TRANSPORT R EVIEWS, 2000, VOL. 20, NO.

3, 347 367

The Asian economic crisis and the aviation industry: impacts and response strategies
MUHAMMAD A. SADI and JOAN C. HENDERSON*
Marketing and Tourism Division, Nanyang Business School (Box B1A17), Nanyang Technological University, 639798 Singapore

( Received 20 April 1999; accepted 18 June 1999 ) Most airlines across Asia are struggling to cope with an unprecedented economic crisis which they have very little control over, and the survival of some remains in doubt. The continuing uncertainty generated by the crisis has accelerated the process of change in the aviation industry and has highlighted the need for adaptability, and its e ects have been deeper and longer lasting than previously anticipated. After a year-long slump in the Asian travel market, airlines are now considering a range of options and rehabilitation programmes including a series of cost-cutting measures. There appears to be a trend towards the extension and consolidation of strategic alliances, structural and operational reorganization, and the application of new technologies. The success of these measures will become apparent over time, but action is necessary to minimize the adverse consequences of the crisis which has dominated the region since 1997.

1. Introduction Until the economic crisis struck Southeast Asia in July 1997, the region was the centre stage for the world s aviation industry. Airports of the region such as Singapore, Bangkok, Manila and Hanoi enjoyed a travel and commercial boom and gained a reputation as international hubs for the industry. Airlines also took advantage of the rapidly rising demand to record increasing passenger loads, revenue and pro tability with route networks being extended. However, as the currencies in the region fell sharply in value, and as disposable incomes subsequently contracted, the tourist business slackened signi cantly, resulting in damaging losses for most airline companies while others faced bankruptcy and closure. In this paper the implications of the Asian economic crisis for the tourism industry will be reviewed followed by a discussion of the impact of the crisis on the aviation business in the region. Finally, recovery strategies will be considered and recommendations to help the industry proposed. The period under examination is that since 1997 when the consequences of the crisis began to make themselves felt and the focus is on the Southeast Asian countries as perhaps the most adversely a ected. 2. The currency crisis The currency crisis began with a series of events in Thailand in mid-1997 and spread rapidly throughout Southeast Asia. The crucial episodes included the

*e-mail: ahenderson@ ntu.edu.sg

T ransport Reviews ISSN 0144-1647 print/ISSN 1464-5327 online http://www.tandf.co.uk/journals

2000 Taylor & Francis Ltd

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attempted bailout of its largest nance company, Finance One, and revelations in the weeks that followed that many more nance companies were facing di culties. A slide in the stock market occurred and investigators failed to prevent the collapse of the Bangkok Bank of Commerce. Panic among investors provoked the withdrawal of funds from other banks. As investors rushed to the banks, international and domestic speculators attacked Thailand s currency. The currency fell sharply as a result. The Thai government resorted initially to shoring up the value of the currency, but was forced to oat it in the face of massive capital movements, in e ect a devaluation exercise. This unpegging of the Thai baht from the US dollar sparked o a round of regional currency depreciation. Since 1 July 1997 the Thai baht and the Indonesian rupiah have depreciated by 45 and 70% respectively against the US dollar, and the Malaysian ringgit and Philippine peso have lost 40% of their value ( T he Straits T imes, 22 January 1998, p. 46). The Singapore dollar also fell by 20% despite its relatively strong macro-economic fundamentals. The currency problems of mid-1997 in Asia re ected a crisis of con dence in capital and the inability of the authorities to defend their US dollar-pegged currencies, despite repeated e orts to do so. The lack of con dence arose partly because of interaction of the banking sectors and stock markets and the region s over-dependence on highly leveraged real estate. Excessive `o -shore borrowing by banks, corporations and investors on a short-term basis went into real estate, stock market speculation and unproductive capacity expansion. Inadequate loan management policies, corruption and cronyism were other factors that contributed to the regional currency collapse. Massive in ows of foreign direct investment (FDI) had boosted growth in industrial projects and tourism-related investments, but they also built up problems. Weaknesses in the regulation of national banking systems made reckless borrowing for asset investments possible, and this in turn led to unrealistic asset price in ation that had also started in Japan in the 1980s. Borrowing by banks in Southeast Asia was US$241 billion or 62% of the Bank of International Settlements (BIS) lending to all of Asia by the end of 1997 (Behrmann 1998) . The sharp rise in regional short-term external debts occurred without accounting for exogenous global macro-economic risks (BIS 1997) . Such conditions created an economic crisis of unprecedented scale and magnitude which is still in the process of working itself out, the real estate, tourism and transportation sectors of Asian economies being among the worst casualties. The possible devaluation of the Chinese yuan and a prolonged recession in Japan have been additional complicating factors as have the social and political unrest generated by the crisis, especially in Indonesia, and environmental haze which was present in the region for much of 1997. 3. The crisis and tourism industry East Asian and Paci c arrivals declined by 1.2% in both 1997 and 1998 as compared with 9.7% growth in 1996 and the double digits of the previous decade. Receipts from tourism dropped 6.9% in 1997 and 3.8% in 1998 against the 10.4% rise in 1996. It is expected that up to 12 million tourists to Asia-Paci c will be lost annually over the next 3 years amid the regional economic crisis (WTO 1998). Traditionally, 80% of tourist arrivals in the Asia-Paci c have been interregional, but as the currencies fell in value across the region these arrivals recorded only zero growth in 1998. Each country performed di erently, however, with Hong Kong su ering the steepest drop of 11.1% in tourist arrivals in 1997 and 5.2% in 1998

