Singapore Airlines - Orient Aviation

COMMENT 

Identity crisis for Asia’s LCCs 

The development of Asia’s low-cost airline sector 

may be impressive, but it is clear that some 

players are now facing fundamental problems 

impacting on their ability to achieve forecast 

profit levels. 

Much of this has to do with high fuel costs, an 

uncontrollable burden on low-cost carriers (LCCs) as it is on 

all airlines. Secondly, for many, anticipated access to crucial 

markets, particularly China, has not been forthcoming. 

More significant, however, is the narrowing gap between 

the operating costs of LCCs and traditional legacy airlines. 

In the Asia-Pacific, that gap has always been lower than in 

Europe and the U.S. 

In recent years mainline operators have proved very 

successful at cutting their expenses and the gap has narrowed 

even further between the rival carriers. 

Some legacy airlines are close to being high-end LCCs 

themselves. This is crucial because many LCCs in the Asia- 

Pacific are competing directly with major airlines on primary 

trunk routes rather than seeking out secondary routes and 

creating new markets. 

This may prove to be a serious mistake. Struggling to 

fill seats, many LCCs are suffering an identity crisis. They 

are introducing frills, considering frequent flyer schemes 

or carrying cargo. They say they are “adding value”, but all 

of this introduces complexity to what should be a simple 

business model. 

Today, in the region, the term “low-cost carrier” has, in 

most cases, become a misnomer. Instead there is an array of 

variations on the theme, with more to come, including longhaul 

international LCCs. 

They range from the true, Ryanair-style AirAsia, to 

midstream Valuair, to China’s private carrier, Okay Airways, 

which, as a result of local regulation, is indistinguishable 

from traditional airlines, even to the extent of fare levels and 

inflight service. 

A comprehensive list of the region’s LCCs is almost 

impossible to compile because it is difficult to determine 

whether an airline is an LCC or not in the true sense of the 

concept. 

It is therefore difficult, at this stage, to forecast which of 

these models will ultimately succeed. What can be said with a 

great deal of confidence is that not all of them will survive. 

TOM BALLANTYNE 

Chief Correspondent 

The Association of Asia Pacific Airlines’ members and contact list 

Air New Zealand 

Chief Executive, Mr Ralph Norris 

VP Public Affairs and Group Communications, 

Mr Mike Tod 

Tel: (64 9) 336 2770 Fax: (64 9) 336 2759 

All Nippon Airways 

President and CEO, Mr Mineo Yamamoto 

Dep. Director, Public Relations, Mr Kaz Iwakata 

Tel: (81 3) 6735 1111 

Fax: (81 3) 6735 1115 

Asiana Airlines 

President & Chief Executive, 

Mr Park Chan-bup 

Managing Director, PR, Mr Hong Lae Kim 

Tel: (822) 758 8161 Fax: (822) 758 8008 

Cathay Pacific Airways 

Chief Executive Officer, Mr Philip Chen 

Corporate Communications General Manager, 

Mr Alan Wong 

Tel: (852) 2747 8868 Fax: (852) 2810 6563 

China Airlines 

President, Mr Philip Hsing-Hsiung Wei 

VP, Corp Comms, Mr Johnson Sun 

Tel: (8862) 2514 5750 

Fax: (8862) 2514 5754 

Dragonair 

Chief Executive Officer, Mr Stanley Hui 

Asst. General Manager, Corp. Communications 

Mrs Laura Crampton 

Tel: (852) 3193 3193 Fax: (852) 3193 3194 

EVA Air 

Chairman, Mr Steve Lin 

Executive VP, Group Public Relations, 

Mr K. W. Nieh 

Tel: (8862) 2500 1122 Fax: (8862) 2500 1523 

Garuda Indonesia 

President & CEO, Mr Emirsyah Satar 

VP Corporate Communications, Mr Pujobroto 

Tel: (6221) 231 2612 

Fax: (6221) 381 1486 

Japan Airlines 

President, Mr Toshiyuki Shinmachi 

Director, International Public Relations, 

Mr Geoffrey Tudor 

Tel: (813) 5460 3109 Fax: (813) 5460 5910 

Korean Air 

Chairman and CEO, Mr Yang Ho Cho 

Senior VP, Corporate Communications, 

Mr Jun Jip Choi 

Tel: (822) 2656 7065 Fax: (822) 2656 7288/89 

Malaysia Airlines 

Chairman, Dato’ Dr Mohamed Munir Abdul Majid 

Asst Gen Mgr, Int’l Affairs, Germal Singh Khera 

Tel: (603) 2165 5137 

Fax: (603) 2161 0558 

Philippine Airlines 

President, Mr Jaime Bautista 

VP Corporate Communications, 

Mr Rolando Estabilio 

Tel: (632) 817 1234 Fax: (632) 817 8689 

Qantas Airways 

Managing Director and CEO, Mr Geoff Dixon 

Head of Corporate Communications, 

Belinda de Rome 

Tel: (612) 9691 4773 Fax: (612) 9691 4187 

Royal Brunei Airlines 

Chairman, Pehin Dato Paduka Haji Hazair 

Chief Executive, Mr Peter Foster 

Tel: (673 2) 229 799 

Fax: (673 2) 221 230 

Singapore Airlines 

Chief Executive Officer, 

Mr Chew Choon Seng 

VP Public Affairs, Mr Stephen Forshaw 

Tel: (65) 6541 5880 Fax: (65) 6545 6083 

Thai Airways International 

President, Mr Kanok Abhiradee 

Director, PR, 

Mrs Sunathee Isvarphornchai 

Tel: (662) 513 3364 Fax: (662) 545 3891 

Vietnam Airlines 

President and CEO, Mr Nguyen Xuan Hien 

Dep Director, Corp Affairs, 

Mr Nguyen Huy Hieu 

Tel: (84-4) 873 0928 Fax: (84-4) 827 2291 

SEPTEMBER 2005 ORIENT AVIATION 5

September 2005 

CONTENTS 

O R I E N T A V I AT I O N V O L U M E 1 2 , I S S U E 1 0 

COVER STORY 

28 BAPTISM OF FIRE 

JAL Group’s new boss, Toshiyuki Shinmachi, was 

faced with major problems when he moved into the 

Japan Airlines’ ‘hot seat’ in April, including a lapse 

in safety standards that caused uproar in Japan. 

But the no-nonsense chief executive has wasted no 

time in implementing an aggressive campaign to 

restore the carrier’s fortunes. 

MAIN STORY 

18 The Asia-Pacific’s low-cost carriers 

(LCCs) are feeling the pinch with 

survival the name of the game 

Also: 

26 India going LCC crazy 

CHINA INTERVIEW 

34 The head of United Eagle Airlines, 

China’s first private carrier, Kai Duell, 

sets out her goals 

EXECUTIVE INTERVIEW 

38 BA chief and former 

boss of both Cathay 

Pacific and Ansett 

Australia, Sir Rod 

Eddington, bids 

farewell to the 

aviation business 

ENGINEERING & MAINTENANCE 

44 Airbus out to woo top names for 

MRO ‘club’ 

INFORMATION TECHNOLGY 

46 Garuda, Lufthansa Systems lock into 

joint venture deal 

HELICOPTERS 

48 A need to kick-start China’s market 

8 ORIENT AVIATION SEPTEMBER 2005

SPECIAL REPORT 

AIRPORT AND AIRLINE SECURITY UPDATE 

52 Airports ‘flawed’. Experts call for 

consolidation or responsibilities 

56 Baggage screening: U.S. playing 

catch-up 

NEWS 

10 THAI president stripped of management control 

11 Hong Kong, Macau start-ups routes battle 

11 Chinese carriers confirm B787 orders 

12 China gives green light to foreign pilots 

12 HAECO breaks ground for second hangar 

14 AAPA appoints new commercial director 

16 Rocketing fuel prices dull financial results of 

Cathay Pacific, Singapore Airlines and Japan Airlines 

REGULAR FEATURES 

5 Comment 

57 Call for better integration 

of biometric ID 

58 Neither man nor machine 

can win security battle 

alone 

59 Airports ‘more at risk 

from terrorists’ 

60 Business Digest – Freight traffic slows 

Association of Asia Pacific Airlines Secretariat 

PUBLISHED BY 

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GPO Box 11435 Hong Kong 

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E-mail: orientav@netvigator.com 

Website: www.orientaviation.com 

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Barry Grindrod 


Publisher 

Christine McGee 

E-mail: cmcgee@netvigator.com 

Chief Correspondent 

Tom Ballantyne 

Tel: (612) 9638 6895 

Fax: (612) 9684 2776 

E-mail: tomball@orientaviation.com 

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E-mail: charlesanderson@orientaviation.com 

David Fullbrook 

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China 

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© All rights reserved 

Wilson Press HK Ltd., Hong Kong, 2005 

The views expressed in this magazine are not necessarily 

those of the Association of Asia Pacific Airlines. 


