Asian carriers are suffering as well December 2001
Asian airlines had just managed to pull out of their regional recession, caused essentially by a financial crisis in 1997/98, when they have been pushed back into another slump by the events of September 11.
The Asian carriers might have expected to have been a little insulated from the full impact, but they have been badly hit by a 15%-plus decline in Europe–Far East traffic and a 40% collapse in transpacific traffic. Moreover, intra–regional traffic is depressed as a direct result of the elongated and deepening recession in Japan — the OECD has just downgraded to -1.0% in 2002. Japan generates about 20% of the intra–Asia international traffic.
As the preliminary post–September 11 traffic results show, the Japanese carriers and Korean were most affected, followed by Asia’s two premier brands — SIA and Cathay — while flag–carriers like PAL and Thai have managed to maintain positive traffic trends.
However, as a direct result of the 1998–99 recession, the Asian carriers have been very restrained in their ordering. The capacity due for delivery in the period up to the end of 2002 is limited to 88 units.
JAL’s major move has been to accelerate a merger with JAS (JAL was already the second largest shareholder in JAS with about 8.5% of the stock). Talks about a merger had already taken place early this year. Amalgamating the number two domestic operator would boost JAL’s domestic share to around 48%, just below ANA’s 49%, and create the world’s sixth largest airline in terms of passengers carried.
JAL insists that the deal will be a" breakthrough for real competition between two big airlines" , a statement that might cause eyebrows to be raised. The Japanese Fair Trade Commission has to give its approval but no strong objections are foreseen. The integration process will take up to 2004 and will involve removing duplication at 30 airports where both carriers currently operate. Claims for cost savings are so far quite modest — around Y16bn ($130m) a year.
It is possible that ANA might respond to JAL’s proposed takeover of JAS by buying out either or both of the two small Japanese carriers — Do and Skymark. However, there would appear to be very little point in doing this as the two newcomers have a very small market share and no perceptible impact on domestic yields. Generally, the threat from new entrants in the theoretically deregulated Japanese market appears minimal, partly because of the need to invest in widebody rather than narrowbody equipment.
The Japanese and Korean carriers have turned to their governments for support. The government will provide provide soft loans totalling Y16bn ($130m) to JAL and Y38bn ($310m) to ANA. Korean Air has received Won 140bn($110m) in government aid while Asiana will get Won 110bn ($86m).
There is no such option for the regions commercial leaders, SIA and Cathay. They are suffering from an unprecedented combination of adverse events:
- Severe trading recessions in both city–states;
- High exposure to both Japanese and US travel collapses;
- Escalating unit labour costs in SIAs case, and an interminable dispute with its pilots union in Cathays case.
In addition, SIA is faced with sorting out the fall–out from its global investments — a strategy which has been compared to that of the SAir Group. The bankruptcy of Ansett has deprived it of feed in the Australian market, while its investment in Air New Zealand is now worthless following that carriers effective re–nationalisation. The investment in Virgin Atlantic has been almost completely written down in SIAs books, and little synergy is apparent in this alliance. Indeed, given the lack of cooperation on code–sharing and conflicts of interest between Virgin Blue and Ansett, relations between SIA and Virgin are not smooth at all.
As for the other southeast Asian flag–carriers:
- Garuda has spent the past few years restructuring and downsizing under the auspices of Lufthansa, and, as it suspended US services in 1997, it has escaped the worst of the fall–out from September 11.
- PAL is still in receivership following its bankruptcy in 1998. The airline has abandoned its over–ambitious strategy of becoming a global Asian carrier and refocused on being essentially an ethnic carrier, and so too is also somewhat insulated.
- MAS is accelerated another major restructuring exercise. Still overburdened with debt from its expansionist phase, a downsizing in personnel and another sharp cutback in network is anticipated.
- Thai has postponed the sale of 23% of its stock, a transaction that was looking shaky in any case no trade investor had committed. In early October the entire board of directors resigned, and the incoming chairman has warned of that the airline would disappear unless radical changes are made, but he tempered that by saying that bankruptcy was still three years away.