Airlines face greater burden

ALL OF THE world's major airlines practise crisis management as a matter of course. Technical troubles on board aircraft, accidents due to pilot error or extremes of weather, even terrorist hijackings - there are thousands of things that could go wrong during the course of a scheduled flight and for which the airlines prepare endlessly.

The co-ordinated hijackings and crashes of four airliners in the United States, which culminated in the destruction of New York's landmark World Trade Centre twin towers and the loss of possibly thousands of lives, combined, however, to make a disaster unparalleled in the history of commercial aviation.

The world's transport industry could make no allowance for the events seen on Tuesday, and the attacks have plunged the world's air transport industry into chaos and financial uncertainty.

'This has become a nightmare scenario for the industry,' said Philip Wickham, an aviation analyst at ING Barings in Hong Kong. 'Demand for air travel is already weak due to the global slowdown. I want to stress that airlines are equities that do not perform during times of hostilities.'

The biggest single question for the world's major airlines will be whether passengers overcome their fears and return to air travel in numbers.

If the answer is no, the leading carriers could suffer huge financial losses.

Security has been stepped up at airports across Asia and the commercial airspace above the US and Canada has been closed. As a result, all flights - both domestic within North America and international flights headed there - have been cancelled.

US airports are expected to remain closed until at least midday on Wednesday (US time), US air transport officials announced after the tragedy.

The country's airports were shut down soon after the crashes, which involved two Boeing 767s and two Boeing 757s, one of each operated by American Airlines and United Airlines.

'Obviously, this is having a huge impact on airlines in Asia, as well as airlines all over the world,' said Nicholas Ionides, regional managing editor of Air Transport Intelligence, a respected industry publication.

Cathay Pacific Airways has suspended all flights to and from the US and Canada until further notice.

These include 12 daily flights between Hong Kong and North America. Japan Airlines has cancelled 32 passenger flights in total. It says cancellations are affecting 18 flights from Tokyo to the US and Australian destinations, 16 of which are passenger flights and two cargo flights. All Nippon Airways has cancelled all its flights to the US from Japan.

Singapore Airlines says its cargo and passenger flights to the US remain suspended until further notice, although it operated the Singapore-Tokyo leg of a Los Angeles-terminating service yesterday morning.

South Korea, a key US ally, cancelled about 30 flights to the US scheduled yesterday. Its two major airlines, Korean Air and Asiana Airlines, fly the Seoul-to-US routes 164 times a week.

For most Asian carriers, trans-Pacific services are their most lucrative. So the shutdown in US commercial air travel, if it is prolonged, will have a devastating effect on the bottom-lines.

The tragedy comes at a time when commercial aviation operators around the world are already suffering a slump in passengers because of the downturn in the US economy. Any recovery in airline traffic mooted for the second half of the year will now be virtually negated.

Amid the chaos and uncertainty, few in the industry believe passengers will return in large numbers when US airports reopen for business later this week. According to US media reports, executives of major American airlines expect passenger traffic will fall by 50 per cent for the remainder of the year.

Timothy Ross, an aviation analyst at UBS Warburg, said: 'This was the last thing the industry needed to compound an already delicate demand situation.'

He said there were two main factors that would affect the financial performance of Asia's airlines following the tragedy.

Carriers with the greatest exposure to US routes would be most affected, while those without strong fuel-hedging strategies would be impacted by rising fuel prices on the world's mercantile markets. Crude oil prices rose by as much as 30 per cent in trading yesterday.

'South Korea has a high degree of US exposure and that is compounded by the absence of fuel hedging strategies. Taiwan also has high exposure to the US market, but its airlines engage in some hedging. Most of the smaller Southeast Asian carriers have little exposure to the US but no fuel hedging strategies in place.

'Cathay has a 25 per cent to 30 per cent revenue exposure to the US, but between 30 per cent to 35 per cent of its fuel needs are hedged. Singapore Airlines has a 20 per cent to 25 per cent revenue exposure to the US, but half of its fuel is hedged,' Mr Ross said.

As a result, collateral damage to Asia's airline stocks was huge yesterday. 'Airline stocks are already reflecting these fears, with double-digit percentage drops now,' Mr Ionides said.

Japan Airlines fell 11.43 per cent to 310 yen, while Korean Air fell to its daily drop limit of 15 per cent to 5,440 won.

In Hong Kong, Cathay fell nearly 20 per cent to HK$6.75, while in Singapore, Singapore Airlines fell nearly 12 per cent to S$10 per share.

The only recent comparison to these events is the Gulf War. Analysts said they feared the terrorist attacks might have a similar impact on the industry. The 1991 Gulf War led many passengers to stop travelling by air, pushed up fuel prices to very high levels and put airlines deeply into the red.

At that time, worldwide air travel declined for the first time since 1945.

According to Mr Wickham: 'Given that international air travel in the Asia-Pacific has been expanding at only 3 per cent this year to July, there is a high possibility it will turn negative for the full year if the threat of terrorist actions persist.'

Still, fuel prices may be a red herring in determining the size of any decline in passenger traffic.

'Demand is much more important,' said Kevin O'Connor, an aviation analyst at Deutsche Bank.

'During the Gulf War, prices went up, but the real problem was that people did not want to fly. That was a much bigger problem for the airlines,' he said.

It remains to be seen whether passengers will return in the wake of the catastrophe. For one, the situation is fluid - will the terrorists strike again? Confidence in the airline industry will depend partly on the US administration's actions and how swiftly the perpetrators are brought to justice.

In the words of one shocked analyst: 'No one really knows what's going to happen. It is turning into a real bad situation for everyone.'

Graphic: airshgbz