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Asia's commercial aviation sector has come under immense financial and operational strain in the wake of last week's terrorist attacks in the United States.

It is adjusting to rising costs, increased safety demands and falling passenger numbers. Yesterday Korean Airlines (KAL) joined the growing queue of regional airlines to warn of retrenchments and reduced services.

Next week some airlines could find themselves grounded if they are unable to secure new war-risk insurance. Insurers are baulking at extending their exposure to what is fast becoming the most expensive payout in history.

Cathay Pacific Airways said it had no immediate plans to follow other international airlines with cuts in staff and services but was reviewing its entire operations.

Japan Airlines also said it had no immediate restructuring plans, although it acknowledged 12 per cent of its international passengers last week cancelled their flights.

KAL official Lee Chang-wook told Reuters it might reduce services on its US routes in light of rising costs and slowing demand and would make a 'certain number of job cuts, although the size and time frame is under review'.

It follows Singapore Airlines' warning of similar action. US carriers have flagged a cut of up to 20 per cent in their services and more than 60,000 job losses. British Airways  plans to axe an eighth of its staff.

Cathay said it wanted to review the full spectrum of its operations and was not about to make a hasty decision.

Analysts said a Cathay restructuring might not be inevitable as the airline was already 'modestly staffed relative to its production'.

It made cost reductions in 1998 following the Asian financial crisis when it cut 2,000 positions and mothballed a number of older aircraft.

It has since reinstated a large number of those positions and in February ordered seven new Airbus aircraft for delivery during the next 18 months.

It said those orders could not be cancelled.

Peter Hilton, head of Hong Kong research for Credit Suisse First Boston, said Cathay was still 'digesting the impact of the events of the last week' and was unlikely to make an immediate decision on cuts.

'The airline has already been through a major cost-reduction programme in the wake of the Asian crisis,' he said.

'I think last year proved Cathay's operations were a bit too strained and needed to have a bit more slack in the system. That was a component of the dispute with its pilots.'

Airlines are also reeling from a decision by major insurance underwriters to cancel cover for war liabilities from midnight on Monday, meaning they will be grounded unless alternate coverage can be arranged at rates estimated to be up to 700 per cent higher than before.

Airframe insurance typically costs between 1.5 per cent and 3 per cent of an airliner's residual value, while full war and terrorist risk cover is usually an additional 2 per cent to 4 per cent.

Cathay declined to quantify its insurance costs, saying only that it formed part of the HK$689 million 'others' category out of HK$14.97 billion in total operating expenses during the first half of this year.



Asian airlines warn of cuts