REGIONAL ROUND-UP 

THAI cash crisis; 

Kanok stripped of 

management control 

The board of Thai Airways International 

(THAI), faced with a 

third quarter loss (to June 30) of 

4.78 billion baht (US$117 million), has 

appointed a special committee headed by 

a board director and suspended the management 

authority of the popular president, 

Kanok Abhiradee, until November. 

In a statement issued after the board met 

in August, the THAI chairman, Wanchai 

Sarathul, said Somchaineuk Engtrakul, a 

former permanent secretary in the national 

Ministry of Finance, is running the committee, 

which includes Kanok, THAI 

board members, government officials and 

independent advisers. 

The financier now holds ultimate managerial 

responsibility at the Bangkok-based 

flag carrier. Thailand’s finance ministry 

owns 54% of THAI. 

The carrier’s escalating losses have been 

primarily caused by high fuel costs, foreign 

exchange losses and a drop-off in traffic on 

some routes after the Boxing 

Day tsunami. Fuel purchases 

now account for 30% of 

THAI’s total operating costs. 

Foreign exchange losses of 

2.72 billion baht were booked 

in the third quarter. 

A bigger loss was avoided 

by THAI reversing 2.08 billion 

baht of income tax payments 

it made on earnings in 

the first half of the fiscal year. 

THAI posted a net profit 

of 4.43 billion baht in the 

first nine months down 49% 

on 2004. 

“We are not sacking Kanok here,” 

Somchaineuk said after the crisis board 

meeting in August. But the board deemed 

that the company’s situation is now quite 

critical as performance kept getting weaker. 

THAI president, Kanok 

Abhiradee: “not sacked” 

“We need to adjust our management structure 

to increase efficiency and speed up the 

decision-making process,” he said. 

After a term of three 

m o n t h s , t o e x p i r e i n 

November, the crisis management 

committee will consider 

Kanok’s position and 

decide if it will dissolve as an 

entity. It could also establish 

itself as a permanent part of 

the THAI management chain 

or set up another type of 

review mechanism to assist 

in running the carrier. 

Kanok was appointed 

president of the airline in 

May 2002. 

At the time of the decision, 

the airline’s vice-president finance, 

Kaweephan Ruangphka, was transferred 

to the human resources division. The 

head of THAI’s audit depar t ment, 

Ngamnit Sombatpibool, has succeeded him. 

 

 

 

 

 

 

 

 

 

 

 

 

 


To add to THAI’s woes, the country’s 

prime minister, Thaksin Shinawatra, 

has confirmed the opening of the new 

Suvarnabhumi International Airport, to 

the south of Bangkok, originally scheduled 

to open this month, could be delayed by up 

to 10 months. 

Meanwhile, THAI has received its 

International Air Transport Association 

Operational Safety Audit (IOSA). IOSAs 

are presented to airlines which achieve specific 

global standards of efficiency and quality 

safety in all major areas of airline operations 

including flight operations, operational 

control, aircraft engineering and maintenance, 

cabin operations, aircraft ground 

handling, cargo and operational security. 

Hong Kong, Macau 

start-ups route battle 

The gradual liberalizing of Hong 

Kong’s aviation structure, once 

a very stable regulatory environment 

for its major carrier, Cathay Pacific 

Airways and regional carrier, Dragonair, 

is provoking some bitter battles for rights 

to routes amongst the start-ups recently 

granted Air Operating Certificates. 

Hong Kong Express, 51%-owned by 

casino magnate and property developer, 

Stanley Ho, launched out of Hong Kong last 

month with a charter service to Taichung in 

Taiwan. 

With its leased fleet of four Embraer 

170 jets, it intends to begin schedule services 

from Hong Kong to Guangzhou in 

September, to Hangzhou in October and to 

Nanjing in December. Two other Chinese 

cities, Chongqing and Ningbo, will be added 

to the carrier’s network in April next year. 

Hong Kong Express chief executive, 

Andrew Tse, said his airline would 

also manage a new Macau-based carrier, 

Golden Dragon Airlines, which also is 

partly owned by Stanley Ho. It has been set 

up to bring regional visitors to the casinos 

of new Asian gambling mecca, Macau. In a 

separate battle, Oasis Hong Kong, a lowcost 

carrier whose business plan was based 

on operating long-haul services to Europe 

and the U.S. has put off its proposed third 

quarter launch date after its application for 

traffic rights to fly to several European cities 

was successfully challenged by another 

Hong Kong airline, CR Airways and the 

holding company of WOW! Macau, Eagle 

Aviation, Oasis said. 

Chinese airlines 

confirm B787 order 

Air China, China Eastern Airlines, 

Shanghai Airlines and Xiamen 

Airlines will be the recipients of 42 

B787 Dreamliner aircraft following the signing 

in Beijing of a US$5 billion deal between 

Boeing, the airlines and the China Aviation 

Supplies Import and Export Co. 

In January, the parties to the final 

purchase signed a framework agreement for 

60 Dreamliners for six airlines, but China 

 

IF I CANT FIND A CLEAR OWNER OF 

A PROBLEM, I BECOME THE OWNER. 

 

 

 

 

 

 



Southern Airlines and Hainan Airlines 

were not involved in the final contract. 

Air China has said it will take 15 of the 

aircraft following approval of the deal by its 

majority shareholder, the China National 

Aviation Holding Corp. (51.6% ). The 

Beijing-based carrier said the B787s would 

begin arriving at its home base from 2008 

and would be utilized on long-haul routes to 

Australia, Europe and North America. The 

remaining B787s will be divided between 

China Eastern Airlines (15), Shanghai 

Airlines (9) and Xiamen Airlines (3). 

China gives green 

light to foreign pilots 

by Chinese carriers after obtaining flight 

licences in China.” 

The regulations are catching up with 

reality. 

Several mainland carriers, including 

Shenzhen Airlines and Hainan Airlines, 

have employed expatriate pilots because 

they do not have enough experienced cockpit 

crew, particularly captains, to fly the new 

airplanes they have ordered. 

The first of China’s private airlines to 

begin flying, Okay Airlines, already has 

recorded another first in its short history. 

Daniela Schmidt, 25, a Swiss national, is 

reported to be the first foreign female to be 

employed as a pilot at a scheduled Chinese 

carrier. 

The Civil Aviation Administration 

of China (CAAC) has revised its HAECO builds 

regulations to allow foreign pilots to 

second hangar 

fly with Chinese airlines. 

Said the director of the CAAC’s Flight The H o n g K o n g A i r c r a f t 

Standards Department, Rao Shaowu: Engineering Company (HAECO) 

“Overseas pilots will be able to be employed will build a second aircraft mainte- 

 

nance hangar, covering 13,000 sq. metres, 

and a new maintenance office at Hong Kong 

International Airport. The HK$320 million 

(US$42 million) facility is due for completion 

in late 2006 or early 2007. 

It will be able to simultaneously accommodate 

two wide-bodied aircraft for heavy 

checks as well as modification and maintenance 

work. 

Separately, HAECO has announced an 

interim profit of HK$289 million to June 

30, an increase of 25% over the same period 

in 2004. 

Said chief executive, P. K. Chan: 

“Originally, airlines tried to keep everything 

in-house. 

“But today they recognize maintenance, 

repair and overhaul activities are a cost base 

and it is a burden to them. We have also 

changed. 

“We are starting to diversify into inventory 

management, technical management 

and engineering design and higher value 

services.” 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



SHORTTAKES 

CARGO>> All Nippon Airways is 

completing negotiations for the sale of its 

27.6% share of Nippon Cargo Airlines 

to majority shareholder, Nippon Yusen 

Kaisha (NYK). The manufacturer of the 

ARJ21, AVIC 1 Commercial Aircraft 

of China, is considering production of a 

cargo version of its ARJ21. China Airlines 

is now flying a Taipei-Vienna cargo route 

twice a week using a B747-400F. Japan 

Airlines will introduce its first B767-300 

freighters into its fleet from April 2007 

after it confirmed an order for three of the 

aircraft and three B767-300ER passenger 

jets with U.S. manufacturer, Boeing. 

Federal Express, the Memphis head 

quartered air express operator will build 

a US$150 million air cargo and logistics 

complex at the new Baiyun International 

Airport in Guangzhou. Fedex rival, Atlantabased 

UPS has signed a Memorandum of 

Understanding with Shanghai Airport 

authorities to have a dedicated express 

hub operating in the Chinese commercial 

capital by 2007, as part of a US$500 

million investment strategy for China from 

2005-08. 

FLEETS>> Fast-expanding Taiwanese 

carrier, EVA Air, has received the first of 

12 B777-300ERs and B777-200LRs from 

Boeing, in a purchase valued at US$1.49 

billion. 

MROs>> Korean Air has received the 

first of 27 United Airlines B747-400s it 

will put through heavy maintenance and 

parts overhaul at the airline’s maintenance 

complex in Gimhae. The five-year contract is 

valued at US$12 million per year. 

