October 15, 2001

Asia's Dark Skies

Airlines in Crisis: From Bad to Worse

Only the fittest will survive

Eric Ellis

A contemplative man, Cheong Choong Kong is not normally given to hyperbole.

So when the Singapore International Airlines chief executive says SIA is facing its "severest test ever" and "the pain is only just starting," colleagues and competitors in Asia's fraught airlines know they're in a crisis like no other.
Cheong is feeling the industry's Osama effect more than most in Asia.

That's because the limits of SIA's tiny domestic base led him offshore in a desperate search for growth. He owns 49% of London-based transatlantic specialist Virgin Atlantic at one end of the globe and a quarter of Air New Zealand at the other.

But as travel phobia plagues the skies after Sept. 11, both deals have become liabilities. Passenger traffic is down about 20%, which could mean a loss of as much as $1.5 billion over the next year for the SIA family of airlines. Little wonder then that the company's shares have slumped 35% since the attacks. The $900 million SIA paid for the Virgin stake in 1999 is likely worth only a third of that now. And the $250 million SIA sank into Air New Zealand last April is worth 90% less in the wake of the Sept. 13 bankruptcy of the Kiwi flag carrier's principal offshoot, Australia's Ansett.

Things could get even worse. A day after Ansett collapsed, Cheong promised to pony up $65 million more for another 10% of Air New Zealand. Now that carrier is in trouble. New Zealand Prime Minister Helen Clark is talking darkly of "statutory administration," an antipodean version of Chapter 11. And legal action may be taken against Air New Zealand directors, including Cheong, by Australian regulators cranky at the prospect of a 70-year-old national icon--and 16,000 jobs--going belly up. Says Timothy Ross, an aviation analyst with UBS Warburg: "With associates like these, who needs enemies?"

Ross says cash-rich SIA will see itself through the crisis and emerge as a net buyer, a view echoed by SIA's new chairman, Koh Boon Hwee, who believes the crisis will "accelerate the liberalization of the industry and allow the consolidation that should have taken place to take place."

Who might come up on SIA's radar? Singapore's neighbor would be a good start. Kuala Lumpur is impatient with the mismanagement of Malaysia Airlines, burdened by $2 billion in debt and smarting from a $430 million loss for the past fiscal year. And there's merger speculation swirling around SIA and Hong Kong's Cathay Pacific to form a mighty Asian carrier. That seems a long shot politically, but analysts say it would make good sense.

For the moment, Asian airlines are focused on survival. As time and war wear on, it may be more like survival of the fittest.