North America-Asia routes may be projected as some of the world's fastest growing, yet capacity growth is at a standstill. David Knibb examines the reasons. One would expect the skies to be full between North America and Asia, given the growth in the Asian economies and the shift in US emphasis from Europe to Asia. After all, transpacific air service now accounts for nearly half of all the international revenue earned by US airlines, up from less than a third a decade ago. Edward Oppler, US Department of Transportation deputy director for international aviation, declares: 'What we have seen is a dramatic shift . . . from the transatlantic to the transpacific.'

The International Air Transport Association expects north Pacific air travel to double in just over a decade. From 12 million passengers in 1993, it says the number of air travellers crossing the north Pacific 14 years from now will exceed 42 million. Boeing expects this growth to average 6.8 per cent annually, compared with only 4.4 per cent over the north Atlantic.

Air traffic generally mirrors economic growth. East Asia's share of world output has expanded from 20 to 31 per cent in the past decade, according to Australia's Asia-Pacific Economics Group. US multinationals are boosting stakes in Asian assets by 25 per cent a year, says the US Commerce Department. As economies grow, so does air traffic. At least in theory.

In fact there is a different story to tell. Airline capacity across the North Pacific has stalled. The number of non-stop scheduled passenger flights between North America and Asia, excluding Hawaii and other Pacific islands, grew last year by less than1 per cent - with a net weekly increase of only two flights. Effectively, there is no growth.

Why? Simply because US airlines mainly want to fly to Japan and cannot, because of bilateral restrictions, slot restrictions, or both. And the Asian carriers generally feel that they can make more money flying elsewhere.

The Hong Kong-US and South Korea-US routes grew by 2-3 per cent last year, but US airlines clearly prefer Japan. 'The traffic base in Japan is so much greater than any other Asian country and that's still where we see the growth,' says Doug Killian, international communications director at Northwest Airlines.

For Northwest and United, Japan offers the added attraction of fifth freedom rights to the rest of Asia from what Killian calls 'our connecting complex at Narita.' A Booz Allen & Hamilton study recently conducted for United Airlines estimated that United and Northwest rights beyond Japan together generate between $1.1 billion and $1.6 billion.

Yet, even without beyond rights, the Japanese market is so big compared to other Asian markets that it remains the main attraction even for the so-called 'MOU' carriers. These are Delta, American, and Continental, which enjoy limited rights under memoranda of understanding rather than the 1952 Japan-US bilateral.

Since they cannot add frequencies at will across the north Pacific and enjoy no fifth freedoms beyond Japan, both Delta and American have previously talked of creating hubs in Taipei or Seoul. Five years ago, Delta announced plans for a major Taipei hub, which it then postponed while absorbing Pan Am's European network. Last August Delta announced it was abandoning Taipei as part of a major pullback from Asia that will leave it with flights only to Japan and Korea.

American's plans for a hub at Seoul also evaporated. It announced a bold plan in 1993 but almost immediately shelved it because of poor transpacific yields. 'Seoul's geography is fine,' says Michael Roach, a consultant with California-based Roberts, Roach and Associates on several Asia projects, 'but it still remains a fact that the huge local market is Tokyo. It's like trying to compete with [Chicago's] O'Hare in Milwaukee.'

So airlines have talked about bypassing Japan, but in reality such strategies are non-existent. Last year the US share of Korean capacity remained unchanged at 23 per cent. In Taiwan it dropped with Delta's departure and US airlines now offer only 15 per cent of all nonstop seats between the US and Taipei. In marked contrast, they dominate two thirds of all US-Japan capacity. Airlines seem guided by the principle expressed by Roach: 'Without a Tokyo hub you're in deep trouble.'

Osaka/Kansai showed more growth than Tokyo/Narita last year for the obvious reason that it could offer slots, long frozen at Narita. Kansai added seven weekly transpacific flights, making it the fastest growing Asian gateway to or from North America. Tokyo/Narita and Beijing were joint second.

Adding flights at Narita, however, is a zero sum game. 'We have to trade slots to add another service,' says Northwest's Killian. 'We've pulled down some service between Tokyo and Seoul and used those slots for new US flights. If north Pacific traffic accelerates it's possible that we might have to pull down more fifth freedom sectors, or add the new flights at Kansai.' Meanwhile the MOU carriers are frozen. They lack rights to Kansai and have too few rights at Narita to gain much from slot trading. They can only press Washington for renewed bilateral talks.

Limited Tokyo slots hinder north Pacific growth in other ways. Asian airline executives have complained for years about excess transpacific capacity and its effect on yields. Yet, despite Japan's current recession, they refuse to relinquish slots for fear they may be unable to reclaim them when traffic picks up. Killian observes: 'Airlines consider those slots very valuable and they're looking long term.' Empty seats are the price for that investment. But Killian foresees surplus capacity waning in response to traffic growth and Delta's retrenchment.

In the meantime codesharing - partly a response to excess capacity - also offers MOU carriers the access they lack beyond Japan. Hence, Delta's alliances with All Nippon Airways and Korean Airlines. Its codesharing with Singapore Airlines relates more to global services than Asian access, which explains why Delta reportedly began talks with Cathay Pacific last August when it announced its pull back from Hong Kong, Bangkok, and Taipei.