ROUTES>> Cathay Pacific Airways 

will introduce a second daily Hong 

Kong-Jakarta service on November 1. In 

December, the Hong Kong-based carrier 

will commence a fourth daily service to 

London from its home base. The launch date 

will coincide with the 25th anniversary of 

Cathay Pacific’s first flight to London. Thai 

Airways International will commence 

flying to Moscow and Johannesburg 

from Bangkok three times a week in 

November and December respectively. 

The airline also plans to launch services 

to Berlin, Hiroshima and Manchester in 

the next two years. THAI began its three 

times a week flights between Bangkok 

and Madrid in August. All Nippon 

Airways is now operating two charter 

services daily from Tokyo’s Haneda 

Airport to Seoul’s Gimpo Airport. 

Japan Airlines also has increased its 

charter flights between Tokyo Haneda 

and Gimpo to twice daily from August 

1. Gulf Air inaugurated Bangkok- Dublin 

flights three times a week in August. 

Qantas Airways will begin services 

between Sydney and Beijing, three 

times a week from January 9. The carrier 

intends to increase the service to daily 

by 2007. In November, the carrier will 

add a fourth service each week between 

Sydney and Shanghai, with the intention 

of introducing daily flights on the route 

also in 2007. 

AAPA appoints new 

commercial director 

The Association of Asia Pacific 

Airlines (AAPA) has appointed a 

new commercial director, Beatrice 

Lim (pictured right). 

Ms Lim was previously a senior air 

transport manager with the Civil Aviation 

Authority of Singapore (CAAS) where her 

responsibilities included international relations, governmentto-government 

air services negotiations and the development of 

various aspects of aviation policy. 

Reporting to AAPA director general, Andrew Herdman, 

she will represent the interests of the organization and its 17 

member airlines on a wide range of commercial and other nontechnical 

issues, working closely with carriers and other aviation 

industry stakeholders. 

Commenting on Ms Lim’s previous experience working 

in both the public and private sectors of the aviation industry, 

Herdman said: “Beatrice brings a broad knowledge of aviation 

policy issues as well as fresh ideas on meeting the challenges 

that lie ahead.” 

Prior to joining CAAS, Ms Lim was legal counsel with 

Singapore Technologies Aerospace, specializing in commercial 

agreements relating to aircraft maintenance and support 

activities. 

She holds a Bachelor of Law honours degree from the 

National University of Singapore and was admitted to the 

Singapore Bar in 1996. An avid traveller, she is fluent in English, 

Mandarin, Cantonese and French. 


BUSINESS ROUND-UP 

Rocketing fuel prices hit 

Cathay Pacific’s interim profit 

Cathay Pacific Airways chairman, David Turnbull 

(pictured right), described the first half of the airline’s 

2005-06 fiscal year “as the worst six months for the carrier 

since SARS” and said rocketing fuel prices caused the pain. 

Reporting an interim net profit for the current fiscal year of 

HK$1.67 billion (US$214.9 million), a decline of 5.7% over last 

year’s result of $1.77 billion for the same six months, Turnbull said 

fuel costs had accounted for 27.9% of total net operating costs for 

the period., up from 21.8% a year earlier. 

Fuel costs now exceeded staff costs as the largest single 

expense at the carrier, Cathay Pacific said. As a result of this trend, 

the airline’s board will increase its fuel hedging from the current 

15% of operating costs. 

Said Turnbull: “While forward bookings 

are encouraging, the high price of fuel, 

which could dampen world growth, may 

well make it difficult for us to achieve a similar 

result in the second half.” He added: “Our policy is to get up to a 

third of our fuel costs hedged. It is a security if things go wrong.” 

All Cathay Pacific passengers pay a fuel surcharge of HK$332 

per long-haul leg and HK$86 on short-haul journeys, but the airline 

said surcharge revenue only partially offset fuel costs. 

Passenger demand and cargo volume for the six months 

improved by 14.5% and 10.2% respectively over the same period 

in 2004. At the same time, passenger and cargo capacity rose 

12.2% and 12.7% respectively. 

Record traffic, but 

fuel hits bottom line 

Singapore Airlines (SIA) said its first 

quarter profit to June 30 declined by 

7.9%, to S$234.6 million (US$141.1 million) 

in the first quarter of its fiscal year to June 

30, from S$254.7 million in the same period 

in 2004. 

SIA said the profit fall was caused by the 

high cost of fuel despite continuing strong 

passenger demand: a record for the airline 

of 4.02 million passengers for any quarter in 

SIA’s operating history. 

Group revenue rose 12% over the same 

quarter last year to S$3.04 billion from S$2.72 

billion. Mid-year, SIA said it had hedged a 

third of its fuel costs at US$54 per barrel and 

would increase fuel hedging to 60% of its 

operating requirements if necessary. At press 

time, fuel per barrel was US$66 per barrel. 

Fuel costs rose to S$892 million, an 

increase of 58% over the same quarter a year 

ago and accounted for 32% of SIA costs for 

the period, compared to 23% of total airline 

costs in the first three months of 2004. 

SIA has issued Request for Proposals (RFP) 

for up to 20 mid-size and ultra long-haul jets. 

ANA, JAL struggle 

to meet targets 

All Nippon Airways (ANA) reported 

a decline in profit for its first fiscal 

quarter of 2005-06 while Japan 

Airlines (JAL) managed to narrow its 

losses for the quarter by 2.38 billion yen 

to 38.38 billion yen compared to the same 

quarter in 2004. 

ANA said its group net profit fell to 2.16 

billion yen (11%) from 2.43 billion yen, for 

the fiscal quarter to June 30, and attributed 

the profit drop to a special loss on asset sales. 

ANA said “it had a fairly good start” to 

the fiscal year with group operating profit 

increasing from 8.87 billion yen to 11.76 

billion yen (up 33%). 

At JAL, a company spokesman said revenue 

from both domestic and international 

flights had not met its predictions, a trend 

partly attributed to anti-Japanese protests 

in China during the quarter reported. JAL 

also said a series of safety incidents at the 

carrier might have caused a passenger dropoff, 

although this was difficult to substantiate 

for now. 

Revenue increased by 5%, from 479.31 

billion yen to 503.38 billion yen for the quarter, 

but operating expenses, largely fuel 

price increases, produced an operating loss 

of 32.04 billion yen compared to a loss of 

30.26 billion yen in the same three months 

last year. 


MAIN STORY 

Tough times: Jetstar Asia and Valuair have announced they 

have merged as competition intensifies in the low-cost sector 

As budget airlines continue to launch across the 

region there is evidence the low-cost model, 

Asia-Pacific style, is undergoing fundamental 

change. In a highly competitive market 

consolidation is in the wind as some players 

struggle to turn in profits – or just survive. 

FEELING TOM BALLANTYNE reports 

THE PINCH 

When news broke in late 

July that Qantas Airways’ 

Singapore-based lowcost 

subsidiary, Jetstar 

Asia, would merge with 

rival budget operator Valuair, it hardly surprised 

industry observers. 

Nor did it shock them that Singapore 

Airlines’ no-frills affiliate, Tiger Airways, 

was seeking a partner to set up a second base 

outside Singapore. 

Business is getting tough in the low-cost 

carrier (LCC) sector and, for most participants, 

profits have been hard to come by. 

In the words of Tony Fernandes, chief 

executive of Malaysia-based LCC market 

leader, AirAsia: “Some of these carriers 

are spreading themselves so thin it is 

desperation time ... it’s pretty clear there are 

some desperate men out there. 

“When jet fuel hits $70 a barrel and 

you are doing seat sales to the extent they 

are – and everyone knows everyone’s cost 

structure – you know they are struggling to 

fill planes.” 

Fernandes is not the only LCC chief 

‘Despite the difficulties, LCCs 

in the Asia-Pacific region 

are buying new aircraft in 

unprecedented numbers’ 

to recognise the pressure is on and the 

budget airline sector in the Asia-Pacific is 

undergoing some fundamental changes. 

Brett Godfrey, chief executive of 

Australia’s Virgin Blue, told Orient Aviation 

that LCCs were “evolving”. 

He now describes Virgin Blue as a “New 

World carrier”, the only “modular” airline 

in the world. 

“By modular, I mean we are offering very 

cheap seats, but you can trade up,” said the 

airline chief. 

“If you want to have a lounge you can pay 

for it and come in. If you want valet parking 

you can have it. I see us as being a modular 

airline that offers products that allow you to 


each the level of a traditional carrier if that 

is what you want.” 

Even a frequent flyer programme – 

anathema to the traditional LCC – is on the 

agenda. 

Times have changed and airlines have to 

adjust to market demand, said Godfrey. 

He made it clear his carrier’s evolvement 

is a tactic designed to position Virgin Blue 

as a competitor to full-service Qantas rather 

than as an LCC competing with the big 

airline’s budget offshoot, Jetstar. 

The aim is to carry both leisure traffic 

looking for bargain basement fares and 

corporate flyers willing to pay extra for the 

frills – all in the same aircraft. 

Industry officials across the region 

have similar views and one LCC chief has 

even warned the basic, no-frills genre – 

the traditional business model of Europe’s 

Ryanair or America’s Southwest – has little 

future in Asia. 