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(Aggerwal 1999) . Furthermore, the destabilizing events in certain countries have scared foreign tourists away from others as well, causing not only air travel to slow down in the region, but also inward investment. The currency crisis has dampened demand for the region s tourism and transportation industries, with East Asian and Paci c countries recording the smallest growth in international tourist arrivals in 1998 among regions worldwide. According to the World Tourism Organization (WTO 1998) , 87 million international tourists travelled to the region in 1998 or ~ 15% of the world s total tourism movements. These tourists helped East Asia and Paci c countries earn as much as US$73. 7 billion in tourism-related revenue in 1998, but this was less than in previous years. The WTO study indicates that the nancial crisis in Asia put the brakes on overall growth in international tourist arrivals in 1998, which slowed to 1.2%. The study asserts that if East Asia and the Paci c had continued to grow at the same rate as previous years, the world average earnings would have come close to the 5.5% growth rate set in 1996. The average earnings from international tourism grew by only 2.7% instead. The study claimed that tourist arrivals in the region could now grow only 5.5% (104 million) by the year 2000, down from the original forecast of between 9 and 12% (170 million and 227 million). The hardest hit would be interregional tourists. Statistics about worlds top destinations reveal that most East Asia and the Paci c countries have slid in their ranking from 1990 to 1998. Table 1 illustrates a general slowing down in tourism growth. Concern was expressed throughout the industry and The Paci c Asia Travel Association (PATA) Managing Director told delegates at the close of PATA s 3-day conference in March 1998 that the region s travel agencies were facing `the greatest challenge today due to the currency crisis. Back in 1989 the future looked excellent, but the prospects for tourist arrivals at regional destinations in 1998 appeared gloomy following a combination of problems including plunging currencies, a sluggish Japanese economy, forest res in Indonesia and bird u in Hong Kong. The PATA executive, however, was optimistic when he stated that the tourism industry had been ying high before the onslaught of the Asian currency crisis in mid-1997 and would see new growth `once the region stabilizes (Travel execs upbeat about Asia-Paci c despite region s crises. T he Business T imes, 31 March 1998) . These positive pronouncements on a recovery were not supported by the WTO. Forecasts produced by the organization in late 1998 are summarized in table 2 and
Table 1. 1990 Rank 12 19 21 15 23 38 31 28 34 Top destinations in East Asia and the Paci c Region in 1998 compared with 1990. 1998 Rank 6 18 20 21 26 27 31 32 36 Tourist arrivals (000) 24,000 9,600 7,720 6,856 5,600 4,900 4,250 4,226 3,590 Percentage change of total 1998 3.8 1.5 1.2 1.1 0.9 0.8 0.7 0.7 0.6

Country China Hong Kong Thailand Malaysia Singapore Indonesia South Korea Japan Macau

Source: WTO (1999).

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Average annual growth rates of travel 1995 2000 (% p.a.). Original Tourism 2020 Vision Study

Asian crisis Revision One January 1998 4.6 9.9 6.9 8.5 5.5 Revision Two October 1998 1.5 7.6 6.0 6.7 2.7

Generating region Intra-regional EAP Europe to EAP Americas to EAP Total Inter-regional to EAP Overall EAP

September 1997 9.1 7.2 5.4 6.4 7.7

EAP: East Asian and Paci c Countries. Source: WTO (1999); Executive Summary; Tourism 2020 Vision, 1998.

indicate a pattern of stagnation and decline; the consequences of these movements are now considered in terms of the principal countries a ected in Southeast Asia Indonesia, Malaysia, Thailand and Singapore and their tourism industries. 3.1. Indonesia Hotels, food outlets and airlines in the tourism industry soon started seeing the impact of the currency crisis, as fewer tourists from the region were able to a ord to travel regionally or beyond. Indonesian hotels began adjusting rates and dismissing expatriate employees as the spiralling Indonesian rupiah and consequent social unrest plagued the country s tourism industry. In an e ort to curb costs, hotel wings and food outlets were closed, putting more workers out on the street. By March 1998 (Cambell 1998) , it was estimated that 25% of Jakarta s 12 million population was unemployed. Indonesian Hotel and Restaurant Association Chairman Pontjo Sutowo predicted falling currencies would contribute to dismal overall interregional arrival gures in 1998. Interregional tourists make up 40% of all foreign arrivals to Indonesia, with a signi cant proportion of long-haul travellers from outside the region. The star-rated hotels, which charge in US dollars, have su ered more than non-star hotels during the crisis. Star-rated hotels have lost their domestic and much of their overseas markets while non-star hotels, charging in rupiah, have bene ted by tapping the domestic market. The main reason has been the inability to determine an acceptable exchange rate for the local currency. To settle this issue, the Indonesian government suggested using RP5000 to US$1 in its 1998 budget, although the actual rate was RP8470 to US$1 (Inter bank currency rate of OCBC bank. T he Business T imes, 4 5 April 1998, p. 10). Many hotels have had great di culty in calculating exchange rates for the rupiah in such an uncertain currency market. Some hotels started using Asian currencies to lure visitors as the regional currencies fell simultaneously with the rupiah. This policy helped non-star hotels to capture some of the domestic and the regional market, but the star-rated hotels which charged in US dollars have continued facing the problems of lost revenue and low occupancy. It has been suggested that these hotels must look into setting a standard exchange rate based on the average of the Asian currencies against the US dollar, along with introducing cooperation among countries in the region, using vouchers and other tactics to increase revenue and raise their occupancy levels.

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3.2. Malaysia In Malaysia the government advised its people to holiday at home to control foreign exchange expenditure and thus limit the damage caused by the currency crisis. This policy has had contrasting results for hotels and travel agents in the country. The travel agents predicted closure and retrenchment with fewer Malaysians going abroad, but the hotels in Malaysia have welcomed the move. A check by T he Straits T imes with hotels in Kuala Lumpur, Penang, Pangkor and Sarawak showed that occupancy rates rose in the last 3 months of 1997, coinciding with the period in which the Malaysian ringgit depreciated by ~ 40% against the US dollar and other major currencies. The trend towards holidaying at home and the weak ringgit proved advantageous to many hotel operators on Pangkor Island o the coast of Perak, for example. At the Teluk Dalam Resort, occupancy in December 1997 was > 80%. Other resorts on the island also reported high occupancy rates, noting that unlike in the past foreigners did not always outnumber local guests. In Penang at Golden Sands Beach along Batu Ferringhi, the number of Malaysian tourists increased to 25% in November and December 1997 (Pereira 1988) . However, the number of bookings for travel to the US, the UK and Australia that have been favourite destinations of Malaysian tourists dropped sharply. This has a ected the cash ow situation for travel agencies, especially those that have concentrated solely on the outbound sector, airlines, cruise and other tourist related companies. T he Straits T imes reported that > 15 travel agencies defaulted in payments to the central body which collects airline ticket charges and it was estimated that one-third of the > 700 travel agencies in the country might have to merge or fold. 3.3. T hailand In 1995 Thailand aimed at becoming the tourism centre of Southeast Asia, especially of the Greater Mekong Sub-region, which was named as a major focus for economic growth and development at the ASEAN Summit in December 1995. Since then Thailand s exposure to the currency crisis has dampened these ambitions. With the devaluation of the baht, holidaying abroad has become more expensive for Thais, especially as Thai travel agencies have started passing on the cost increases to customers. For example, tourist tra c from Thailand to Singapore started to fall at the onset of the crisis. Inbound travel was also a ected initially, although it since appears to be making a recovery. Tourist Authority of Thailand (TAT) gures show that from January to November 1997 total arrivals were 6 457 455, down 1119 from the same period a year earlier ( Bangkok Post, 30 January 1998) . The Thai authorities, which launched a high-pro le tourism drive in 1996, had hoped that the weaker baht would attract foreign visitors and inject much-needed cash into the local economy, but the key East Asian market, which had been in decline due to the region-wide economic slump, rose by only 1% over 11 months to 4.1 million tourists. Hoteliers have also been hit badly in the tourist o -season, with province-wide occupancy rates ranging from 35 to 50% in May 1997. Tourist arrivals at Bangkok s airport grew 4% year-on-year in the rst quarter 1997 to nearly 1.5 million, but the city s 85 000 hotel rooms lost business as service apartments and unsold condominium units moved into the daily rental sector.

