First it was the crisis in South East Asia. Now it is meltdown in Russia's financial system that is spreading panic in global markets. The lesson from Asia is that what may start with currency collapse swiftly and inevitably translates into damage for the real economy of production, output and jobs. For Russia that process has already begun.

The Asian crisis too began with an assault on foreign exchange markets. It led off in earnest a year ago with a speculative attack on the Thai baht. Currency instability has since spread among the former Asian tigers, bringing in its wake full-blown economic downturn.

In Indonesia, where financial crisis has been compounded by political upheaval, economic output is expected to fall by 15% this year alone. Others are expected to follow its plunge into deep recession, with estimates that economies may shrink by as much as 8%. Air transport is already feeling the consequences.

Although the biggest European carriers do not yet have a clear fix on the direct effects of the Russian crisis, one immediate consequence will be to dent the lucrative business market to the former Soviet Union. Russian contagion could also clearly hurt business in Eastern Europe, but its indirect impact may be much wider, with repercussions as far flung as Latin America. The stability of financial markets, from Venezuela to Brazil and Argentina, has been undermined by the fallout from Russia, which has dampened commodity prices from oil to coffee.

But the crisis may not be all bad news, at least for western companies. One of the less reported consequences of the Asian crisis has been a flight to the quality and perceived security of established world players. Western banks are already benefiting as concerns mount over the reliability of local Asian institutions. This flight to quality is also taking to the skies. While the Asia-Pacific carriers such as Garuda Indonesia have been wrestling with a downward spiral of traffic and revenues, western airlines have, in the main, been able to maintain or even increase their loads.

In part it is simply a case of smart business practice. Unlike the local carriers, major international airlines have the ability to pick and chose between their Asian routes, focusing only on those that remain profitable. Yet the western carriers also appear to have benefited from a drift of passengers, especially at the premium end of the market, away from struggling local airlines.

Kyle Davis, vice-president of American Express Purchasing Management Group (Europe) believes that "-all the ingredients are in place for fare increases" on premium air fares. Demand for long haul travel continues to grow, fuelled by globalisation of world markets, while supply remains "severely constrained", not least by the barriers in place against new competition.

Events in Asia illustrate this situation well. Demand for travel to Asia has been bolstered as western corporations hope to take advantage of the region's weak economies by looking for new business opportunities. US financial institutions, for instance, have taken the chance to gain a strong foothold in the Japanese market, which for decades was impenetrable. "Airlines responded to the crisis in Asia by reducing the number of flights rather than lowering prices," says Davis. He now believes that business travel has stabilised and "-looks poised to rise, at least until the end of the year".

Whether the prospects are so good for Russia remains questionable. For the time being, at least, commerce with Moscow will hold up as western corporations struggle to protect their extensive inward investments. Airlines such as British Airways have reported a loss of group and leisure traffic since the crisis, but have seen business travel pick up.

It is clear, however, that, after the moratorium on debt declared by the Yeltsin administration, confidence has been badly shattered and the long term impact could be serious. Analysts are calling for radical changes of direction in Moscow before there can be any prospect of a restoration of confidence. The breakdown of the banks, in the view of some, is leading to a breakdown in the entire mechanism of trade finance, causing a disastrous stop to the flow of imports.

The Russian authorities have spent most of the past decade attempting to establish the rouble as a serious tradable currency - not only with institutions, but with the public. Those efforts have now perished, bringing back the threat of hyper-inflation. The decision to explore a currency board approach, used in emergencies by nations from Argentina to Indonesia, is a last ditch attempt to restore stability.

The short term implications of economic collapse are clear enough for anyone flying into the region, but it may be the indirect fallout from this crisis in world markets that eventually causes more damage to the world airline industry.

In western Europe, where interest rates remain low and growth robust ahead of the launch of the euro at the start of 1999, damage should be limited. Eastern European could also suffer, although they have turned increasingly westward, seeking to disengage from the former Soviet Union. LOT and Malev, for example, have code-share deals in place with BA.

Far more important will be Russia's knock-on effect. Latin America is particularly vulnerable because, like Russia, its exports are based largely on natural resources. Moreover, financial markets have been inherently unstable, which means that the current down draught on global markets could deliver an especially heavy blow to output and growth.

Concerns about Latin American problems have already fed through to Spain. The ripples from Russia will be global, and this time - in contrast with Asia - western airlines are more likely to suffer.

Source: Airline Business