“Simple, no-frills offerings will no longer 

be competitive. Generic LCCs will need to 

consider an improved value proposition 

to remain in the game,” said Udom 

Tantiprasongchai, chairman of Thailand’s 

Orient Thai Airlines and owner of LCC 

One-Two-Go. 

“Given the current market situation on the 

cost side and the cut-throat price war, it is 

unlikely the business model will work.” 

A nd rew D r ysd ale, A sia - Pacif ic 

regional director for 

the International Air 

Transport Association 

(IATA) also believes 

s o m e L C C s w i l l 

fail and others will 

consolidate, although 

he said newcomers 

will appear. 

He is convinced the 

model is changing. “If 

you look at Europe, you 

see a blurring between 

traditional airlines and 

LCCs. We are seeing 

that happen here, but it is 

occurring at a faster rate 

than it did in Europe,” 

said Drysdale. 

“Already there are 

carriers in the middle, 

h a l f way b e t we e n 

LCCs and traditional 

airlines. Valuair is a 

perfect example. We 

are beginning to see 

‘ Simple, no-frills 

offerings will no longer 

be competitive’ 

Udom Tantiprasongchai 

chairman, Orient Thai Airlines 

parent company of 

LCC One-Two-Go 

them moving more 

rapidly towards the 

middle.” 

Andrew Herdman, 

director general of 

the Association of 

Asia Pacific Airlines 

(AAPA) agreed, and 

said there would 

inevitably be some 

failures. 

“ E s t a b l i s h e d 

car riers have been 

driving up their cost 

efficiencies, improving 

their performance and 

the cost differentials 

between the established 

carriers and the new 

entrants are narrowing. 

We have to see how it 

evolves, but in Europe 

t h e r e h a v e b e e n 

failures. That’s just 

the market working, that’s what happens in 

other industries as well.” 

Said Peter Negline, regional transport 

analyst for JP Morgan Securities: “The prolific 

growth of airlines in the low-cost space does 

concern us a little bit.” Before the segment 

could establish itself and see a long-term 

future, failures were expected, he added. 

Valuair, said Negline, proved his point. The 

airline was failing and 

shareholders sought 

and found a buyer for 

the business. 

Even well- established 

players such as 

AirAsia and Virgin 

Blue are feeling the 

pinch. 

Both have warned 

shareholders income 

this year will not live up 

to expectations. Virgin 

Blue’s net profit fell 13% 

in the year to June 30. 

The bottom line was hit 

by sluggish demand, 

increased competition 

‘ Some [LCC] carriers are 

spreading themselves so 

thin it is desperation time’ 

Tony Fernandes 

chief executive, AirAsia 

and a 60% rise in fuel 

costs. 

“It was a very, very 

tough year for us. We 

came down a peg in 

our expectations,” 

said chief executive 

Godfrey after taking 

delivery of his carrier’s 

50th B737 Next 

Generation aircraft in 

late July in Seattle. 

In Southeast Asia, 

the Jetstar/Valuair 

merger is a clear 

attempt to turn two 

unprofitable operations 

into a money-spinner. 

While described as a 

merger, the two carriers 

will continue to operate 

as two brands under a 

newly formed holding 

company, Orange Star, 

chaired by Qantas 

chief executive, Geoff 

Dixon. 

Dixon said the two 

carriers “will operate in 

their own right for the 

foreseeable future, with 

little or no change to the 

service offered by either airline”. Their 

eight aircraft will continue to offer multiple 

daily flights to nine destinations. 

Capital of US$36.3 million will be pumped 

into the new entity, mostly from Jetstar. The 

remaining amount is likely to be provided by 

Valuair shareholders. 

Insiders have told Orient Aviation it is 

likely that Valuair will be ultimately absorbed 

into Jetstar and disappear as a brand. 

The merger came just days after Kuala 

Lumpur-based AirAsia abandoned a US$12 

million bid for Valuair. AirAsia’s Fernandes 

said a deal with Valuair was something “that 

AirAsia looked at and we walked away from 

because we were not interested in getting into 

a bidding war”. 

The shuffling among Singapore’s budget 

operators may not signal a dot.com boomstyle 

collapse, but it sends out a strong 

message that structural change is being 

forced on many new entrants as they juggle 

with the unique complexities of low-cost 

operations that Asia-Pacific conditions are 

throwing up. 

Three major factors are prompting a 

reassessment of strategies: 

• LCC operating costs are rising, mainly as 

a result of fuel prices 

• Regulatory hurdles are preventing them 

winning critical air rights they need to 

enter some lucrative markets 

• Legacy airlines have been so successful 

cutting costs, they are able to effectively 

compete with LCCs on ticket prices 


MAIN STORY 

In the face of these challenges, many 

LCCs are seeking new market niches that will 

secure stable income. They are introducing 

“frills”, hoping to lure customers away from 

the legacy carriers. 

Other carriers besides Virgin Blue are 

even considering frequent flyer schemes. 

They are dabbling with plans for entry onto 

long-haul routes to Europe and the U.S. and 

increasingly looking towards share issues 

and initial public offerings to raise the capital 

they need to survive and expand. And they 

are bringing in new technology that allows 

them, for the first time, to interact and codeshare 

with traditional full-service carriers. 

T he changes a re occu r r i ng on a 

fragmented landscape. Since Virgin Blue 

and AirAsia set the regional LCC wheels in 

motion in 2000 and 2001 respectively, there 

has been a low-cost stampede. Today, there 

are over 30 LCCs operating in the region, 

seven of them owned by legacy airlines, with 

at least 11 more planning to launch flights in 

the next 12 months. 

India is the hot spot, with new LCCs 

emerging at an unprecedented rate. In 

China, there are plans for several new 

budget operators, but they are struggling to 

implement a true LCC model in the face of 

the local regulatory regime. 

Despite the difficulties, LCCs in the 

Asia-Pacific region are buying new aircraft 

‘We are trying to give people 

the opportunity to fly direct 

to secondary airports. This 

is not about stealing traffic 

from the major flag carriers’ 

Tony Davis 

chief executive, Tiger Airways 

in unprecedented numbers. 

Among orders in the past six months 

were 100 A320s for AirAsia, 60 B737s for 

Indonesia’s Lion Air and eight A320s for 

Tiger Airways, as well as big purchases from 

two Indian operators. Yet-to-fly IndiGo has 

ordered 100 A320s and Kingfisher is buying 

five Airbus A330s, five A350s and five A380s 

(see India LCC crazy, page 26). 

Whether growth sustains this increase 

in capacity in the next few years remains 

to be seen. “If we look around the region 

it is fair to say, in broad brush terms, not 

every country has welcomed LCCs. There 

are still regulatory hurdles to be dismantled 

before we will see them emerge in a true 

adherence to the low-cost model,” said JP 

Morgan’s Negline. 

“Countries like Thailand, Malaysia, 

Indonesia (in a domestic context), India 

and certainly Australia and New Zealand 

are very warmly welcoming LCCs. China, 

Hong Kong, Singapore, the Philippines 

and Japan have shown a tendency towards 

liberalization in that regard, but the realities 

have yet to catch up. We have yet to see fullyfledged 

businesses emerging in earnest. As 

yet, Korea and Taiwan have not made any real 

visible moves in that direction.” 

LCC operations in the region are erratic. 

In many cases, budget airlines are not 

competing against each other, but against 

national flag carriers on capital city trunk 

routes such as Bangkok-Singapore and Kuala 

Lumpur- Hong Kong. 

Tony Davis, chief executive of Tiger 

Airways, pointed out that from Singapore, 

Valuair and Jetstar Asia have four routes 

Cooperation not confrontation for Thais 

By Dave Fullbrook 

in Bangkok 

Defying the sceptics, all three Thai low-cost carriers are still 

flying, still competing, still growing. However, reflecting 

tough conditions, airlines are now discussing steps to 

stabilise the market, ease head-to-head competition and improve 

cooperation. 

One-Two-Go is adding eight Boeing MD-80s to its fleet of jets; 

Thai AirAsia another two Boeing 737-300s to its fleet of eight, while 

Nok Air, Thai Airways International’s (THAI) offspring, continues 

to fly four 737-300s. 

Thailand’s three budget carriers already coordinate their fuel 

surcharges. Orient Thai/One-Two-Go and Thai AirAsia have an 

agreement to transfer passengers to each other’s services in the event 

of delays or cancellations. A similar arrangement is in effect between 

Nok Air and its parent THAI. 

In August, the low-cost airlines plus THAI, Bangkok Airways, PB 

Air and Phuket Air met to discuss joint measures to blunt the impact 

of rising jet fuel prices and other costs. They agreed to develop a 

multilateral arrangement for transferring passengers stranded by 

late departures or cancellations. 

THAI is reiterating promises to withdraw to just domestic trunk 

routes, four years after first announcing plans to drop most domestic 

services, from which it only makes losses. Should THAI overcome 

significant political obstacles to drop most domestic services, the 

low-cost airlines plus PB Air will pick up many, but not all of them. 