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3.4. Singapore The Singapore tourism sector was anticipating a di cult year in 1998, forecasting an 8 10% drop in visitor arrivals compared with 1997. Singapore had a total of 7.2 million visitors in 1997, a 1.3% decline on 1996 s total. The year 1997 was also marked by the worst growth since 1983 when visitor arrivals fell 3.5%. The Singapore Tourism Board expected the Asian market, which contributes ~ 70% of visitors to Singapore, to soften by 15 20% in 1998 (Quiniquini 1998c) . The STB also believed that the bleak tourism picture would bring down hotel room rates and occupancy levels. It appears that the present currency crisis will hamper the Tourism 21 targets of 10 million arrivals and S$16 billion (US$10 billion) in tourism receipts by the year 2000. The number of visitors coming to Singapore did continue to drop in the 4 months from October 1997 to January 1998, as a result of the regional currency turmoil and economic slow down. Only 509 752 tourists came in January 1998, a 16.7% plunge over the same month in 1997. Singapore s top three tourist markets in January 1998 Indonesia, Japan and Malaysia all showed double digit declines. The number of Association of Southeast Asian Nations (ASEAN) visitors went down by almost 15%. Figures released in 1999 con rm an overall drop of 13% to 6.24 million tourist arrivals in 1998. The regional economic crisis also resulted in a marginal fall of 0.4% in standard average room rates of hotels, which slipped to $148.30 a night. Average hotel occupancy rates of ~ 79.5% in 1997 have also gone down in 1998. In summary, the problems have been those of uncertainty and marked decline in the rate of growth. It should be noted, however, that some markets saw expansion and that it was travel within the region which experienced the steepest fall. Many visitors from American and European markets took advantage of the favourable exchange rates to boost arrivals from these more mature sources. 4. The crisis and the aviation industry While most Asian airlines have grown up in a market de ned by rapid tra c growth, where increased market share has been an overriding strategic goal, the industry is now facing the harsh realities of loss of business from both corporate and leisure travellers, revenue-eroding fare wars, order deferrals, loan re-negotiations and sta layo s. Even the International Air Transport Association (IATA) downgraded its forecast of passenger growth in the Asia Paci c region to 4.4% over the 5 years up until 2002 from the 7.7% growth projected before July 1997 ( Bloomberg Report 1997). Asia-Paci c tra c had been forecast to increase from 35% of the worlds aviation total in 1995 to ~ 50% in 2010, but is now expected to reach only 33% in the same period. Airlines in Indonesia, Malaysia, the Philippines and Thailand have been the most seriously a ected by the deepening economic crisis in the region, although all carriers operating these routes have su ered. The exception appears to be China where the market has been growing at the rate of ~ 10% annually. All major airlines within the region have been cutting down on sta and eet size, deferring aircraf t orders, and cancelling and suspending services. The former pro tmaking days of Southeast Asian aviation appear to be over for the foreseeable future as the region s economic crisis has cut into the pro t margins of the world s largest airlines and aerospace manufacturers. The Boeing Company, which had been selling 20% of its planes to Asia, predicted that it would sell 150 fewer planes over the next 5 years (Major Asian Airlines may face collapse. Aviation Analyst , June 1998) . The

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airports and eet sizes in Asia Paci c countries have experienced a relative decline in their growth. Figure 1 depicts the declining trend of passenger tra c in top 20 airports in Asia Paci c region. This has happened mainly because of the recent economic downturn. Figure 2 provides a summary of the turbulent events that Asia s aviation industry experienced in 1998 (Hashim 1998) and indicates the extent and magnitude of the problems facing the carriers. Before the crisis, passenger tra c had been growing by ~ 16% a year over the previous 5 years which encouraged Malaysia to build a new multi-billion dollar international airport. This airport was opened for tra c on 26 June 1998. The airport is 70 km south of Kuala Lumpur and was built to replace the congested Subang Airport. The rst phase of the US$2.25 Kuala Lumpur International Airport (KLIA) can handle 25 million passengers a year, while Subang has been handling some 16 million. However, the extra capacity that the Subang Airport o ers now seems redundant as passenger tra c has failed to reach predicted levels due to turmoil in the region. The chief of KLIA conceded that `With the slowdown, demand will come down and we will have some excess capacity on opening day ( Far Eastern Economic Review, 23 June 1998, p. 3). The extent of this spare capacity might be a cause for concern given that the airport covers 10 000 hectares and boasts an expensive state-of -the-art total airport management system that links functions such as ight information display, baggage handling, gate allocation and air tra c control. It will have two runways capable of handling 90 100 aircraf t movements an hour compared with Subang s one runway, which manages 22 24 aircraf t an hour. The opening of KLIA was intended to alleviate the problems congested Subang Airport faced and represents part of the Malaysian aviation authority s attempts to boost the country s standing in the global arena and to stimulate passenger tra c into Malaysia. However, it faces the di culties of low passenger volumes and excess

Figure 1.

Top 20 airports in Asia Paci c: growth/decline of passengers from January to June 1998.

