Air Transport World

Pall over Asia

The region's airlines struggle to cope with the downturn. But have the lessons been learned?

Like a stone dropped into a pond, Asia's financial crisis sent ripples far and wide, helping to fuel a process of change and reconstruction in the region's airline industry.

After 14 months, few carriers have emerged stronger.

In fact, two Indonesian airlines, Sempati and Merpati, apparently have shut down and Garuda is technically bankrupt but continues to operate, a beneficiary of the vagaries of the country's corporate law as well as the state of chaos that exists even today. Across the region, airlines are canceling or deferring aircraft orders, laying off workers and withdrawing from theater routes in favor of intercontinental legs.

Although the air transport industry is not the only sector to be hit by currency devaluation and recession, airlines have proved to be especially vulnerable to the business cycle. First, economies in recession mean less business travel and less consumer demand. Additionally, as Richard Stirland, director-general of the Assn. of Asia Pacific Airlines, points out, there is a "huge disparity in what [currencies] costs are denominated in and what [airlines] get their revenues in."

Asia's airlines had bills for fuel, overflight fees and aircraft in U.S. dollars but usually were generating revenues in their respective local currencies. An extreme example is the Indonesian rupiah, which lost more than 80% of its value between July, 1997, when it was trading at 2,500:$1 and July, 1998, when it was trading at around 12,900:$1 (at one point it fell to 17,000:$1).

This disparity became ever more significant as Asian airlines went on aircraft-buying binges. Consultant and aircraft broker Jim Eckes of Indoswiss observes: "Among the offenders were Boeing and Airbus, who encouraged airlines to buy planes with very little deposit put down. In hindsight, these were the planes the airlines didn't need."

Both manufacturers dispute this view, the response being a mix of "we don't make the decisions about purchases" and "we're committed to a long-term relationship with our customers and therefore, it is not in our interest to encourage them to take excess planes." Absent from the discussion is any suggestion that issues such as global trade, competition between manufacturers to win new orders, corporate power, greed, stupidity and the Asian concept of face played a role in the disaster.

While pegging the immediate cause of the current crisis to the Thai government's decision on July 2,1997, to allow the baht to float is easy, the seeds were sown over many years as Asia's airlines bought into the myth of guaranteed future growth and profitability. These are the themes: Problems accumulated in the boom years; overambitious fleet plans, usually with new planes; high degrees of debt financing to fund these; the stubbornness of some in defending the national carrier; poor management quality and excessive reliance on political and personal relations as opposed to commercial ones. …

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