Business travel poll 1998: Who’s in the top flight?
Business travel poll 1998: Hotels
Business travel poll 1998: Airlines
For many years, Cathay Pacific Airways has epitomized the confidence and expectations of a prosperous new Asia. Hong Kong’s flagship carrier has grown with its home continent, challenging the world’s best on service, efficiency and style. Alongside south-east Asian neighbour Singapore Airlines it reflects a wealthy, mobile, demanding and discerning clientele, the product of economic success.
Times change. In January, Cathay Pacific Airways announced 760 redundancies, on top of 550 announced late in 1997 as a result of the airline’s move from Kai Tak to Hong Kong’s new Chek Lap Kok airport in July 1998. A February edition of its in-house weekly magazine offered bleak reading: “January’s results provide a clear indication that there will be a very difficult year ahead. The advance loads for the coming few months are worrying.”
Analysts are in vocal agreement. In February alone, Nikko Securities, ING Barings and Merrill Lynch put out reports questioning the strength of Cathay stock. In a report entitled “Cathay Pacific: a turbulent long-haul flight”, ING Barings analyst Nam Park cut his earning forecasts for the airline by 45.2% for 1998 and 42.2% for 1999. Merrill Lynch assistant vice-president Wendy Wong, titling her report “Running ahead of itself”, reduced Cathay’s intermediate long-term rating from accumulate to reduce. Partly, this is a result of Cathay’s impressive outperformance of the Hang Seng index since the start of the year (by 43.7%, according to Park at ING), but it also reflects tough times at the airline, with load factors – passenger capacity – around 55% to 60% (60% is the approximate break-even point), low passenger yields through ticket-price cuts and less cargo revenue.
On March 11, announcing Cathay’s results for 1997, chairman Peter Sutch confirmed just how bad things were. The company’s profits were down 55% on the previous year to HK$1.69 billion (US$218 million). “It has been an exceedingly hard 12 months,” said Sutch, warning that the year ahead would also be very tough.
The stay at home factor
Cathay is just one of many in the travel sector to suffer from Asia’s economic downturn. The reasons for their troubles are not difficult to pinpoint: in hard times, people are clearly less likely to travel for pleasure, and companies make travel budgets one of their first priorities for cost savings. Pierre Jeanniot, director general of the International Air Transport Association (IATA), said in February that airlines operating in Asia would see profit reduced by $2 billion in 1998. His organization has reduced forecasts for Asia-Pacific passenger numbers in 2001 by 31 million, a 15% drop. “If there is a deflationary environment people travel less,” says a Hong Kong analyst. “Tourist travel is discretionary, and if your mortgage repayments have gone through the roof, you won’t go on holiday. If you’re travelling short haul on business, companies will tell you to go economy instead of business class, and with business-class travel being a huge part of airline revenue, this adversely affects yields.”
The downturn in Asia is affecting all sectors of the travel and tourism industry. But airlines are particularly vulnerable. The worst hit have been local operators, but big airlines from outside the region have also had to cut back. United Airlines has abandoned routes to the Philippines and Qantas has cancelled flights to Seoul. However, Air France has managed to find a bright side to the region’s problems. It has moved its Asia operations to Bangkok and cut annual operations costs by 75%.
For big airlines in Europe and the US, the region’s problems will, at worst, cause a small dent in profits. But for local players the crisis is a catastrophe. Asian airlines are, by and large, fairly young businesses. They have expanded rapidly through Asia’s boom years, building up considerable foreign debt: a single brand-new Boeing 747-400 jet, the biggest of the jumbos, costs at least $130 million. Cathay is in fact one of the least highly geared airlines in the region, although with new headquarters and many aircraft on order, its gearing could go up to as much as 70%. Thai International, with negative equity, is suffering more. “The ones that had very weak balance sheets to begin with are in serious trouble,” says Wendy Wong at Merrill Lynch.
Servicing that debt becomes more difficult as passenger numbers and revenues drop, but things have become much harder for those with debt in US dollars. Pity the Indonesian government. It carried out a partial bail-out of its beleaguered national airline, Garuda, shortly before the regional currency crash. The injection of government funds reduced Garuda’s debts from Rp3.1 trillion to Rp1.4 trillion – at a time when the rupiah was 2,700 to the dollar. Since last summer the currency has plummeted and has remained below 9,000 to the dollar for most of this year. As a result, the debt stands at far more now than it did in the first place.