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capacity and is unlikely to be a serious challenger to Singapore s Changi Airport s role as a regional hub, at least in the short-term. Another possible rival to Changi in the future is the new Hong Kong Airport, Chek Lap Kok. A report in SIA s in-house newsletter stated that it had tremendous potential but was handicapped by over pricing and the high costs of using the airport. The report said that airport charges including landing, parking and terminal building fees for a Boeing 747 at Chek Lap Kok are ~ HK$44 000 (US$5680) , the third highest behind Japan s Kansai and Narita. The recent economic crisis has aggravated the situation and threatens Hong Kong s competitive edge as a regional aviation centre.
Brunei Royal Brunei Airlines chiefs are silent on the extent of the losses, but they have indicated that it would take 2 years to rescue the 24-year-old carrier. China In the first half of 1998, Chinas 34 airlines as a group sustained losses of > 1 billion yuan (US$110 million). Indonesia One of the six airlines, Sempati Air, folded in June 1998. The rest, including national carrier Garuda Indonesia, are struggling to stay afloat by axing staff and flights. The economic crisis has led to a steep drop in passenger numbers and revenue while the fall in the rupiahs value is also pushing up costs. Losses are also blamed on uneconomic routes and contracts with politically linked partners. Hong Kong For the first time since its public listing in 1986, Cathay Pacific posted a half-year loss in the year ending 30 June 1998. Cathay Pacific reported a loss of HK$175 million (US$22.50 million) compared with a net profit of HK$1.07 billion (US$140 million) over the same half-year period in 1997. Japan Japans three largest airilnes JAL, ANA and JAS are battered on two fronts: a drastic drop in airline traffic from Asia due to the regional economic crisis and rising competition at home arising from deregulation of domestic air services. The competition in the domestic market is likely to get worse with the recent launch of Skymark Airlines, which is offering a flat 50% discount on the full fare charged by the major airlines. Another new airline is due to start flying between Tokyo and Sapporo later in 1998. Malaysia Slower traffic, rising costs and huge foreign exchange losses have left MAS RM$260 million (US$98.80 million) in the red, its first loss in over a decade. The airline is cutting services, selling planes and holding back delivery of new aircraft ordered. Philippines Philippine Airlines (PAL) shut down operations in September 1998 because of a bitter labor dispute and US$2 billion in losses. PAL resumed flights in October 1998. Thailand Thai Airways International has scrapped orders for three new planes, dropped unprofitable routes, slashed its advertising budget by two-thirds and scrimped on inflight services such as meals and wine. Thai Airways recorded a net loss of almost 3 billion baht (US$8.20 million) from October 1997 to June 1998. Source: The Straits Times, 13 November 1998, reports by Mary Kwang, Derwin Pereira, Wang Huiling, Kwan Weng Kin, Douglas Wong, Luz Baguioro, Ching Cheong, Anuttra Chinalai.

Figure 2.

Some key events in 1998.

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Changi Airport itself is one of the principal regional hubs and has been gathering momentum in the past few years, in terms of both visitor arrivals and technological improvements. The close relationship between Singapore Airlines (SIA) and the Singapore government has strengthened its position as has the interest shown by SIA in entering alliances with former competitors. However, despite these advantages and opportunities, Changi, too, is facing some di culties due to economic conditions with a fall in passengers and delayed opening of a third terminal. The relationships between airlines, their alliance partners and airports will help to determine which airports become strong hubs and which airlines best survive the economic crisis. Unless airlines are in a strong alliance, they and their base hubs are likely to be in a precarious position. It is, however, going to be di cult to achieve a long-term competitive advantage in the near future and the e ect of the Asian economic crisis on the aviation industry has been deeper and longer lasting than most analysts could have anticipated. Commentators now suggest that it could take a number of years to return to the passenger volumes of January 1997 at economically viable yields. 5. Recovery strategies The Asian economic crisis and the consequent fall in air travel and switching to cheaper alternatives such as ferries and coaches has undermined the pro tability of the aviation industry. The crucial factors in uencing this pro tability include aircraf t capacity utilization, the passenger-load factor and the development of unit costs (Asbeck 1999). There are limits to the extent to which individual airlines can improve their passenger-load factor and cut costs, but to improve pro tability the aviation industry has to compete more e ectively and must devise an appropriate strategy. Alternative strategies include overall cost leadership, di erentiation and focus or market niche targeting (Porter 1980) . Recent events indicate that members of the airline industry have adopted an overall cost leadership strategy through market consolidation and strategic alliances, and di erentiation strategy through customer loyalty schemes, technological advancements and innovations in operational tactics. The overall cost-leadership strategy is applied through a set of functional policies aimed at achieving a low cost position in the market. To remain competitive the aviation industry has to carry out aggressive construction of e cient-scale facilities, vigorous pursuit of belt-tightening, strong control on overhead costs, avoidance of marginal customer accounts, and cost minimization in areas like Research and Development, service, sales force, and advertising. In addition, all these objectives have to be achieved without sacri cing quality, service and customer satisf action. The di erentiation strategy has been pursued through customer loyalty schemes, information technology initiatives and additional measures. While market consolidation and alliance building might appear to contradict attempts at di erentiation, it should be emphasized that the goal is cost saving rather than conformity and reduced competition. There is little evidence of signi cant market niche targeting and the following discussion concentrates on the elements of the two principal strategies. However, it should be noted that the goal of survival has dominated strategic planning in most cases.

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6. Market consolidation Increased pressures to eliminate ine ciencies to boost pro tability have forced various airline companies to consolidate their ying routes to cut back on cost outlays that are not earning adequate returns and adopt measures that give better control over budgeting, planning, coordination, control, motivation and performance evaluation. In this regard the airline industry has been aggressively searching out e ciencies in marketing, customer services, total management and other areas of operation. Thus, the best course of action for the aviation industry has been seen as one of slashing costs by selling planes, laying o sta , cutting routes, creating alliances, restructuring management, outsourcing services and deferring orders to manuf acturers for new ones. The major regional carriers including Garuda of Indonesia, Malaysian Airline Systems (MAS), Philippine Airlines (PAL), SIA and Thai Airways International (TAI) as well as other operators have adopted such policies; their responses are discussed below. 6.1. Garuda and other Indonesian airlines The Indonesian airlines have seen perhaps the worst days in the country s aviation history. Garuda is committed to the established pro table routes only and has drawn up arrangements with other airline operators to service the destinations it has abandoned. For example, the company discontinued ights to the USA, but signed a corporate agreement with Northwest Airlines for daily ights to Los Angeles (Quiniquini 1988a). The airline has had to cancel a large number of ights because of low load factors which continue to fall. It also suspended 300 workers, including pilots and ight attendants, to cope with soaring costs ( T he Indonesia Observer , 14 March 1998) . Garuda s load factor, calculated on the basis of the carrier s 121 ights throughout the world, had dropped to ~ 44% by mid-1998. Bouraq, an airline that serves regional and domestic routes, had to return two of its seven B-737-200 planes to cope with rising operational costs 70 80% of which were denominated in dollars when its earnings were primarily in rupiah. It also has laid o sta . Another Indonesian airline, Sempati, has been closed since May 1998. The Indonesian carriers amassed unpaid debts of US$500 million for aircraf t leases. To resolve this issue, the Indonesian government said that it would seek a stay on debt servicing for several airlines that collectively had to maintain US$35 million in costs per month in aircraf t-leasing fees on 70 aircraft. The Indonesian National Air Carriers Association (INACA) Secretary General, citing 70% devaluation of the rupiah, asked the government to call a `soft moratorium on debt payments until the rupiah stabilized. 6.2. Malaysian Airline Systems (MAS) MAS sustained an M$260 million (US65 million) net loss for the year ended 31 March 1998. The loss is MAS s rst in over 10 years and comes after a record pro t of M$333 million (US$83.25 million) for the year ended 31 March 1997. The reasons given for the loss include a fall in tra c, escalating costs and severe foreign exchange losses of M$718 million (MAS Annual Report for year ended March 31, 1998. T he Straits T imes, 30 May 1998, p. 96). The revaluation of foreign debts left MAS with a translation loss of M$3.49 billion (US$900 million). The Malaysian ringgit has also fallen by ~ 30% against the US dollar in which most of MAS s business is conducted. In fact, the net losses of MAS would have been much worse if it had not reported gains of M$620 million (US$155 million) on the sale of aircraf t and engines

