Asian economic slowdown may liberalize aerospace sector

Asian economic slowdown may liberalize aerospace sector

By Bradley Perrett

SINGAPORE (Reuters): The sudden weakening of Asia's economic
outlook this year may prompt liberalization of the region's
costly air transport and aerospace sectors.

Subsidies, public ownership and regulation will probably
diminish, industry analysts said.

But any loss of subsidies must impede the region's uphill
struggle to develop a leading aerospace industry, perhaps leaving
the big U.S. and European companies dominant until well into the
new century.

Analysts say airlines would benefit from reforms in the long
term, but air transport is highly geared to gross domestic
product and the next few years may be quite bleak.

"GDP growth, or lack of it, translates directly to air
passenger and freight demand," said the Center for Asia Pacific
Aviation, an Australian consultancy.

"The only question is how significant the slowdown will be and
how long it will last," the consultancy said this month in a
report on Asian airlines.

The weakening has started, in fact.

"We have already seen a softening of load factors," Carlos
Chua, an executive with the Association of Asia-Pacific Airlines
in Manila, told Reuters.

The Australian consultancy said that could even kill off a few
of the weaker Asian airlines, or at least prompt mergers and
maybe regional alliances.

Air transport and aerospace traditionally attract government
intervention like few other industries. National airlines are a
focus of national pride and building aircraft is internationally
glamorous, especially for a developing country.

But analysts said Asia could no longer afford the traditional
world-wide practice of restricting air traffic treaties to favor
home airlines at the expense of consumers and business
passengers.

Instead, said an aviation analyst at a regional bank,
governments pressured to stimulate growth would increasingly see
foreign competition as a way of driving down prices, sharpening
economic efficiency.

"Open skies are coming," he said. "Not everywhere, and not
quickly, but they are coming."

Peter Harbison, managing director of the Center for Asia
Pacific Aviation, saw the International Monetary Fund urging
liberalization as it doled out cash to replenish the depleted
foreign reserves of some Asian governments.

"The international aid packages will be accompanied by
extensive advice about the need to liberalize the region's
aviation system, in order to stimulate growth," he said.

"There will be renewed pressure from both within and outside
the region to relax route access and entry controls."

Regional governments, sensing opportunity in their weaker and
therefore increasingly competitive currencies, would find it an
attractive option, he said.

"Tourist growth is a rapid stimulus for economies."

Many Asian airlines are now privately owned, but few
governments have parted with their airports.

Airport expansions could be a good way to boost fading
economies, but governments may not be able to afford them. The
analysts saw the only solution in privatization, if not 100
percent, then at least enough to pay for extensions.

Every country can develop an airline industry roughly
proportionate to its own economy, but the barriers to
establishing a leading aerospace sector are huge.

"Aerospace requires a tremendous amount of long-term
investment," said Paul Lewis, Asian editor for industry magazine
Flight International. "You are not going to see a return on your
money for 10, 15, 20 years."

Several Asian governments have provided prolonged financial
support to overcome those barriers, but analysts increasingly
wonder whether the subsidies will continue to be available.
Such national development projects are exactly the ones that
economists say have wasted Asian capital, consumed public money
and driven up current account deficits.

"People like the IMF and the World Bank are going to take a
long, hard look at these cash-intensive (aerospace) investments,"
Lewis said. "They will want to know what the money is going to,
whether there will be a return."

So far, civil aerospace has been one Western industry that
Asian innovation and efficiency have been barely able to dent.
Unlike General Motors and Volkswagen, Boeing and Airbus worry
almost entirely about each other, not Asia.

Many countries make some of their own military equipment, but
even Japan tried and failed in the 1960s to develop an industry
that designed and built its own civil aircraft. Now it mostly
makes parts for U.S. and European aircraft and engines.

China is trying to develop in the niche market of satellite
launchers, but offers little in the much larger business of civil
air transport.

Indonesia, on the other hand, has some of the most ambitious
aircraft programs in Asia -- but might now cull them.

The national aircraft maker, IPTN, currently offers a range of
turbo-prop transports and wants to develop a jet airliner seating
114 to 132 passengers, a market already covered by Boeing and
Airbus.

Since development of the N2130 jet is expected to cost $2
billion, the project has been heavily criticized as a luxury that
Indonesia could do without.

Its future may be in doubt. Shortly before the IMF approved a
financial bailout of Indonesia this month, Jakarta said it would
review government expenditure "for state-owned enterprises and
strategic industries."

Hopes for an Asian civil aircraft rest also on the survival of
two less ambitious projects

In one of them, a Korean consortium has signed a memorandum of
understanding to build a 70-seat jet with European partners.

The other is a 105-seat airliner that China and Singapore,
little affected by the 1997 market collapse, may build in
partnership with Airbus.