In January, Garuda announced that it had deferred payment on a number of loans. The statement was issued to deny reports that it had defaulted on two payments worth $8 million owed to Crédit Lyonnais, Banque Paribas and Deutsche Morgan Grenfell. The banks had arranged the financing for the purchase of six jets from the Airbus Industrie consortium, whose constituent members include British Aerospace, Aérospatiale and Daimler-Benz Aerospace. The deaths of 234 people on a Garuda A300 Airbus that crashed in Sumatra in September also damaged the airline’s reputation and revenue. A Jakarta business newspaper has quoted Eko Suwaryo, Garuda’s personnel director, as saying that the airline will start laying off 3,000 of its 13,000 employees in March. Jakarta’s transport minister, Haryanto Dhanutirto (Garuda is owned and run by the ministry of transport), wants the airline to go further and sell off $230 million in assets. He has described Garuda as a “parasite living off the ministry of transport’s profits”.
Orders in the pipeline
Garuda’s suffering is particularly severe. But as currencies have fallen in the region, airlines from Thailand to Korea have found themselves grappling with a growing problem of foreign debt. Not only do the airlines need to meet repayments on existing aircraft, there is also the problem that Asia’s confident airlines have ordered many more aircraft for the future. Aircraft manufacturer Boeing says that one-third of its large order backlog is made up of Asian orders. Between 1998 and 1999, says ING Barings analyst Nam Park, some 140 new aircraft will be delivered to the region, equivalent to the total present fleets of Cathay and Singapore Airlines combined.
The airlines are working to unravel their future commitments where they can. Cathay Pacific is trying to sell seven Boeing 747-200s, worth about $23 million each. The airline has also cancelled options for further aircraft beyond 1999. But it has four Boeing 777-300 aircraft, five Airbus 340-300s and one Airbus 330-300 on order for delivery this year, with three more jets to follow in 1999. Malaysian Airlines has $3 billion in debt but a further $4 billion in orders and options for 13 Boeing 777 jets, some of which it is discussing leasing or selling to US carrier Delta. Korean airline Asiana, particularly badly hit, has written to other carriers offering aircraft for sale or lease, some of them on order and some already in service. Philippine Airlines and Thai Airways International also have outstanding orders.
Clearly, this could have a knock-on effect on aircraft manufacturers themselves. In Asia, as elsewhere, the industry is dominated by Boeing and Airbus. Some reports suggest that 60 aircraft deliveries could be deferred as a result of the Asian crisis. Speaking at the biennial aviation conference Asian Aerospace ’98, in Singapore in February, Larry Dickenson, Boeing’s vice-president for international sales, said the number was likely to be considerably less. But one analyst describes 60 deferrals as a “conservative estimate”.
Cancellation or rescheduling?
Malaysian Airlines, Philippine Airlines and Thai Airways have been in talks with Boeing about rescheduling deliveries. But Boeing denies that any of these airlines has cancelled orders outright. “We are encouraging our customers to make long-term decisions and not be over-reactive,” says Dickenson. But there is little doubt that Philippine Airlines is in serious difficulties. In a leaked internal communiqué, the company’s president, Jose Antonio Garcia, told his staff they were facing “an uncertain future”. He said the company was in serious financial trouble and would not survive unless drastic steps were taken.
In fact, analysts argue that capacity is unlikely to be scaled back in the near future, since six months before an aircraft is delivered, it is already 35% paid for. “Lead time is about 12 to 13 months for an aircraft, so they are difficult to cancel,” says Wong at Merrill Lynch. “Year 98 capacity will still be delivered. Scaling back will only take effect in 1999.” By then, the downturn may be over, and travellers may be returning to the skies. Is there any point in scaling back when that might lead to undersupply? “Some might be forced to,” says Wong.
Airlines suffer through reasons of scale: getting the finance together to keep a fleet of aircraft in the sky is no easy feat, and many of their expenses come in hard currencies. But hotel chains don’t have things much easier. “Hotels are hit hard by a tourism downturn because they have high operating leverage: their costs are more or less fixed,” says UBS Securities analyst Raymon Ngai in Hong Kong. While most businesses can streamline their operations, a five-star hotel cannot cut staff without undermining its five-star status, the whole reason for its appeal.
On February 19, Hongkong and Shanghai Hotels became the latest Hong Kong institution to announce dismal results. The company owns interests across Asia, most notably the Peninsula Hotel in Kowloon’s Tsim Sha Tsui resort. It announced that its net profits dropped 87.5% in 1997, from HK$916 million to HK$114 million.