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as well as an M$142 million (US$35.5 million) gain on asset sales. Passenger load factor fell by 1.7 to 67.9% in year ending 31 March 1998. However, the cargo load factor improved 2.6 percentage points to 60%, there was an 8.7% rise in group turnover to M$7.1 billion (US$1. 80 billion) and a 4.3% increase in capacity in that year. 6.3. Philippine Airlines (PAL ) PAL lost US$200 million in 1997, mainly due to the economic slowdown in the region, and has been edging towards bankruptcy as a result of striking pilots, corporate in ghting and management di culties. PAL faces reduced passenger loads and carries with it an in ated debt, as most of its revenue in the Philippine peso has reduced in value. The revenue loss was 40% in 1997 due to peso depreciation and the fact that many of its expenses were paid in hard currencies. PAL had decided drastically to reduce its eet to 14 planes from 54 before the crippling pilots strike, which started in mid-1998 (PAL pilots threaten to sue airline, T he Shipping T imes, 29 June 1998, p. 18). PAL planned to sell most of its planes in an attempt to haul itself out of US$2 billion in debts and has approached Northwest, Lufthansa and British Airways for a cash infusion (Asia s airlines take a dive. L os Angeles T imes, 15 June 1998) . Cost-cutting measures adopted include 25% salary cuts from the level of vicepresidents and above, and ~ 30% of the lower level sta were retrenched (Jaleco 1998) . PAL also trimmed o less pro table ights to Europe, the Middle East and Indonesia. 6.4. Singapore International Airlines (SIA) SIA announced that it was to cease operations to Berlin at the end of March 1999. The decision was made after a review of its worldwide route network (SIA website). Berlin was the third destination to be withdrawn from the network since the start of the economic crisis. Before the Berlin decision, ights to Sendai in Japan and Hangzhou in China were also terminated in late 1998 ( Sunday Morning Post, Hong Kong, 20 December 1998) . In addition, SIA has cut the capacity on regional routes that are adversely a ected by the current nancial crisis such as those to Bangkok, Jakarta and Hong Kong. It is concentrating on lucrative routes and embarking on various promotional activities in pursuit of its objective to keep ying as one of the most pro table airlines, realizing that the competition for both inbound and outbound tra c has heightened since the economic crisis began in Asia, as carriers compete in a contracting market. However, it has increased ights to some cities in the USA, Europe, Australia and India in a move to counter the di cult trading conditions, tap markets which have not been a ected by these and promote Singapore as a tourism and aviation hub there. 6.5. T hai Airways International (T AI) TAI posted a massive net loss of 26.66 billion baht (US$640 million) in the rst quarter of its 1997/98 scal year as the crisis took its toll. The slump in the rst quarter, attributed to foreign exchange losses as a result of the collapse of the baht in 1997, followed a net pro t of 1.5 billion baht (US$36 million) in the corresponding period of 1996. The airline has a eet of 80 aircraft and ies to most major destinations around the world and has been forced now by the government to cut costs as revenue slumps. The belt-tightening measures include cancelling wine for

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business class travellers on the domestic ights and cutting back on meals outside of regular meal times on international ights. An American Express report (Regional airfare rise despite nancial crises. T he Straits T imes, 7 May 1998, p. 16) stated that the airfares in Thailand have increased about 4% in baht terms, although when quoted in US dollars they showed a drop of 44%. The report further stated that the airline was facing signi cantly higher costs as most fuel prices and debts are denominated in the US currency. TAIs immediate future lies in the restructuring of its equity base in order to increase the legal capital on foreign share holding. 6.6. Other airlines Hong Kong ag carrier Cathay Paci c Airways said that the Asian economic turmoil, weak Asian currencies and a fall in tourism to Hong Kong led to an attributable loss of HK$175 million (US$22.50 million) over the 6 months ended 30 June 1998 (Cathay Paci c (CX) says the Asian economic downturn, . . . T ravel News Asia, 17 August 1998, p.15). In contrast it had made a pro t of HK$1068 million over the same period in 1997. Cathay Paci c, as a saving measure, will reduce its 15 000-strong sta by 5 7% over the next 12 months in an intensive cost-cutting campaign in the face of shrinking pro ts and passenger yields ( South China Morning Post, 31 May 1998, p. 12). The cuts were intended to save the airline US$63.25 million a year, but Cathay Paci c has gone ahead with its order of 13 new planes (including seven Boeing 777-300s, the worlds longest commercial aircraf t) in an apparent contradiction to the general trend. The airline has also out-sourced services such as sta hotel and transportation arrangement to cut costs and boost business further. Qantas Airways, Air New Zealand and Ansett Australia have suspended ights to destinations a ected by the nancial turmoil. South Korean carrier Asiana Airlines also has reduced ights between South Korea and some Southeast Asian destinations. Northwest Airlines, which generates 35% of its revenue on the AsiaPaci c route, expressed its disquiet when earnings dropped in the second quarter of 1998. Its response included the suspension of unpro table ights to South Korea (Tolhurst 1998) . To conclude, it can be said that airlines across Asia are struggling to adapt to an unprecedented crisis which they can do little about, and some are ghting to survive. Any aircraft not ying is a liability, failing to generate revenue but costing airlines parking fees and maintenance. A long slump of over a year in the Asian travel market has led many carriers to consider the option of implementing an overall costleadership strategy through market consolidation. This strategy helps airlines to achieve the lowest cost with regard to their operations, ying routes, parking and maintenance, so that they can o er lower fares than their competitors. However, there is a danger that fare-cutting to meet the competition will cut into airlines pro t margins. Cost-cutting is considered a popular policy under these circumstances. Many carriers have attempted to reduce costs by selling planes, sacking sta and cutting routes. Some airlines, while seeing passenger load factors shrink by 10% in an industry where 1% can be the di erence between pro t and loss, have tried shifting planes to routes which generate income in dollars. This has rarely worked because there is limited tra c on these routes and the competition is already severe. The only bright spot for airlines during the crisis has been low oil prices, which have reduced

