IT SEEMED an unbeatable combination. For more than a decade, Southeast Asia's airlines developed a worldwide image of exotic service to exotic locations, while simultaneously profiting from lucrative but restricted routes in their own region's high-growth economies. But they are suffering the consequences of their push into other aviation markets. They are having to confront more aggressive competition, and a realisation that it may take more than advertisements showing smiling Singapore hostesses to bring in the passengers. Cathay Pacific recently announced a 46 per cent drop in profits for the first half of 1993. Singapore Airlines (SIA) saw profits fall 8.4 per cent in the year to March, and Thai International announced earnings of 594 million baht (about HK$184 million) for the nine months to June - 67 per cent lower than the previous year. A primary cause of the fall in earnings has been the success of Asia's aviation market: recession-hit Western airlines have transferred aircraft to routes into the region to curb losses in their home territories. Southeast Asian airlines have also been the victim of the success of their domestic economies, where rising labour and land prices have increased operating costs. Cathay Pacific managing director Rod Eddington says: ''Asian airlines will never be able to rely on the combination of circumstances which they have had in the past, to guarantee them high profitability. They had low labour costs, rapidly growing markets and a substantial degree of lack of interest from North American and other airlines.'' According to the International Air Transport Association, the Asia-Pacific region - which stretches from the Indian subcontinent to Australia - accounted for 25 per cent of the world's passenger traffic in 1985. By 2000, it is projected to represent close to 40 per cent, in an area where average fares are higher per kilometre than in either Europe or North America. The market's fast growth means that, despite the recent downturn, Southeast Asia's airlines remain more profitable than their main competitors, many of which are making losses. But a combination of factors is clouding the sky ahead. The most pressing has been Japan's shift towards recession. Japanese travellers represent the largest single market for most of Asia's airlines. Figures from the Japan Travel Bureau, the tourism office, are expected to show a slight fall in the total number of Japanese overseas travellers during July and August 1993 - the first drop in six years - while Japanese travellers to Asian destinations are expected to fall by 10 per cent over the same period. The impact has already been felt: Cathay's passenger yields (revenue per passenger kilometre) fell by 6.1 per cent in the first half of 1993, while SIA's yields fell 6.7 per cent during 1992. When Japan's economic cycle swings upwards, airline earnings across Asia would be expected to follow, since the aviation industry is sensitive to consumer spending patterns. But each Southeast Asian airline faces further individual problems: Cathay's profits are being squeezed by Hong Kong's annual inflation rate of nine per cent. Its efforts to curb costs led to the 15-day cabin crew strike. The profits of Malaysian Airline System (MAS) have suffered from misjudgments made in the late 1980s. Over-optimistic estimates of demand growth have left it with too many new aircraft. At the same time, the Malaysian government has fixed prices on domestic routes, which MAS is obliged to operate, at below cost. SIA is exposed more than other Southeast Asian airlines to the recession affecting European and North American routes, where it has expanded rapidly over the past decade. Thai International has a record of poor management. Past inefficiencies in placing orders for aircraft, for instance, have left the airline with a fleet comprising nine aircraft types, made by five aircraft manufacturers, with three makes of engine. Thecompany plans to simplify its fleet. Two common challenges face Southeast Asia's airlines. The first is the downward pressure on prices caused by competition. The Asian fleet grew rapidly during the 1980s, but demand for tickets always outstripped supply. In the past two years, estimates Jardine Fleming Securities, Asian airlines increased capacity by between 10 and 12 per cent a year while demand rose by only about seven per cent a year. With orders for aircraft made at least two years in advance, the airlines clearly misread the effects of global recession on the Asian market - a predicament worsened by the arrival of overseas competitors. Mr Eddington claims the influx of overseas airlines will be short-lived, but the new competitors, primarily US airlines led by United, disagree and have been clamouring for more ''open skies''. That is, access to the highly profitable restricted routes operated by Asian airlines. The second challenge facing Southeast Asian airlines is the pressure on costs caused by the strong performances of the region's economies. In an effort to control salary bills, airlines based in the more developed economies have taken on cabin crew from cheaper Asian labour pools, such as the Philippines or India. Cathay has moved some labour-intensive operations into China. But costs will remain hard to control in Singapore, Japan, South Korea, Taiwan and Hong Kong, as they complete the evolution from low-cost manufacturing centres to higher value-added service economies. However, shrinking profit margins may eventually be offset by the emergence of new high-growth markets, such as China, Vietnam and Indonesia.