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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

Recession and restructuring mean turbulent skies for Asian airlines - and more services for passengers

By Jonathan Sprague and Assif Shameen


Comeback The resurrection of Philippine Airlines

Alliances Teaming up to fight the slump

Unfriendly Skies New carriers take off

IT IS THE BEST OF TIMES and the worst of times - the former if you are an airline passenger and the latter if you are an Asian airline operator. The combination of industry restructuring and the Asian Economic Crisis is squeezing fares and improving services, while also squelching demand and pushing up losses. Air travelers can enjoy in-seat videos, extra meal choices, empty planes and brand new airports, but only two major Asia-Pacific carriers - Singapore Airlines and Australia's Qantas - are likely to make any profit this year, and maybe next. For airlines, times will get even tougher. "The operating environment for airlines in Asia is probably going to get uglier in coming months with excess capacity, falling loads and falling yields," says Sim Chey Hoon, aviation analyst for Merrill Lynch in Singapore. But for passengers, the future is fine.

Two recent events show the contrasting and complementary trends shaping Asia's aviation industry - the death and possible resurrection of Philippine Airlines (PAL) and the announcement of the Oneworld alliance linking five carriers from around the world, Qantas and Hong Kong's Cathay Pacific plus British Airways, American Airlines and Canadian Airlines. The first shows the severity of the environment facing Asian airlines, as well as the complex web of private and national interests shaping the industry. The latter shows one way out as airlines seek to entice passengers and cut costs by banding together. "Alliances are clearly the wave of the future," says Philip Tulk of Lehman Brothers in Hong Kong. Still an evolving concept, how alliances will work out remains to be seen. But Tulk predicts, "Five years from now, my guess is that there will be more airlines within alliances than outside."

What's so great about alliances? In theory, an alliance makes flying several airlines feel like flying just one. Say you need to go from Jakarta to London, then on to New York and Santiago, Chile. Few if any carriers can take you all the way, and flight times and seats will be limited. Buying separate tickets on multiple carriers is expensive and a pain, coordinating flights a nightmare, and accumulating frequent flier points a lost cause. Unless you fly Thai Airways to Bangkok, Lufthansa or SAS to Europe, then United Airlines, Air Canada or Varig of Brazil to the Americas. They are all members of the two-year old Star Alliance, and can be combined on one ticket. If you belong to the mileage program of one carrier, you get credit for miles flown on any of them. If you are a premium member, you get access to priority check-in and lounges all along the way. And all that, Star hopes, will encourage you to stick with its members. For Asian travelers, that may mean switching from the national airline to whichever one is in the best alliance.

Knowing a good thing when they see one, Star's rivals are not about to just wish it clear skies - hence Oneworld, for one. The trend is not only about customers. Said Bob Ayling, chief executive of British Airways at the Oneworld launch: "It will bring together five leading airlines to maximize benefits for our customers, employees and shareholders." Through shared facilities, alliances will trim costs for their members. But more than that, alliances aim to help members grab and lock in customers, particularly full-fare business travelers who place a premium on flexibility, frequency and a full menu of destinations, explains Mercedes Mostajo of consultancy Booz, Allen & Hamilton in Singapore. A member carrier may add only a few extra passengers and raise the proportion of high-yield executive fliers just a bit, but in the tight-margin airline business, those small numbers are crucial, Mostajo says: "If you increase by 2% or 3% those yields or volumes, that goes directly to your profits." And they are especially crucial in Asia today, where the pie is shrinking.

Alliances will also change the way airlines arrange routes, with greater coordination among partners. That will probably mean fewer direct flights and more spoke-and-hub arrangements as is the pattern in the U.S. and Europe. Asian travelers from Jakarta, Kuala Lumpur and Manila will be changing planes more often in Singapore, Hong Kong and possibly Bangkok before reaching their final destinations. "For new billion-dollar airports like Kuala Lumpur, it's going to be really bad news," says Lim Chin Yong of Morgan Stanley Dean Witter in Singapore. The huge airport is not a hub now, and is unlikely to be with Malaysia Airlines in neither Star nor Oneworld and not a strong candidate for either. But being a spoke does not equal condemnation into some air-travel limbo. "To those who say spokes would become deserted backwaters, you only need to go to Brussels or Boston to find out they aren't," says aviation analyst Sanjeet Devgan of Prudential-Bache Securities Asia in Hong Kong.

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