If they can operate those routes profitably in these costly times, even 

stimulate traffic, their survival chances will rise. 

Carriers are also looking to coordinate schedules to ensure 

departures are more evenly spaced, which they hope will result in 

better load factors. 

THAI executives have often stressed cooperation over competition, 

although that has not always been borne out in reality. Still, given 

the pressures facing the industry, such cooperation or cartel-like 

arrangements stand a better chance of sticking now. 

The Thai economy is experiencing a soft patch, largely due to 

higher oil prices and the downturn in tourist arrivals. However, 

economic fundamentals remain sound, with massive infrastructure 

spending by the government likely to perk up the economy from 

next year. 

Even so, three budget carriers plus four other airlines make 

for a crowded domestic market, leaving question marks over their 

medium-term futures. 


MAIN STORY 

while Tiger has nine. “On the four routes 

the other airlines operate they go to principal 

airports and overlap with the major carriers. 

So on Singapore-Hong Kong, in addition to 

Cathay Pacific and Singapore Airlines and 

whatever fifth freedom operators there are, 

you have Jetstar and Valuair.” 

Davis said the LCC business should not be 

about cannibalising existing markets. “We are 

trying to create new markets. We are trying 

to give people the opportunity to fly direct to 

secondary airports. This is not about stealing 

traffic from the major flag carriers,” he said. 

In the Philippines, for example, Tiger 

flies to Clark airport and not Manila’s main 

Ninoy Aquino international terminal. “This 

is about going into markets that are not so 

economically attractive to major carriers 

and airports early in their evolution, to create 

more opportunities and stimulate new traffic 

growth by offering people fares they would 

otherwise not be able to obtain.” 

He also accuses rivals of straying from the 

LCC model. “When we were first developing 

Tiger Airways as a business model LCCs 

were very much the same. What we have 

done is establish Tiger as the low-fare airline. 

Our competitors on the LCC front are very 

much positioning themselves as mid-frills, 

or slightly closer to the traditional airline 

model,” said Davis. 

One of the reasons for the Jetstar Asia/ 

Valuair merger is that route rights appear to 

be creating major problems for some carriers. 

Jetstar failed in its bid to win clearance to 

fly to crucial markets such as China and 

Indonesia. It had planned to have eight A320s 

flying by November, but has had to lease four 

to Turkish carrier AtlasJet, otherwise they 

would be sitting unused on the ground. 

“This fleet size was based on our 

ability to fly to a number of destinations, 

including ports in Indonesia and China,” 

said chief executive Ken Ryan. “However, 

the Singapore Government has been unable 

to ensure traffic rights awarded to Jetstar 

Asia can operate to countries such as 

China and Indonesia.” He said the carrier is 

experiencing “excellent” loads on its existing 

routes and forward bookings are good. 

AirAsia is another carrier that has 

had route rights problems. Its Indonesian 

subsidiary, AWAIR, had to abort the launch 

of flights between Singapore and Jakarta as a 

result of an air treaty disagreement between 

Singapore and Indonesia. 

“It is definitely an issue,” said IATA’s 

Drysdale. “The rate at which LCCs are 

growing has probably surprised governments. 

‘Already there are carriers in 

the middle, half way between 

LCCs and traditional airlines. 

Valuair is a perfect example 

of that’ 

Andrew Drysdale 

Asia-Pacific regional director, IATA 

The expansion of LCCs is outpacing the 

expansion of air rights. It takes governments 

time to reach new agreements. However, I am 

confident this issue will be resolved.” 

In China, hopeful start-ups hardly fit 

the LCC mould. The country’s first private 

airline to take off, Okay Airways, has ticket 

prices virtually the same as traditional rivals 

and cabin service, including inflight meals, 

are akin to normal airline service. 

“There are many insurmountable obstacles 

to operating low-cost flights in the current 

environment,” the airline’s president, Liu 

Jieyin, told local media. 

Landing fees and import tariffs are fixed 

in China. This means private companies 

‘We came down a peg in our 

expectations [in 2004]’ 

Brett Godfrey 

chief executive, Virgin Blue 

have no control over a significant amount of 

total operating costs, which, until recently 

when the Civil Aviation Administration of 

China (CAAC) ended the China Aviation Oil 

Holding’s monopoly on the sale of jet fuel, 

could have been as high as 80%. 

When Shanghai-based Spring Airlines 

launched in July with widely-publicised 

US$25 airfares – massively undercutting 

the $99 charged by other airlines on the same 

routes – the heavy discounts did not last for 

long. Within a week the carrier was forced to 

raise prices by $12 after protests to the CAAC 

from competing full-service airlines. 

JPMorgan’s Negline said while LCCs 

grab media attention it needs to be kept in 

perspective. 

“We have the basis for LCCs in terms of 

population and economics, but we cannot 

forget the nature of the incumbents. The 

incumbents in Asia and the Pacific have 

very significant dynamics compared to the 

U.S. and Europe. The very powerful balance 

sheets of a number of major regional carriers 

gives them the wherewithal to determine the 

outcome of what happens in the low-cost 

arena,” he said. 

Negline believes LCCs have yet to earn 

a place at the table. “We are finding private 

equity investors very willing to chase 

down investment opportunities, but their 

optimism has yet to be matched with very 

solid, sustainable, long-term earnings (by 

LCCs),” he said. 

Negline added there was no escaping the 

fact that 50% of governments in the region 

have substantial equity interests in their 

national flag carriers. “That creates vested 

interests that will obviously distort the 

playing field at some point,” he said. 

Many planned start-ups are straying 

from the recognised LCC model. China’s 


MAIN STORY 

Chengdu-based United Eagle Airlines 

(former SIA chief executive Dr Cheong 

Choong Kong is deputy chairman) insists 

it does not want to be labelled with a “nofrills” 

tag. 

“We don’t want to be identified in 

the marketplace as another low-cost carrier. 

“We are a service driven airline,” said 

company secretary, Hu Wen Bin. 

Vietnam’s Pacific Airlines – Singapore’s 

state investment arm Temasek is in the 

process of taking a 30% stake in the carrier 

– is typical of the new approach. 

Losing money as a traditional operator, 

it will be repackaged. The aim, according 

to Pacific director, Luong Hoai 

Nam, is to be a “value-based” 

airline, which will differ from a 

traditional LCC by providing food 

and entertainment, but at reduced 

prices. 

Oasis Hong Kong Airlines, with 

its planned launch in November now 

delayed, has decided that while it 

will be low-cost, it will not be shorthaul. 

With Dragonair founder, Steve 

Miller, at the helm, it plans to use three 

leased Boeing B747-400s to operate 

to Europe and later to the U.S. 

Miller has said the only frills 

will be meals and passengers will 

be charged for alcohol and in-flight 

entertainment. There will be no frequent 

flyer programme. However, at press time, 

Oasis was said to be re-thinking its longhaul 

plans. 

Nearby, the planned WOW! Macau is 

targeting Asian, European and Middle 

Eastern routes. 

Marrying low-cost and long-haul is 

not confined to newcomers. Virgin Blue’s 

Godfrey confirmed the Australian domestic 

carrier is considering U.S. flights. Qantas 

CEO Dixon told Orient Aviation offshore 

flights are on the cards for its domestic 

subsidiary LCC, Jetstar. 

Dixon will not name prospective routes, 

but signalled they will not necessarily be 

confined to regional destinations. India’s 

Kingfisher is another new airline that has 

big ambitions on long-haul routes, having 

ordered w id ebody A i r bu s 

aircraft including A380s. 

As they re-think where they 

fly, many LCCs have already 

introduced “frills”, but generally 

charge for the services. 

Jetstar Asia and Pacific Blue, 

the New Zealand subsidiary of 

24 ORIENT AVIATION SEPTEMBER 2005 

Virgin Blue, are among those to introduce 

portable “Video-on-Demand”. Virgin Blue 

is planning to introduce inflight television. 

There is some disagreement over these 

“frills”. AirAsia’s Fernandes has no doubts. 

“I’m dead against it. Look at AirAsia three 

years ago. Look at AirAsia now. We are 

exactly the same. You are confusing the model 

and introducing complexity,” he said. 

His view is far from universal. Tiger 

Airways’ Davis considered it a fundamental 

issue for LCCs, but said if it brought in extra 

revenue and could increase profitability 

“then I think it is fair game”. Tiger is looking 

at some options for increasing revenue. 

Virgin Blue is an interesting example 

of an LCC in transition. Since Australian 

transport conglomerate, Patrick Corporation, 

took majority control earlier this year there 

has been a significant shift in its approach. 

Even chief executive Godfrey, a veteran 

of the LCC business, said the Patrick 

involvement is “taking us from a leisure 

player to being a serious new world airline, 

or a value-based proposition, as opposed to 

a cheap-as-chips carrier”. 

Virgin Blue plans to pull in business 

passengers with new airport lounges, 

refundable fares, priority check-in, improved 

on-time performance, frequency of flights 

and new routes. 