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the dollar-dominated cost of aviation fuel. Without this relief, the outlook for Asian carriers would have been even grimmer. According to Kotler and Armstrong (1997) , if an airline company is not superior in technology, procurement, service and ying routes, the market consolidation strategy may not work and the airlines may not survive a crisis. PAL, TAI and Korean Air are a few such examples that face serious di culties. These airlines have sold their planes amid the crisis. Under the survival plan drawn up with its creditors, PAL is expected to axe ights to nearly two-thirds of its 69 destinations, sell or terminate leases on 40 of its 54 aircraf t, and pare down its workforce to ~ 4000. PAL is also negotiating with Cathay Paci c for fresh funds in exchange for a stake in the airline. TAI, which is 93% government-owned, plans to sell ~ 380 million shares, or 25% of its equity, to foreign buyers. If the crisis is prolonged, there is a danger of Asian airlines ooding the used aircraf t market and depressing prices. The market consolidation strategy may face additional problems such as disruptions in the workplace and in employees personal lives. Stress, frustration, anxiety and anger are typical reactions experienced by both individuals who are laid o and individuals who remain in the organization. For example, 600 angry pilots went on strike following PALs retrenchment plans, causing the airline to incur heavy losses (Villa et al. 1998) . Consequently PAL had to temporarily shut down its operations. 7. Strategic alliances The region s nancial di culties have also accelerated trends towards alliances, many of which were already underway in the industry. The reason for building alliances among the major airlines is, therefore, not only as a cost-e ective way of expanding airline business, but also a strategy to combat the regional economic crisis. In addition, increasing consumer demands for global travel to be made more convenient and exible have spurred alliances. Such alliances lead to a wider range of products that bene t not only the customers, but also the companies. For the airlines, the tie-ups are expected to bring cost synergy, and for the passengers they often mean lower ticket prices and more destinations. Since the beginning of 1999, Cathay Paci c together with American Airlines, British Airways, Canadian Airlines and Qantas Airways have worked together in Oneworld global alliance (Cathay Paci c website) to become the worlds second largest airline group operating in the Asian market. British Airways is a key partner in the group and is looking to build up its presence in Asia Paci c with a view to its recovery and return to growth at the end of the nancial crisis. The group s goal is to be industry leader in providing the most customer-oriented and customer-f riendly service. Oneworld also intends to improve their existing collaborations in frequent yer programmes. When implemented, customers will enjoy greater opportunities for mileage awards and will gain more access to various airport clubs and lounges. Improved services and e ciency bene ts are promised with no adverse e ects on fares, as well as smoother transf ers and a `range of round the world products . Other possible future partners are Japan Airlines and Dragon Air. Star Alliance is the principal rival to Oneworld, being established in 1997 and consisting of Lufthansa, United Airlines, Scandinavian Airline System, Air Canada, Varig and TAI. Between them, the total passenger tra c of Oneworld and Star Alliance represents about one-quarter of total annual scheduled passenger tra c. Details of the relative eet sizes are presented in gure 3.

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Figure 3.

Association of Asia Paci c Airlines: relative eet size.

SIA planned to join the Star Alliance in 1999, allowing it to strengthen its network and improve the attractiveness of its frequent yer programme. The fact that an airline such as SIA, which has traditionally valued its independence and resisted entering into alliances, has chosen to do so indicates current competitive pressures in the market. Apart from the two aforementioned alliances, Malaysia Airlines is likely to team up with Northwest Airlines, Jet Airways, Air China, Japan Air Systems, Continental Micronesia, Continental Airlines and KLM later in October 1999 to form a third world airline alliance (Ripper 1999) . There have also been several bilateral agreements signed. For example, SIA and Air Canada agreed to nalize a memorandum of understanding (MOU) in March 1999. Provisions in the MOU cover key elements such as reciprocal participation in frequent yer programmes, schedule coordination, through check-in, reciprocal lounge usage and code sharing. In an attempt to improve networking and airline services, SIA and South African Airways also formed a strategic alliance with e ect from 1 April 1999 (Singapore Airlines website). This alliance will work towards seamless travel on alliance-partnered ights. Passengers will only have to check in once for a connecting ight on the partner airline and the convenience of using the partner s check-in counters at their home airports is provided. In these ways, the strategic alliance should not only result in more e cient use of resources, but also better service. Thus, there is a marked trend among airlines in Paci c Asia towards joining strategic alliances, such moves helping airlines to increase their capital base and enhance global competitiveness (Tae 1997) . The ultimate objective is to recover from the e ects of nancial crisis and to win overall cost-leadership in the aviation industry. Strategic alliances will also enable the industry to corner the global aviation market by synergy of strengths, complementarity of routes and cost savings.

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Analysts ( Sunday Morning Post, Hong Kong, 20 December 1998) claim that there will be rapid acceleration in the role of strategic alliance in future. This strategy will also fuel the consolidation process of cross-border mergers, with far-reaching implications for airports. As a recovery strategy, alliances bene t airlines as they allow the saving of costs on baggage handling and other shared ground services. Combining reservation systems and coordinating ight times also generates more sales. Alliance members can enhance existing cooperation in the eld of frequent yer programmes, enabling them to provide more mileage awards, wider recognition for top-tier customers and access to more airport clubs and lounges. Other advantages to the customer include smoother transf ers for passengers travelling across the global networks, greater support from employees of each airline who are equipped to assist and care for customers travelling with any of the member airlines, and greater value through a range of round-the-world products. Initiatives are also underway to extend some of these improved services to freight and mail customers. 8. Information technology initiatives Even in the di cult times of the economic crisis, there have been rapid advancements in technology and the increasing a ordability of powerful computing processors that has led to the worldwide corporate adoption of computerized information systems to achieve greater operational e ciencies, implement faster value chain cycles and capture environmental information more e ectively. Porter s value chain model highlights the primary and supporting activities that add a margin of value to a rm s products and services where information systems can be best applied to achieve a competitive advantage (Porter 1980) . The value chain model is best understood in terms of Porter s di erentiation strategy in which primary activities are directly involved in the making of a di erentiated product or delivery of a service. They include inbound logistics, operations, outbound logistics, promotion and customer service. The supporting activities of the value chain, on the other hand, provide inputs that allow the primary activities to take place. The information technology (IT) applications applied by the airline industry in procurement, human resource management, technological development and company infrastructure are worthy of note with regard to recovery strategies. The continuous improvement in Internet technology and the proliferation of web users has spearheaded the incorporation of electronic commerce applications by the airline industries into their value chain. Electronic commerce helps businesses achieve greater e ciency, quality, innovation and customer responsiveness. Most airlines have established corporate web sites on the Internet as a publicity tool and as a means of building closer ties with their customers. One value-added service that is available on some of these web sites is online ticket booking, which allows customers to book their air tickets by submitting credit card numbers via the Internet. Applying the value chain model, one can see that this Internet booking facility puts the company in a stronger competitive position in terms of superior outbound logistics. With the development of sophisticated Internet security protocols such as Security Electronic Transactions (SET), online credit transactions are likely to become popular with users. This makes electronic commerce applications a worthwhile investment for businesses looking to re-engineer their distribution

