rapid economic growth

Airlines Race for Slice of Burgeoning Asia Market

HONG KONG — Rapid economic growth, rising affluence and increased liberalization are combining to produce a flurry of new airline projects in the Asia-Pacific region.

These days, hardly a week seems to go by without news of another venture’s being set up. On Tuesday, Qantas Airways, the Australian carrier, announced plans for not just one, but two new airline operations, underscoring the broad transformation that the Asian airline sector is undergoing.

Expanding middle classes in populous nations like China and India, changing regulations and a wealth of freshly built airports have driven plans for new carriers and hefty aircraft orders in recent months, as airlines across the region rush to secure a slice of the growing pie.

“Whatever happens in financial markets over the coming weeks and months, one thing we know — Asia will continue to play a larger part in the global economy and a bigger role in the world,” Alan Joyce, the Qantas chief executive, said Tuesday in a statement announcing the airline’s new international strategy.
“It is already the world’s largest, fastest-growing and most profitable aviation market. There is nowhere like it. It has massive untapped potential.”

Qantas’s response to the shifting economic landscape is to set up two ventures in the region over the coming years, adding to its existing low-cost brand, Jetstar.

In Japan, Qantas is teaming up with Japan Airlines and the conglomerate Mitsubishi to form Jetstar Japan, a low-cost carrier that is expected to start flying within Japan at the end of next year. Later, it would start offering short-haul international service to key cities in Asia.

Separately, Qantas is planning a new premium carrier that will be based in Asia and operate with a new name and brand. No date was specified for its introduction.

The plans form part of a major revamp of Qantas’s international operations, sharpening their focus on Asia. The makeover also includes plans for a major fleet upgrade — Qantas announced it would buy as many as 110 new Airbus A320 aircraft — as well as plans to fly to Santiago and curtail services to London.

In contrast to Qantas’s business within Australia, where the carrier retains a 65 percent share of the market, the international operations have been struggling, weighed down by relatively high costs and intensifying competition from Asian and Middle Eastern competitors.

The airline’s announcements Tuesday highlighted a wider regional trend: the rapid growth of Asian air travel, and the race by carriers in the Asia-Pacific region to cater to the rapid growth that industry executives and analysts believe still lies ahead.

Demand for air service in Asia is going through a “quantum leap,” said Victor Chu, the chairman of First Eastern Investment Group, a private equity firm based in Hong Kong that is setting up a low-cost carrier in Japan. Named Peach, the airline is due to take to the skies beginning in March and will be 39 percent owned by All Nippon Airways of Japan.

Rising affluence levels in countries like India and China, he said, are causing the ranks of the middle class to swell on a scale that the world has never seen.

Over the past decade or so, that phenomenon has catapulted several Asian carriers into the league of the world’s busiest airlines.

Delta Air Lines of the United States remains the largest carrier in the world, but the mainland Chinese carriers China Southern and China Eastern, for example, are now among the top 10 airlines in terms of passengers flown,
despite being barely known outside the region.

Cathay Pacific, which is based in Hong Kong, and Korean Air Lines are the world’s largest carriers of air cargo. Hong Kong has become the busiest cargo hub in the world, and increasing traffic at the city’s airport has prompted calls for a third runway to be constructed.

Moreover, the Asia-Pacific region is the most profitable in the air transport sector. The International Air Transport Association estimated in June that Asia-Pacific carriers would make a combined profit of $2.1 billion this year, just more than half the global total of $4 billion. North American carriers’ profits could total significantly less — $1.2 billion, according to the association’s projections — and European airlines may make as little as $500 million this year.

“There are hundreds of millions of people out there who have never been able to travel before,” Mr. Chu said. “Suddenly, many of these can afford to travel, while travel restrictions have begun to ease. You have to act fast if you don’t want to be left behind.”

Many, in fact, have already acted.

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Off the Charts: Where Private Borrowing Led to Public Debt

The outstanding countries were Spain and Ireland.

Today, of course, the picture is far different. The two countries’ national economies are shrinking, not growing. Ireland has received a bailout from Europe, and while Spain can still borrow money, it is forced to pay at least two percentage points a year more than Germany, a spread the Spanish government says it cannot afford to pay indefinitely.

At the time the two economies appeared to be impressive, there was one indication that could have provided a warning. Each country’s private sector was borrowing heavily overseas. Those loans were fueling rapid economic growth that, in turn, produced rising tax collections, allowing national governments to run budget surpluses.

In principle, there is nothing wrong with debt-financed growth. What matters is whether the borrowed money is going to create productive enterprises and purchase valuable assets that will generate future profits to repay the debt.

But in bubbles, that is not likely to happen. In Ireland and Spain, as in the United States, property booms led to overinvestment in housing, and to plunging property prices when the bubble burst. What was important was that during the boom years, the financial systems of many countries completely failed to channel money into productive investments.

Bad capital allocation was not the only way for a country to get into trouble, of course. The stories of Greece and Portugal are different.

Spain, fortunately, had relatively good regulation of its major banks, which has helped to limit the damage. But local banks have been hurt badly. In Ireland, virtually the entire banking sector collapsed, and was bailed out by a government that could not afford the cost.

The accompanying charts show the relative standing of the five largest economies in the euro zone — Germany, France, Italy, Spain and the Netherlands — and the three smaller countries that have sought bailouts.

The charts show the annual rate of economic growth over the years 2005 and 2006, as well as the average budget surplus or deficit during those years and the level of national debt, relative to gross domestic product, at the end of 2006. For comparison, similar charts show the same indicators for the years 2009 and 2010.

The fourth chart is an estimate of the amount either lent to or invested in the private sector, as a percentage of G.D.P. The figures are based on the logic that the current account, which includes international trade and other noninvestment-related transfers of funds, must balance with the capital account, which includes both investments and proceeds from previous investments. Whatever part of the capital account is not accounted for by the government budget deficit presumably is due to private sector activity.

One of the lessons of the financial crisis and its aftermath is that excessive private sector debt ended up being converted to public sector debt, through bailouts of financial institutions, through government spending to help sectors of the economy devastated by the collapse of a speculative bubble and through the loss of tax revenue from the failing companies and newly unemployed citizens.

Floyd Norris comments on finance and the economy on his blog at nytimes.com/norris.

Article source: http://feeds.nytimes.com/click.phdo?i=447dc78aba55dfc27bb7a58925df0016

Airlines Race for Slice of Burgeoning Asia Market

Off the Charts: Where Private Borrowing Led to Public Debt

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