“If Jetstar’s going to try and eat your 

lunch, you have to take some of Qantas’ 

dinner,” quipped Godfrey. While Virgin 

‘ The very powerful balance sheets of a number 

of major regional carriers gives them the 

wherewithal to determine the outcome of what 

happens in the low-cost arena’ 

Peter Negline 

regional transport analyst for JP Morgan Securities 

Blue will continue with a user-pays strategy 

– resisting “giving away hot foods and 

newspapers” – it wanted to raise awareness 

it could compete with the full-service Qantas 

offering. 

Virgin Blue has also done something 

no other LCC has been able to achieve: 

establish a code-share with a traditional 

legacy airline. 

This is thanks to breakthrough technology 

that allows LCCs to link into the more 

complex traditional reservation systems 

used by big carriers. 

The system has major implications 

because it will allow budget operators to 

Not all start-ups want to be low-cost 

operations. China’s United Eagle Airlines 

says it is very much “service driven” 

link with legacy airline passenger feed. 

Other carriers are striving to lower costs 

and improve revenue flow by increasing 

involvement in subsidiary businesses. 

AirAsia has embarked on an aggressive 

plan to boost ancillary income to support 

revenue by launching Go Hostel, Go Car, Get 

a Room, Go Holiday, air space advertising 

and charter flights. 

Information technology is seen as a 

critical element in the LCC struggle to keep 

costs down. Even computer software giant 

Microsoft is getting into the act. 

Five Asia-Pacific LCCs – Tiger Airways, 

Nok Air, Valuair, AirAsia and Jetstar Asia 

– are using Microsoft Business Solutions 

(MBS) to lower costs by integrating systems 

that run operations, distribution, customer 

relationship management and even a frequent 

flyer programme (if they have 

one). LCCs also hope low-cost 

terminals due to come into 

service at three of the region’s 

airports – Singapore, Kuala 

Lumpur and Seoul – could save 

at least 30% of LCC operating 

costs.

MAIN STORY 

India goes LCC crazy 

If the growth of Asia’s low-cost airline 

market has been phenomenal in recent 

years, India seems set to outpace it 

by a country mile. But not everyone is 

over-excited about jumping in early for 

a piece of the pie. 

Tom Ballantyne reports 

When Indian low-cost 

newcomer Spicejet 

prepared to launch 

earlier this year it 

tapped into a sleeping 

demand for cheap air tickets. In just 24 hours 

before its first flight in May, it took 37,000 

bookings for seats that were going at a third of 

the price of full-service rivals, governmentowned 

Indian Airlines and privately run Jet 

Airways and Air Sahara. 

While Spicejet is not India’s first lowcost 

carrier (LCC) – Air Deccan has been 

operating for two years – its arrival marked 

a new phase in India’s budget boom. 

Quickly followed by highly ambitious 

Kingfisher and an LCC offshoot of national 

flag carrier Air India, Air India Express, 

there are more to come. 

Yet another newcomer, IndiGo, has been 

officially announced. It will begin taking 

delivery of aircraft late next year. Also on 

the drawing board are up to eight others, 

including Go Air, Indus One and Air One. 

What is interesting about some of the 

new carriers is not so much that they are 

appearing in rapid succession, but the scale 

of their planned operations. 

Kingfisher is not aiming to remain a 

domestic minnow. It began flying in India in 

April with the first of 14 Airbus A320 family 

jets it has on order. But at the Paris Air Show 

in June it announced a US$7 billion order 

for five Airbus A330s, five A350s and five 

A380s. 

Owned by India’s biggest brewer (the 

airline is named after its beer brand), the 

UB Group, it has declared its intention 

to be the country’s biggest private airline 

by 2010. Also in Paris, IndiGo, owned by 

travel group, InterGlobe Enterprises, handed 

Airbus an order worth US$6 billion for 100 

A320 jets! 

No one seems to be in any doubt India can 

Kingfisher Airlines owner, Vijay Mallya: looking to cash in on India’s vast 

number of new air travellers by 2010 

cope with this growth. Airbus chief operating 

officer, customers, John Leahy, described it 

as one of the world’s most promising markets 

and said market forecasts predict 100 million 

new consumers will become potential air 

travellers in the country by 2010. 

Kingfisher owner, Vijay Mallya, is even 

more optimistic. 

“If you look at the emerging India, by 

2010 there will be a new generation of 

consumers of about 150 million,” he told a 

recent press conference. 

“Who are these people? These are 

youngsters who are earning money out of 

information technology, biotechnology, 

entrepreneurs. People who have a much 

greater propensity to spend than when I 

was young.” 

Last year, about 19 million people travelled 

by air in India, a fraction of the billion-plus 

population. 

The Indian Government has projected 

20% annual growth in air travel over the next 

five years alone. The Indian aircraft fleet is 

expected to rise from 150 aircraft now to 400 

in the same period. 

Despite the prospects, there is concern 

the market will be flooded with capacity. 

Already, there have been vicious price wars 

that will do little for the economic viability 

of India’s airlines. 

When Spicejet launched with one-way 

fares as cheap as 99 rupees (US$2.27), 

incumbent, Air Deccan, fought back with 

tickets costing just one rupee. 

While its normal fares for major trunk 

routes are between US$70 and US$115, 

the pricing competition is almost certain to 

intensify as more seats have to be filled over 

coming years. 

Continuing liberalization of Indian 

aviation is expected to see a rising number of 

foreign low-cost operators flying into India 

to tap into the enormous forecast growth. 

However, one carrier that is not rushing 

to get rights in the near future is Malaysianbased 

AirAsia. 

Voicing the fears of many observers, chief 

executive, Tony Fernandes, said: “I think we 

will wait to pick up the pieces. We will see 

who is left after all this. There is going to be 

a bloodbath. 

“Airports are not ready for low-cost 

carriers in India. We are in no rush. It’s not 

about being first, it’s about doing it right.” 

Only time will tell if he is right. 



Shaky profitability, a complex merger 

and a damaging series of safety 

incidents have forced Japan Airlines 

to conduct a penetrating re-evaluation 

of its operations. New JAL Group 

president and chief executive, 

Toshiyuki Shinmachi, has mapped out 

an aggressive course of remedial action 

designed to provide sustainable 

returns for shareholders and revive 

JAL’s dented safety reputation. 

He spoke about his plans to 

TOM BALLANTYNE in Tokyo. 

BAPTISM 

OF FIRE 

JAL Group president and chief executive, 

Toshiyuki Shinmachi: merger with JAS 

has been a slow and difficult process 


When Toshiyuki Shinmachi 

was a boy, growing 

up in the seaside town 

of Zushi on the shores 

of Sagami Bay, about 

50 kilometres southwest of Tokyo, he liked 

nothing better than fishing in its calm 

waters. Now 62 and still living nearby, in the 

beautiful little city of Kamakura, there will 

clearly be little time for fishing in the next 

few years. 

Shinmachi took charge of Japan Airlines 

(JAL) in April. He not only stepped into the 

aftermath of a safety crisis (see separate 

story), but he took charge of an aggressive 

business plan designed to push the world’s 

seventh largest carrier through one of the 

biggest transformations in its history. His 

aim is to make JAL lean, mean and, for 

virtually the first time, consistently profitable. 

Faced with the uncontrollable challenges 

– high fuel prices, terrorism threats, volatile 

economic conditions – confronting other 

carriers, JAL also has unique problems. 

A difficult and complex merger with 

one-time rival, Japan Air System (JAS) is 

still being consolidated. There is ongoing 

chronic congestion at Tokyo’s Narita 

airport, not to mention a massive U.S. 

airline presence on JAL’s home turf. 

In the past five years, income has been 

on a roller-coaster ride. Yet, in the next three 

years, Shinmachi has to slash staff numbers, 

rationalise the fleet, dump loss-making 

routes, make sure JAL’s international 

business is in the black and turn fragile 

group earnings into solid operating profits 

of more than US$900 million annually. 

This year alone the airline plans to 

cut $700 million from bottom line costs. 

Considering JAL’s operating income in the 

year to March 31 was a meagre $26.1 million, 

after a loss of $67.6 million the previous year, 

there is little doubt Shinmachi is facing the 

toughest challenge of his life. 

It is not going to be easy. The carrier’s 

new financial year has begun with a group 

net loss of $344.2 million in the first quarter 

to June 30. That was a slight improvement 

on the $365.7 million net loss in the same 

period last year, but clearly shows costcutting 

will have to be deep to turn around 

the carrier’s results. 

Again, fuel prices were a heavy burden, 

costing JAL $776.9 million in the latest 

quarter, up $194.9 million on the previous 

period in 2004. If fuel prices remain 

at current levels, fuel will cost JAL an 

additional $414 million in the current 

Japan Airlines: inherited aircraft types it 

did not want following the JAS merger 

financial year. 

JAL’s medium-term corporate plan 

– covering the three fiscal years ending 

March 31, 2008 – is aggressive because 

it has to be, he told Orient Aviation. “The 

situation was very serious, even for JAL, 

particularly starting from 2003 when we 

had the Iraq War, as well as SARS in 2003. 