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function. A current example would be the introduction of Internet booking facilities by Qantas Airlines, which can be found at their award-winning website (Qantas Airlines website). Besides electronic commerce applications, IT can also provide bene ts in other areas of the value chain. A case in point is the recent installation of Auto Check-in Kiosks by SIA in the departure concourse at Changi Airport, Terminal 2 (Singapore Airlines website). These kiosks allow a passenger holding an Automated Ticket and Boarding Pass (ATB) to check-in by themselves. Such initiatives to automate the operations function of the value chain may help SIA win a superior brand position in the customer s mind, thereby contributing to their success in adopting di erentiation strategy. Such a strategy and its resultant customer-loyalty are crucial in times of recovery from a crisis. 9. Customer loyalty schemes The aviation industry, in response to the crisis and competitive pressures in general, has recently introduced and extended its frequent yer programmes. Frequent yer programmes are becoming so common in the industry that an airline cannot expect to gain any competitive advantage out of their mere implementation. There is a need for competitors to di erentiate their packages to meet the speci c needs of their targeted customers. A good example would be the extensive marketing campaign kicked o by Cathay Paci c Airways to promote its frequent yer programme, Asia Miles (Cathay Paci c website). Marketing communication channels such as television commercials, newspaper advertisements and direct mailing lists were employed to introduce its programme. Asia Miles not only allows members to earn and redeem awards for global air travel, but also allows them to earn Asia Miles in all aspects of their daily life including banking, making phone calls, buying air tickets or staying at their favourite hotel. Table 3 provides an account of some of the programmes and their principal features. As can be seen, many companies are involved in these schemes and appear to o er similar services and this might undermine their e ectiveness as a di erentiation tool. The challenge remains to devise a distinctive programme that attracts the traveller but does not compromise commercial viability. 10. Additional measures The Southeast Asian airlines under the auspices of the Association of Southeast Asia Nations Tourism Association (ASEANTA) have agreed recently to o er standard discounted fares for tourists ying into the region in a determined bid to prop up shrinking tourism revenues (ASEAN Airlines Launch Special Pass to Woo Tourists to Region. T he Straits T imes , 1 February 1999, p. 16). The ASEANTA initiatives have led to the introduction of a special air pass entitling passengers to buy coupons at US$90 for travel to any single ASEAN destination. The air pass can be purchased by travellers ying in to the ASEAN region on any of their national carriers and allows them to add on additional ASEAN destinations at a standard incremental fare of US$90 per destination. A minimum of three ight coupons at US$270 must be purchased together with an international ticket for travellers to be entitled to the air pass. Through the air pass concept the aviation industry in Southeast Asia has been seeking to woo back tourists to the region by collective and coordinated action.

Asian econom ic crisis and the aviation industry

Table 3.

363

Frequent yer programmes. CX ASIA miles versus SQ KRISFLYER miles. What you earn First Class 150% Bus Class 125% Economy class 100% 500 Asia miles per stay Earn KRISFLYER miles By ying: SQ, Air New Zealand, All Nippon Ansett, British Midland, Delta Airlines Lufthansa, SAS, Silkair By staying at the: Hilton, Hyatt, Inter-continental, Marriott, Mandarin Oriental, Pan Paci c, Meritus, Renaissance, Shangri-La What you earn First Class 150% Bus Class 125% Economy Class 50% 500 Asia miles per stay

Earn ASIA miles By ying: All partner alliances: CX, British Airways, American Airlines Qantas, Canada Airlines, Swissair, Sabena, Japan Airlines By staying at the: Hilton, Hyatt, Inter-continental, Marriott, Mandarin Oriental, Pan Paci c, Tokyo, Renaissance, Shangri-La, Sheraton, Conrad, Peninsuala, Westin By driving: Hertz

250 500 miles per rental

By driving: Hertz

250 500 miles outside Asia, 250 miles within Asia and 500 miles US$1.00= 1 KrisFlyer mile US$1.50= 1 KrisFlyer mile

By spending: American Express Citibank Standard Charter By using: HongKong Telecom

By spending: US$1.00= 1 Asia American Express mile US$1.50= 1 Asia Citibank and UDB mile HK$12= 1 Asia mile By using: HK$20= 1 Asia Singapore Telecom mile for IDD, Mobile calls and Internet HK$8= 5 Asia miles for HK Calling Card telephone calls

US$1= 5 miles

Source: CX and Singapore Airlines (March 1999).

In view of the dwindling visitor population in the region, several individual carriers have o ered discounted packages. For instance, Qantas Airways announced a further round of fare cuts to Singapore, Shanghai and Beijing of up to 53%, following similar cuts to Hong Kong and Bangkok fares in early February 1998. Prices of ights from Europe to Singapore have fallen by as much as 50% with the latest promotion package o ered by the Singapore Tourism Board and Singapore Airlines designed to increase the arrival gures. SIA has o ered attractively priced promotions, like the New Singapore Stopover holiday

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package to encourage tourists to stop over in Singapore. SIA has also chosen to sell its tickets directly to big-budget corporations instead of using travel agencies as middlemen in the distribution chain (Quiniquini 1998b) . SIA still requires travel agencies for servicing smaller accounts such as the individual leisure traveller, but they have re-examined commissions payable to these agencies as cost-cutting is still paramount. 11. The way ahead Having examined some of the problems and responses to date, some recommendations for future action on the part of the industry in general are now considered in terms of increasing e ciency, human resource management, issues of quality, applications of IT and marketing activity.