The attitude of American Airlines was illustrated in December when the US DOT invited applications for routes under the new Hong Kong bilateral. Northwest and United each submitted plans to operate their own services. American proposed two services via Vancouver under a codeshare with Canadian Airlines.

Rather than commit its own resources to routes beyond Japan, American is relying on Canadian, one third owned by AMR Corp. Roach notes: '[AMR chairman Bob] Crandall seems to have recognised that they're not a major player in the Pacific and are not likely to be anytime soon.'

United and Northwest view Asian codeshares differently from the MOU carriers. As Northwest's Killian notes, 'We didn't form the codeshare with Asiana as a way of serving points beyond Seoul. Japan serves us very well with the beyond service. We don't need to bypass Japan except for Narita's slot restrictions.' Instead, United and Northwest are looking for feed from within individual countries and Killian says Northwest sees the benefit of its Asiana codeshare as 'more feed from secondary markets in Korea and vice versa'. He adds: 'We can carry US passengers to Seoul and then feed them to Asiana to points within Korea.' United wants to codeshare with Thai International and China Southern.

Asiana probably views matters the other way around - delivering passengers at US gateways for Northwest to distribute internally - but Northwest's view of its Asiana alliance is consistent with its talks with Japan Air System about domestic Japanese feed and with other Asian carriers, some undoubtedly Chinese.

In fact Beijing is the only other city in Asia to show significant transpacific growth. Most of it simply represents a diversion of nonstops from Shanghai to Beijing, but more are planned. Washington has approved five weekly nonstops from Detroit, and Northwest is hoping for Chinese approval in time to start service this spring. 'China has incredible potential,' says Killian, 'but it's starting from a very low base. That's why we're expanding gradually in China.'

China-US growth is more likely to develop nonstop than through Japan, because of the resistance to fifth freedoms in both Tokyo and Beijing. In the meantime, if Chinese and US negotiators settle their differences over capacity, China Southern could soon become China's third transpacific carrier.

Indeed China Southern seems keener about North American services than most Asian airlines. Cathay Pacific, Air India, and Philippine Airlines will add services this year under new bilaterals, but net transpacific growth by all Asian carriers last year was zero.

The blame for this cannot be attributed to the slot shortage in Tokyo - Asian airlines can bypass Japan. Their apparent lack of enthusiasm stems largely from the overcapacity caused by dual designations and internecine rivalries. Taiwan's EVA Air wants to establish a strong position in the US against China Airlines while Asiana aspires for the same against Korean. In their competition for outbound US traffic both are willing to pay extraordinary overrides to US consolidators. Asiana is offering 44-49 per cent; EVA 35-45 per cent. Preoccupied with Japan, US airlines have generally left these Asian rivalries to the Asians.

Given Japan's importance to Asia-North America service and the various limits on Japan, it comes as no surprise that north Pacific gateways have not proliferated in the same way as across the Atlantic. One airport on each side of the Pacific - Minneapolis and Beijing - gained transpacific nonstops last year. There is little immediate prospect of any more given that the north Pacific has only one strong gateway and airport.

If gateway proliferation is minimal, there is even less prospect of new transpacific carriers emerging. China Southern could join the list, but North America has no nominees. Roach, who consulted for America West on its Nagoya route, comments: 'Taking on the Pacific is not something one does lightly.'

Cargo alone goes contrary to nearly all these trends. Passenger capacity is static, cargo capacity is growing. Some of it is seasonal, but 'permanent growth is definitely building,' says Lee Hibbets, research director for Seattle consultants Air Cargo Management Group. Passenger growth is mostly by US carriers (notably Northwest) while new cargo lift is mostly Asian.

Routing may make the biggest difference. Japan is the choke point for transpacific passengers and non-Japanese freighters avoid it. Flights to North America from Hong Kong or Singapore 'don't do a tech stop in Japan,' Hibbets stresses, 'because it's too expensive. Instead, they'll stop in Khabarovsk or Petropavlovsk [Russia] or Anchorage'. On fifth freedoms, Hibbets is equally clear: 'Even if they did stop they wouldn't pick up or drop any cargo. The Japanese are pretty stringent about that.'

Japanese and US negotiators have set a target date of March for a cargo accord and whether cargo issues will lead into passenger issues remains unclear. Tokyo wants to move from cargo into a substantial review of the entire bilateral, but both sides fear they may only be able to agree on another mini-deal that leaves fundamental issues unresolved. So long as the Japan-US dispute festers, however, it will continue to affect all growth on the north Pacific.

Japanese and US negotiators have set a target date of March for a cargo accord and whether cargo issues will lead into passenger issues remains unclear. Tokyo wants to move from cargo into a substantial review of the entire bilateral, but both sides fear they may only be able to agree on another mini-deal that leaves fundamental issues unresolved. So long as the Japan-US dispute festers, however, it will continue to affect all growth on the north Pacific.

Source: Airline Business