“We had very heavy damage to revenue 

and traffic. This is, for us, the final 

restructuring medium-term plan. We have 

to [make sure we] reach the targets in order 

to survive and provide suitable returns to 

JAL Group stakeholders,” said the chief 

executive. 

The silver-haired Shinmachi, who has 

been with JAL since 1965 and has also spent 

more than 10 years in the cargo sector is a 

jovial and outgoing executive, seemingly at 

ease with those around him be it the media 

or members of JAL’s 43,800 workforce. He 

will need to be. 

JAL originally planned to trim personnel 

by 4,500 by March 2007. However, in the 

airline’s up-dated medium-range plan that 

target has been increased by 1,400 job cuts 

to 5,900 by March 2008, excluding pilots 

and flight attendants. Already, the once 62- 

strong board of directors has been slashed 

by 34% to 41. 

What is more, directors have taken salary 

cuts of between 20% and 30% depending 

on seniority. Shinmachi’s own pay was 

slashed 35% after the Ministry of Land, 

‘Simplification is a major 

target for us. The 14 aircraft 

types are configured in 

32 different ways. We will 

reduce that to 25.’ 

Toshiyuki Shinmachi 

JAL Group president and 

chief executive 

Infrastructure and Transport ordered JAL to 

improve its business in March. 

As he trims the fat, Shinmachi will be 

trying, finally, to complete the JAL-JAS 

merger. This will involve outsourcing more 

functions, including some maintenance 

operations, wider use of information 

technology (IT) and the dumping of 

unprofitable routes. 

There will be added emphasis on cargo 

with more freighters joining the JAL fleet to 

serve new destinations. 

He has set uncompromising targets. In 

fiscal year 2005 (ending March 31, 2006), 

the aim is for a net profit of Y10 billion 

(US$91.8 million). By the end of the 2006- 

07 year, Shinmachi hopes to have turned the 

loss-making international passenger sector 

into profit. In the third year, the target is 

operating income of $918 million. 

Fleet reform is a high priority for 

JAL. The JAL/JAS merger resulted in 

efficiencies, but JAL inherited unwanted 

aircraft and types of aircraft. JAL has 277 

airplanes, a fleet comprising of 14 different 

types. “We are going to reduce that to 11 

types by the end of fiscal 2007, although we 

will end up with around the same number of 

aircraft,” said Shinmachi. 

“Simplification is a major target for us. We 

also have to reduce aircraft configurations. 

The 14 aircraft types are configured in 32 

different ways. We will reduce that to 25. It 

will improve efficiency.” 

DC-10s, Airbus A300B2/B4 jets and 

YS-11 turboprops will be retired. The same 

fate for older B747 aircraft and MD80s will 

be accelerated. 

Meanwhile, the order book is filling 

up. JAL has 30 Boeing B737NG (Next 

Generation) 700/800 single aisle jets on 

order, with 10 more options. It also is buying 

30 of the mid-sized B787 Dreamliners with 

20 options. From 2008, these will replace 



older B767 and A300 aircraft. 

For the very large Airbus A380 Shinmachi 

is keeping his options open. “This is a fine 

aircraft, but we don’t need it just now. We have 

been flying B747s with nearly 600 seats on 

domestic routes for more than 30 years and we 

currently operate 10 domestically. 

“We are gradually replacing them with 

more fuel-efficient B777-300 types, with 

472 seats. For competitive reasons we might 

consider the A380 on international routes 

if it proves to be successful in attracting 

customers. But we are not in a hurry,” he said. 

The JAL chief has already declared war 

on fuel prices, which account for 17% of the 

carrier’s flight operating costs. 

Last year it paid US$2.6 billion for fuel, 

18% up on the year before. As with all airlines, 

it is one of the biggest issues to be faced. 

“The price of jet fuel is still well above 

US$60 a barrel. We had estimated it would 

be around US$54. 

“But we have contingency plans and if 

we follow these plans we can cope, even 

if the price rises to $70 a barrel. We have 

strong hedging in place – around 50% of our 

fuel – and a detailed cost reduction plan,” 

he said. 

Unprofitable routes will be slashed. 

JAL will suspend flights from Fukuoka to 

Honolulu, Hong Kong and Seoul as well as 

all flights to Saipan from Kansai and Tokyo, 

and to Guam from Nagoya. Services from 

Kansai to Honolulu will 

be trimmed from twice to 

once daily. 

“We have this selfimposed 

mission of operating, 

even to the smaller 

destinations. 

But rising fuel costs 

and other factors means 

the business environment 

is very severe. Now, we 

have to look at these 

non-profitable routes and 

eliminate them,” he said. 

The merger with JAS 

has delivered one benefit: 

a well-balanced revenue 

structure. International 

passenger revenue is 38% 

of JAL’s total revenue 

with domestic passenger 

revenue 39%. 

Before the merger, 

said Shinmachi, JAL was 

over-exposed to the more 

volatile international 


Japan Air System: merged with Japan Airlines 

market. The revenue ratio from passenger 

traffic was about 70% from international 

and 30% from domestic business. That 

is now nearer 50-50. A well-balanced 

structure means greater financial stability,” 

he said. 

Nevertheless, the merger has been a 

slow and painful process. The originally 

planned structure of a JAL Group with 

two subsidiaries – JAL International and 

JAL Domestic – led to complications and 

duplication. Employees complained about 

poor organization and communication. 

In January, former CEO, Isao Kaneko, 

int roduced a plan to st reamline the 

CAREER TRACK 

Toshiyuki Shinmachi graduated from Tokyo’s 

Gakushuin University in March 1965 with a 

degree in politics and economics. He joined 

Japan Airlines (JAL) a month later. 

After working in various areas of the airline, 

including many years in the cargo division, he was 

appointed vice-president cargo sales, Japan region in 1995. 

In 1997 he was elected to the JAL board as a senior vice-president and 

by 2000 was a JAL managing director. 

With the start of the merger between Japan Air System and JAL in 

2002, Shinmachi was appointed senior managing director of Japan 

Airlines System Corporation (the holding company of the new airline), as 

well as senior managing director of Japan Airlines. 

In June last year he became president of Japan Airlines Corporation 

and president of JAL. He was promoted to chief executive officer of the 

JAL Group on April 1 this year. 

A keen sportsman, Shinmachi enjoys swimming and tennis, but says he 

has little time to pursue another interest – golf – these days. His cultural 

interests include the appreciation of joruri, the narrative chanting to 

musical accompaniment generally associated with the traditional Bunraku 

Puppet theatre. He is married with a 35-year-old son. 

management system to speed up decisionmaking, 

eliminate duplication and clarify 

responsibilities. 

The result will be the creation of a new 

company by unifying the holding company 

and the two main subsidiary airlines by 

March 31, 2007. 

Cargo revenue accounts for 11.9% of 

JAL’s overall income. The airline will be 

expanding its lucrative cargo business 

throughout the growth markets of Asia, in 

particular China. 

Shinmachi said JAL will enter the late 

night domestic cargo market, despite a 

delay of its planned introduction in midyear. 

B747-400 freighters 

will be added to the 10 

already in the fleet, as 

well as medium-sized 

freighters. 

Despite growing political 

tension between China and 

Japan, JAL expects a 135% 

growth in its Mainland 

business by 2008. In July, 

JAL began an extended 

code-share arrangement 

with Shanghai-based China 

Eastern Airlines (CEA) 

and now offers 247 weekly 

flights on 30 Japan-China 

routes, including codeshares. 

It also has code-shares to 

China with China Southern 

Airlines (CSA), Cathay 

Pacific Airways, Hainan 

Airlines and Xiamen Airlines. 

In June, JAL operated its first 

Chinese domestic codeshare, 

between Beijing


and Chengdu, with Hainan. 

Both JAL and ANA are fully utilising 

capacity under the bilateral agreement 

between the two countries. If there was 

to be an expanded capacity ag reement , 

Chinese airlines would want more slots 

at Tokyo, which are simply not available. 

“This could be a problem,” he added in an 

understatement. 

A solution is in sight, but not in the near 

term. 

Firstly, the extension of Narita’s 

second runway to 2,500 metres, from 

the existing 2,180 metres, to allow larger 

aircraft to use the international airport is 

being planned, but it is not expected to be 

completed until 2008. Secondly, a fourth 

runway will be available at Haneda, Tokyo’s 

domestic airport, in 2009, allowing a 40% 

expansion of capacity. 

While only Korean charter f lights 

o p e r at e t o H a n e d a now, Shinmachi 

is confident some scheduled international 

services will be allowed to use the near-city 

airport when the fourth runway opens. 

I n t he meant i m e, JA L i s t a k i ng 

advantage of the new Chubu International 

Airport, or Centrair, at Nagoya, for both 

international and cargo flights. 

JAL executives are reviewing the 

carrier’s global alliance policy. The airline 

has consistently remained independent, 

preferring to forge bilateral co-operative 

agreements (with 26 carriers). 