The ailing airlines should consider a comprehensive rehabilitation programme including reducing eet size, selling o aircraf t, deferring delivery of planes ordered in better times, rationalizing manpower requirements, disposing of assets and inventories, sale of unpro table business units and revising route networks. Financial and management restructuring might be necessary for improved e ciency and also in order to avoid the risk of planes which y overseas being con scated because of foreign debt. Foreign equity could even be considered as a means of survival. To reduce the losses, particularly on unpro table routes, the airlines may have to resort to contracting cabin crew, setting up subsidiaries to take over loss-making routes, and asking airports to reduce their landing and parking fees. National airlines should consider pooling their resources so that they can conduct commercial ights jointly with the logos of all participants featured on operating aircraf t. Even the stronger regional carriers must anticipate a di cult business environment in the immediate future. These carriers have to provide personalised service to passengers and exclusive bene ts and privileges. Besides adopting cost-cutting measures, cost-control budgets should also be implemented hand in hand with the former as a market consolidation strategy. A cost-control budget helps in planning, coordination, control, motivation and performance evaluation. The budget targets are to be set high enough to be challenging but achievable and should be further supplemented with promises of extra incentives for performances exceeding the target level (Merchant 1990) . The airlines should strive for open and honest communication channels. Individuals facing retrenchment need to be informed as soon as possible. Other employees remaining with the organization need to know what the company s new goals and expectations are, in light of the downsizing. Besides opening up the communication channels, the organization may provide job search assistance. Airline operators can o er severance pay and/or bene ts for a speci ed period, for employees who are laid o . For employees who face a pay-cut, they can be compensated with non- nancial bene ts. Since the airline industry is likely to be facing problems of excess-capacity, free air tickets could be used as compensation for pay-cuts. However, it is not always easy to cut salaries or downsize if the organization is unionized.

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About 74% of air collisions, crashes and other mishaps result from errors made by the pilot, air tra c controller or inadequate maintenance (Robbins and Coultar 1997). Such maintenance and human errors could be signi cantly reduced, if not prevented, by better employee training. Furthermore, job responsibilities of employees who remain in the organization after the downsizing are likely to increase. Extra duties could lead to greater work stress and, hence, a decrease in e ciency. Courses in stress management or time planning could be useful for those employees. Reorganization and restructuring is another approach that can speed up the recovery process. But the employees resistance to change is a pressing issue that the airline industry has to face. This may be due to job insecurity, sudden change of duties, lack of skills, slow adaptability and fear of uncertainty. The airline industry can use techniques such as communication with and participation of employees in the decision making process, new skills training, and a short paid leave to facilitate adjustment. During the recovery process, the airline industry must make sure that all those who are still working in the organization know and believe that they are a valuable and a much-needed resource. The total quality management (TQM) model is useful in helping airline operators to gain a competitive edge as a recovery device. One aspect of TQM is process improvement. The airline industry can be more e cient in its processes by speeding up the time it takes for workers to service or `turn around its planes at the airport. For example, maintenance crews can enter the rear of the unloading plane s cabin and begin cleaning up, rather than wait for all the passengers to clear. By employing such techniques, airlines can add one more ight per plane per day, allowing it to sell 3500 more seats daily at little additional operating cost (Kotler and Armstrong 1997) . TQM also includes close links with suppliers, turning them into partners. Instead of using 10 vendors and forcing them to compete against each other to gain the company s business, the organization can use fewer vendors and work closely with each of them to improve e ciency. For instance, SIA may consider partnering or contracting exclusively with Boeing Company so that mutual needs can be met more e ectively. Good supplier relationships may also lead to lower landing fees and gate-rental prices. Rapid advancements in technology and the increasing a ordability of powerful computing processors has led to word-wide corporate adoption of computerized information systems. These IT systems have been adopted by the Southeast Asian airline companies to achieve greater operational e ectiveness, to implement faster value chain cycles and to capture environmental information more e ectively. IT initiatives such as Auto Check-in Kiosks allow passengers holding an ATB to check-in by themselves. Such IT initiatives help airports to create e ciencies as well as win a superior brand position in customers mind, thereby contributing to their success in adopting a di erentiating strategy. This competitive advantage and its resultant customer-loyalty are crucial in times of declining demand. The marketing function adds value to the recovery process. Air travel should be skilfully positioned and advertised to capture the attention of travellers who perceive it as of value. The airline industry must stimulate demand through

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M. A. Sadi and J. C. Henderson various promotional and advertising campaigns such as Asia Miles by Cathay Paci c already referred to.

12. Conclusion The Asian nancial crisis is thus proving a period of great uncertainty and new challenges for the tourism industry in the Asia Paci c region and airlines in particular with some of Asia s best-known airlines facing collapse. PAL is reportedly trying desperately to trim its operations to stabilize nances and MAS is facing fundamental restructuring. Indonesia s Garuda is also in serious trouble because of the currency s collapse. TAIs immediate future will be determined by the political debate underway in Bangkok over a restructuring of its equity base, with draft legislation going through parliament to increase the legal capital on foreign share holding. Cathay Paci c has also seen its load factor slump, forcing it to reduce capacity. Others, like SIA, appear to be weathering the storm, but are still faced with declining volumes, revenue and pro tability. The success of the approaches adopted can only be properly assessed in the longer term as companies continue their struggle to come to terms with the crisis. It is, however, interesting to note some possible contradictions and tensions when considering current policies. While the pressure to reduce costs and achieve e ciencies has encouraged cooperation and collaboration among airlines with a trend towards homogeneity in product and service as a result, they are also seeking to di erentiate themselves. Whether these strands can be e ectively combined remains to be seen. While the conditions represent a threat to the survival of regionally based airlines, larger carriers from outside the region also see them as a commercial opportunity. Lufthansa, British Airways, Ansett/A ir New Zealand and Qantas are among a number of airlines vying to acquire a stake in all these Southeast Asian airlines. Although the Asian nancial crisis has had detrimental e ects on the airline industry s pro tability, it has forced the operators to rethink their business processes in pursuit of greater e ciency and providing customers with value for money. Marketing strategies such as overall cost-leadership and di erentiation when used prudently, can promote sales without incurring excessive costs. By applying TQM to the airline industry in Southeast Asia, customer service can be enhanced and the operator thus assisted in gaining a competitive advantage. Information technology can be strategically applied to the airlines value chain of activities, whether in the outbound logistics or operations function, to help the aviation industry to recover in times of crisis such as the current one. Finally, it could be argued that there are simply too many airlines for the existing demand given prevailing market conditions at the close of the decade and major structural change in one form or another is inevitable. If the structural changes are not made, airlines in the future may go out of business or be forced into mergers to survive. The malaise in the Southeast Asian aviation industry could have a contagion e ect worldwide with as yet unforeseen results as the Asian economic crisis continues to develop into one that has become more severe and unpredictable in its consequences than originally anticipated. Clearly this is an area for continuing research in order to improve understanding of the civil aviation industry and its vulnerability to events in the external environment.

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