The hotel group’s operating profit fell by a rather less alarming 7.3%, to HK$1.04 billion. The reason for the difference was the group’s decision to book HK$565 million against projects that had been cancelled or delayed, mainly as a result of the economic downturn. This included the suspension of two projects, the Kota Ciputra project in Jakarta and the Giang Vo Lake project in Hanoi.
The group’s problems in Hong Kong itself – the Peninsula Hotel’s occupancy rate ended 1997 with an average of 60%, compared with 73% in 1996, and was down to 52% in January 1998 – are in some ways peculiar to the territory. Following its handover to China, the former British colony has lost some of its appeal to tourists. For high-spending Japanese tourists, Hong Kong’s attractions have certainly waned: the Japanese media have reported, somewhat belatedly, that Japanese tourists have been ripped off by Hong Kongers for years.
But there is another reason: the Hong Kong dollar’s peg to the US currency. When, in the second half of 1997, one Asian currency after another broke links with the dollar, Hong Kong held fast to its currency policy. The Hong Kong Monetary Authority, headed by Joseph Yam, drew on Hong Kong’s enormous reserves and raised overnight interest rates to prohibitive levels to defend the peg. This unquestionably impressive achievement has made Hong Kong the most expensive place in Asia to visit. Tourist arrivals fell by 26.6% in December, giving a full-year decline of 11.1% in 1997.
The result has been cut-throat competition among Hong Kong’s top hotels and among airlines offering flights to the territory. Late last year, shrewd UK travellers could have found themselves return flights from London to Hong Kong direct on Virgin Atlantic Airways for only £340 ($558) – with three nights in the four-star Metropole Hotel in Kowloon thrown in as well (Virgin’s return airfare was £999 a year before). Cathay Pacific and British Airways, the other airlines on the competitive Heathrow-Hong Kong route, have also developed tie-in packages with hotels. While such deals may boost occupancy rates, they leave little room for profits.
But would an end to the peg help? For a business such as Cathay, maybe: although servicing foreign-currency debt would become more arduous, revenues would improve. “It would be beneficial,” argues Wong at Merrill Lynch. “It is not highly geared, it generates a lot of revenue in foreign currencies, and because the Hong Kong dollar is so strong relative to Asian currencies it is deterring people from coming here.” Another analyst, who is of the firm opinion that the peg won’t go anyway, disagrees. “On the one hand it would be beneficial, because its cost base would go down, but in practice there would be such tremendous turmoil in Hong Kong that I don’t think you could view it as being beneficial to anybody in the short term.”
Hotels would probably have to respond to any devaluation by generating more foreign-currency income. In Thailand the baht’s fall against the dollar has led 12 large Bangkok hotels, among them the Shangri-La, Hilton International, JW Marriott and two members of the Sheraton chain, to announce plans to charge room rates in US dollars from April. The Oriental Hotel and Grand Hyatt Erawan started doing so last year.
Thai travel agents have threatened to boycott the hotels. But hoteliers claim that up to 35% of their operating costs come in US dollars, through imported food and drink, expatriate salaries, overseas advertising and promotion and reservation-system fees. Even without considering foreign-currency loans, they claim the devaluation is causing them pain.
Ways round the downturn
Others disagree. “Between 40% and 50% of their operating costs are attributable to labour costs,” says Raymond Ngai, an analyst at UBS Securities in Hong Kong. “If they charge in dollars and pay their staff in local currency then they should benefit from the downturn.” He notes the example of a tour agency in Hong Kong that has a contract with a
Sheraton hotel in Phuket, a Thai holiday resort. For the past few months, the Sheraton has been quoting room rates in baht to a tour operator that continues to sell in US dollars – clearly, a gold mine for the tour operator. But this year, the Sheraton will start to quote in dollars, allowing it to claw back the currency gain from the operator. Ngai believes that what really worries the hotels is not their dollar costs but the impact of a general economic downturn on occupancy rates.
Hyatt International has around 40 hotels in the Asia Pacific region, representing 70% of the group’s total properties. The group was one of the first to quote in dollars in Thailand and Marina Bullevant, director of communications for Hyatt, defends the policy. “When you get great currency fluctuations it becomes difficult for the traveller to plan in advance,” she argues. “When it’s to the benefit of both parties we quote in US dollars. It’s for convenience and planning and consistency.” Bullevant points out that the Hyatt was quoting in dollars in Bali for years before the economic crash (and has since started doing so in Seoul) without anybody complaining about the arrangement. She also reminds critics that if the baht suddenly strengthens, those who quote in dollars will stand to lose out.
