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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

ON A WING AND A PRAYER

Page 2


OF COURSE THERE IS more than one way to play the game. Singapore Airlines (SIA) has so far chosen not to join any of the major groupings. (It was once allied to Delta and Swissair but broke away.) However, the cash-rich carrier is taking a 5%-to-10% stake in Taiwan's China Airlines, is looking for a bite of Thai International when that airline is privatized, and plans to bid for South African Airways together with Star-member Lufthansa. "I think alliances now in aviation are a very definite trend," SIA chief executive Cheong Choong Kong recently said. Whether that means SIA will join Star, as some analysts think is inevitable, or whether it will keep forming bilateral and equity-backed links remains to be seen. "They have an interesting strategy of developing strong bilateral ties with key airlines and they are waiting to see how these will work before deciding whether they would get into Star," says Merrill's Sim. "It seems to me that SIA management isn't so sure about the overall benefits of alliances."

There are potential downsides to these link-ups - for both airlines and passengers. Occasional and vacation travelers do not benefit as much from alliances as business passengers, although they are not hurt either. Shared facilities could mean greater crowds. And there is a possibility that the consolidation of the industry into a few cartels could translate into higher prices, but that opens the door to discount carriers like those flourishing in the U.S. For airlines, alliances mean some extra investment in adapting operations and marketing. Some top-rated airlines may hesitate to dilute their brands by becoming linked with less-prestigious colleagues - which may be why SIA has so far avoided making any vows. And if member goals start to diverge - which is likely as alliances grow larger and add more members - getting out could be costly in terms of lost investment and customer loyalty.

Alliances also are no panacea for the ills that have plagued Asian airlines since long before the recent Asian Crisis hit - bad management, a difficult adjustment to gradual deregulation and, especially, overcapacity. "There are too many planes in Asia flying too many times to too many places, and there are not enough passengers around to fill all those available seats," says Lehman's Tulk. Most Asian airlines are backed by governments. Expansion was as much a matter of pride as of business sense. For years, official protection and a growing market helped cover up bad management and delayed the day of reckoning. But with the Crisis, that day has arrived. PAL's was only the most visible dive. Malaysian Airlines, Thai International and Korean Airlines are all bleeding, and even Cathay with its well-regarded management and competitive operations is expected to post losses this year, according to Credit Lyonnais Securities Asia. And the tough times will last. "With Asian economies in recession, the airline industry in the region isn't likely to recover in the next two to three years," warns Tulk.

And recovery will mean infusions of foreign capital and management, with the stronger regional players - SIA and possibly Cathay - plus some Western giants taking roles in what had been national carriers. Not only pride but the structure of the airline industry has always prevented cross-border airline ownership. Air routes and landing rights are currently negotiated by governments on behalf of their country's airlines, which means airline ownership has to be nationally based. That system may not change in the near future, but the increasingly globalized industry is finding ways around border restrictions. "Alliances are a response to the inability to have cross-border ownership in this industry," says Peter Harbison, a Sydney-based aviation consultant. "Asian airlines have swum against the trend for far too long but the economic climate and falling yields have forced a rethink." Governments are also bending. Philippines President Joseph Estrada has offered management control to foreign investors in PAL, even though foreigners are restricted by law to just 40% ownership. Eventually, the concept of national flag carriers may fade away.

But first, to survive the current downturn, Asian airlines are renouncing their quest for instant glory. Prudential-Bache's Devgan notes that two years ago, at the height of the regional aviation boom, Asian airlines had orders and options for hundreds of new aircraft and were boosting their capacity nearly 10% a year. "Now it seems over the next few years we might have fewer planes and more cooperation among carriers, which would lead to better yields and profitability," he says. Booz, Allen & Hamilton's Mostajo says airlines have to make sure they get their fundamentals right to survive in the best possible condition. "Then, when the crisis is over, they can say let's go back, get our traffic back and make the big bucks."

And don't forget us passengers. We should benefit as each airline tries its best to entice both customers and potential partners. "No alliance would want to take in a carrier that doesn't have a reputation for good service or reliability," Devgan says. Yes, the flight is rough, but look forward to a happy landing.

Page 1 | Page 2


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