Hong Kong-based JP Morgan regional airlines analyst Peter Negline. "But I suppose it would have been foolish not to react in the way people did. This was not an economic event, not a political event. It was a medical event, and the doctors were very, very worried."

AAPA director general Richard Stirland also stands firm by his April statement that Asian carriers were facing their worst-ever crisis. "At the time, it certainly was the worst crisis ever to face airlines in this part of the world," says Kuala Lumpur-based Stirland. "There has been nothing else in the 40 years of my experience in this industry where the airlines have lost up to 80% of their traffic, as in the case of Cathay Pacific." He adds that "it could have been curtains" for some airlines, had SARS not been contained relatively quickly and had they not had revenue from cargo operations to help carry them through.

Counting the damage

Now that SARS is largely contained, the question remains as to just how much damage was actually done? Hong Kong was among the hardest hit; at its worst in May, home airline Cathay Pacific averaged only 7,870 passengers a day - a drop of 75% on 2002. On 19 May alone, it carried just over 5,000 passengers, and some flights flew with a handful of passengers simply because Cathay badly needed the cargo revenue. At the time, ticket sales represented barely a third of revenue, while cargo contributed two-thirds. Chairman James Hughes-Hallett called this "an extreme reversal of traditional roles".

Things began to pick up in the second half of June and through July, when Cathay carried an average of more than 28,000 passengers a day, although this was far below the 40,000 passengers a day that it forecast when budgets were drawn up for the year. The traditionally profitable airline was losing millions of dollars a day and cut around 45% of its scheduled flights at the height of the downturn. It also took drastic cost-cutting action that included forcing staff to take unpaid leave.

Cathay was not the only airline to make hefty cuts. Hong Kong-based rival Dragonair slashed services by more than half and Singapore Airlines (SIA) cut capacity by around a third. Other majors such as Japan Airlines made cuts on an only slightly smaller scale. SIA also dramatically reduced salaries and carried out its first major retrenchment exercise in around two decades.

But, as is often the case in developing Asian markets, what comes down goes back up. And when demand does return, it often does so very quickly.

"In terms of a rebound, by and large, things have come back a lot faster than expected," says Negline. According to AAPA's Stirland: "It's quite understandable. When something passes so quickly, the fears it generates evaporate quickly as well." Stirland also says that since SARS was brought under control within a few months, many planned trips were only deferred rather than scrapped outright, and this is partly the reason for the solid recovery now being seen.

But if SARS returns, as some health experts believe it will, Stirland is confident the impact will be nowhere near as great as the one it had between March and July this year, as it is no longer a new, unknown enemy. He says Asian carriers and airports, and the medical community as a whole, will be well prepared - although "we have to be very quick off the mark" in re-introducing screening measures and informing passengers of preventive action being taken.

The main lesson to be learned from SARS is the virtue of having strong cargo operations. Stirland says some of the AAPA's member airlines, such as Taiwan's China Airlines and Korean Air, told him that, at times during the crisis, cargo was their only saving grace. Asian carriers are unique in having a much higher percentage of revenue from freight than airlines in other parts of the world, and they were lucky during the downturn that demand held up relatively well. Many increased dedicated cargo operations during the period to compensate for the reduction in available aircraft bellyhold space caused by passenger flight cuts.

"The whole SARS thing illustrated the benefits of having multiple revenue streams," says Stirland. Negline agrees, saying: "There is no denying that the strength of the cargo market was a profoundly positive influence during the period. It may well have saved some airlines." He adds: "I suppose if you are a freight guy, you've found that you're appreciated a little more these days."

The SARS experience also confirmed that Asia-Pacific airlines are able to move quickly and effectively in crises. Analysts say they were generally impressed with the way they reacted: slashing capacity quickly and cutting costs and, in some cases, using the downturn as a catalyst for implementing change that was probably overdue.

Crisis management

This is largely because they have had experience in dealing with similar, albeit less devastating, problems in recent years. They had already been through two major downturns - one caused by the two-year Asian economic slump starting in mid-1997 and the other following the September 2001 terrorist attacks in the USA; and perhaps the list should also include that created by the Bali bombings.

Post-SARS, airlines are reacting just as they did after the US terrorist attacks and the Bali bombings by slashing fares to lure people back on to aircraft. But how much capacity to bring back and how quickly are tough questions for the airlines. SIA, for one, has been relatively slow in bringing back capacity after SARS was contained in Singapore, although others, such as Cathay, have been far more aggressive.

Cathay says it plans to be back to a full passenger flight schedule by the end of September "We have two options - either to follow a conservative approach and only restore truly profitable services, or restore them all as quickly as we can," says Cathay's director corporate development, Tony Tyler. "We have gone for the second option."

While yields are suffering badly, and it can be argued that such hefty fare-discounting will result in a delayed return to "normal" pricing levels, most observers believe there was really no alternative. "I suppose it's more important for the long-term future of the industry to bring people back onto aircraft," says Negline. "It's about rebuilding long-term confidence."

At least revenue is flowing in again on the passenger side of operations. And if SARS does not return later this year during the northern hemisphere's winter months as some health experts fear, AAPA's initial feeling that the impact of SARS would be short-lived may ultimately be proved correct.

Source: Airline Business