One of the countries suffering most from the travel downturn is Vietnam. Indonesia’s Sungeiway Group opened its Sunway Hotel in Hanoi on February 16 to a market of oversupply and lack of interest. If all the hotel openings planned for 1998 go ahead – the 299-room Hanoi Sheraton is slated to open in March – the supply of international-standard rooms in Hanoi will rise from 1,000 to 2,300. This expansion was planned at a time when Vietnam was thought likely to become a thriving business centre – a growth economy like China. That seems less likely now, and filling the rooms is proving increasingly difficult: both the Sofitel Metropole and Hanoi Daewoo have cut room rates by up to 50%.
Things are scarcely better in Ho Chi Minh City: work has stopped on the Park Hyatt and on the 90% complete Saigon Marriott. “We’ve delayed the opening of the hotel because we wanted to see which way the market was going,” says Bullevant at Hyatt, who thinks the hotel will open towards the end of 1999 instead of in 1998 as previously planned.
The effects of Asia’s downturn have been felt far and wide. Australia, which devoted considerable effort to attracting Asian tourism in the 1990s, is particularly vulnerable. The Australian Tourist Commission says that in 1991 fewer than 400,000 visitor arrivals came to Australia from Asia; in 1997 it was over 1.3 million. Tourism has been described as Australia’s biggest export, and any collapse would hurt the economy badly.
Australian appeal
In January, the Australian Tourism Council warned that the Asian economic meltdown could lead to the Australian tourism and leisure market losing out on A$10.8 billion (US$7.2 billion) over the next 10 years, and called for emergency funding to lure tourists. The state-run body launched a A$5 million campaign in seven Asian countries to do exactly that on February 3. “The Australian Tourism Council recognized that there is a need to re-evaluate our strategies and become even more aggressive in our approach given the current circumstances,” says managing director John Morse in Sydney.
Qantas’s half-year net profits were depressed by its Asian business. A statement issued by the airline notes: “The Asian economic situation, which had a more pronounced impact in the latter part of the half year, was largely responsible for this steady result.”
Delivering the results, the airline’s chairman, Gary Pemberton, said: “We are now experiencing the adverse impact of economic conditions in Asia and expect the rate of performance improvement to slow over the next 12 to 18 months. The situation in Asia has had a significant impact on our operations in Korea, Thailand and Indonesia, with a lesser impact in Hong Kong, Taiwan, Malaysia and Japan. We have already taken steps to suspend and rationalize services to some Asian destinations and redeploy aircraft to other routes.” Qantas’s chief executive, John Strong, says that excluding Japan, Asian services represent around 20% of total revenue passenger kilometres (the number of paying passengers multiplied by the number of kilometres they travel).
In Asia itself, the decline in travel and tourism is affecting many other businesses. “Retail is down, because 15% to 20% of retail spending is done by tourists,” says Stephanie Wang, an analyst at HSBC in Hong Kong. “That affects property: in a lot of the Kowloon and Tsim Sha Tsui shopping malls, people are requesting rent cuts.”
A special report delivered at the World Economic Forum in Davos, Switzerland, by World Travel & Tourism Council president Geoffrey Lipman projects that over half a million jobs will be lost in the global travel and tourism industry as a result of the Asian economic crisis. But the report is positive overall. It argues that some 10 million jobs will be created after the recovery in a broadly defined travel-and-tourism market embracing around 10% of most economies.
Lipman claims that despite being one of the sectors hit hardest by any recession, travel and tourism can also be a useful way out of a downturn. “Travel can turn down very quickly,” says Lipman. “But equally it can turn back up again very quickly if the climate is right. Travel feeds into an economy very quickly. If you get foreign visitors you are moving exports; you are moving foreign exchange.” The devaluation of Asian currencies has turned the region into a bargain for visitors from elsewhere. Their return would be a good way of bringing dollar or sterling revenue back in to those countries, he argues.
“For the long term, we urge governments to recognize the impact of travel and tourism on national and regional economic development and factor that into their policymaking priorities – particularly in assisting recovery in Asian markets,” says Lipman. It may be some consolation for Asia’s hoteliers and airlines that, while they enter their lowest ebb for years, they could still provide the ticket for Asia to rise again.