“It is working very well for us. But right 

now we are looking at whether there are 

additional benefits we can get from joining 

a global alliance,” he said. 

JAL also is keeping a close watch on 

moves towards consolidation, particularly 

in the U.S. “That will have some impact on 

the groupings and the members of global 

alliances,” he said. 

He is concerned about increasing moves 

by financially troubled U.S. operators to 

place additional capacity into Asia in an 

attempt to boost much-needed revenue. 

“We are experiencing over-capacity in the 

Pacific and it will intensify,” he said. “But 

the U.S. airlines have the rights to fly to and 

through Japan. There is nothing we can do 

about it.” 

When he does have some spare moments, 

one of Shinmachi’s great pleasures is 

walking the historic trails around his home 

at Kamakura. 

A perfect place, it would seem, to reflect 

on the challenges he will face in returning 

JAL to full health. 

Shinmachi moves 

fast on safety issues 

Any aviation executive will tell 

you that safety is the number one 

priority for an airline. So, how does 

a major operator like Japan Airlines 

(JAL) react when it receives a public 

dressing down for safety lapses? 

The answer: Very quickly. 

When Asia’s largest carrier, 

Japan Airlines, received 

an embarrassing public 

rebuke from Tokyo 

a v i a - 

tion authorities earlier this year 

over a series of safety related 

incidents the company acted in 

typically Japanese fashion. In 

essence, highly respected JAL 

chair-man and chief executive, 

67-year-old Isao Kaneko, 

shouldered the blame and 

on April 1 stood down from 

his post. His replacement as 

CEO, 62-year-old Toshiyuki 

Shinmachi, who also became 

group president, has wasted no 

time attacking safety head on. 

Neither is he hiding from 

the fact that serious flaws 

had emerged in the airline’s 

safety systems. “We have 

analyzed the cause of the incidents and 

have formulated countermeasures to 

improve safety based on our findings. 

While the majority of the incidents were 

non-threatening, involving aircraft and 

component technical failures and reflecting 

day-to-day wear and tear of equipment 

common to all airlines, a small number 

involved human error and were serious 

breaches of basic safety. These we deeply 

regret,” he said. 

The findings of an in-house enquiry into 

the causes of the lapses revealed insufficient 

safety awareness, a lack of quick and accurate 

information-sharing and pressure to secure 

on-time performance (OTP) combined 

with pressure caused by time limitations. 

Also, there was a lack of communication 

between management and front offices, a 

Former JAL chairman 

and CEO, Isao 

Kaneko: stepped 

down after accepting 

responsibility for the 

carrier’s safety lapses 

result of the new corporate set-up following 

the integration of JAL and Japan Air System 

(JAS), completed in April last year. 

Executive board members, including the 

new president, have already visited more 

than 100 JAL offices in Japan and around 

the world to ensure safety is a constant and 

ongoing concern of all staff. 

The incidents that led to the highly 

unusual decision in March by the Japan 

Civil Aviation Bureau of the Ministry 

of Land, Infrastructure and Transport to 

publicly tell JAL to lift its 

safety game, included: 

• Use of inappropriate 

parts in a B747 freighter 

landing gear in January. 

• Failu re by pilot s to 

confirm air traffic control 

instructions at Shin Chitose 

Airport at Sapporo, also in 

January. 

• Failure by pilots to confirm 

ATC instructions at 

Incheon Airport in Korea 

in March. 

• Operating a domestic 

passenger flight with disarmed 

emergency slides in March. 

Publicity surrounding 

these events led to the 

reporting of other incidents, mostly posing 

no threats to passengers, but nevertheless 

damaging to JAL’s image. These included 

a B747 flight from Brazil, which landed at 

Sapporo after a pressure change triggered 

the release of oxygen masks. 

Another JAL jet bound from Nagoya to 

Manila, was re-routed to Kansai when its 

altimeter malfunctioned. 

In April, JAL joined 40 other carriers 

registered in the IATA Operational Safety 

Audit (IOSA) programme. 

Designed to assess the operational 

management and control systems of an 

airline, the audit covers over 700 operational 

standards and recommended practices. 

In the last two decades, Japan’s airlines 

have had a good safety record with no 

passenger fatalities. 



Little Eagle, 

big ambitions 

It was a dream challenge for Beijingborn 

Kai Duell. After the comfort 

of Northwest Airlines, where she 

had worked in executive positions 

for two decades in almost every 

department, sharing her time between the 

U.S. and China, she was headhunted for a 

move to Chengdu, in the heart of China, to 

set-up China’s first fully privately-owned 

carrier, United Eagle Airlines (UEA). 

After one year of preparation UEA is now 

airborne and, backed by a board of directors 

that includes former Singapore Airlines 

chief executive, Dr Cheong Choong Kong, 

China’s first female airline boss is happy 

with progress. 

GECAS is leasing three Airbus A319s 

to join UEA’s sole A320 by January, with 

perhaps six more by January 2007, flying 

on at least 20 routes. The carrier has only 

two at the moment. Freighters are also under 

consideration. 

Orient Aviation special correspondent 

DAVID FULLBROOK spoke to United 

Eagle’s chief executive. 

Q: After so many years at Northwest, 

how does running a small 

start-up airline in China compare? 

A: It’s very challenging, especially in 

China. We were the first company to be 

approved, before us there was no 100% 

privately-owned airline in China. When we 

welcomed the first aircraft I thought ‘wow’, I 

did not realise we would have accomplished 

so much in one year. Usually the average 

preparation time for a new airline is one or two 

years. So I think we have done quite well. 

Q: What do you enjoy most about 

running a start-up in a country like 

China, compared to working at 

Northwest? 

A: There were many occasions when 

I thought about how we should lay the 

foundation for this airline. I certainly could 

not just imitate the foreign model, but I also 

did not want to make it like a traditional 

Chinese enterprise. I wanted to find a new 

United Eagle Airlines 

chief executive, Kai Duell: 

wanted to create a new 

airline model in China 

way, create a new model. Because it’s a 

new airline, we can do things differently, 

creatively, create our own branding and 

design. I think finally I’m able to put my 

years of experience to good use. 

Q: Is UEA a low-cost carrier in the 

Ryanair or JetBlue mould? 

A: It is not correct to link the private 

airlines to the low-cost airlines in China. 

United Eagle is not a low-cost airline because 

of the current cost structure in China, the 

direct operating costs do not allow a true 

low-cost airline to exist in China. Also 

Chinese customers do not totally accept the 

no-frills service. 

But in the future, with more deregulation 

and opening up to support low-cost airlines, 

they could exist. We position ourselves as a 

service-driven carrier, somewhere between 

a low-cost airline and a traditional airline. 

Focusing on safety and service, we are trying 

to minimise costs in many areas and have 

the flexibility to change later according to 

the market. 

Q: How would you describe the 

regulatory environment in China 

right now? 

A: We cannot see an overnight change. 

I can see and feel the energy and intent of 

government officials who want to open 

up this industry to more private capital 

investment, to risk-takers. After the three 

private airlines were approved, five or 

six more preparatory licences have been 

granted. That is an indication of the opening 

up of the market. 

Q: Are there any route restrictions 

for new airlines? 

A: The route approval is based on the 

airline business licence awarded b y t h e 

CA AC (Civ il Av iat ion Administration 

of China). The United Eagle licence is not 

restricted. I think the private airlines 

approved later may not get the same 



licence as the first three. They may be 

restricted to branch routes, regional 

services or charters. We can apply 

for any route, but when we apply for 

a new route we need to go through an 

approval process. 

At the end of this year or next year, 

the CAAC will be more liberal in 

approving route applications. Certain 

markets might be more restricted, such 

as in the Shanghai area, because they 

are saturated. Some other markets, 

like the northeast or southwest, the 

market is there, but they need airlines 

to go there, to start flying, to develop 

the markets. The regulations will try 

to balance these needs. Soon the CAAC will 

issue a new policy regarding branch routes 

to encourage airlines to use smaller aircraft 

to develop those markets. 

Q: Are you planning to enter 

the Beijing-Guangzhou-Shanghai 

‘golden triangle’? 

A: We are now studying those routes. I 

believe that in those markets demand still 

exceeds supply, so we can enter with our 

lower costs and lower penetration costs. We 

focus on the yield management concept. As a 

new airline it is not reasonable to say we can 

sell our tickets above the average price. 

Q: Why do you think the government 

appears to be taking a fairly 

cautious approach to opening the 

market, certainly when compared 

to India or Indonesia? 

A: The government recognises the 

Chinese market needs to open up, but they 

Chief executive Kai Duell, talks to a pilot on board 

UEA’s A320 

are fairly cautious. Safety is a primary 

reason. Volume is growing faster in China 

than most parts of the world, 16% a year, but 

over 30% in the Chengdu area. With around 

100-150 aircraft being imported a year, it is 

necessary the CAAC regulates and controls 

the airlines’ desire to expand very quickly. 

There is a shortage of pilots in China. I 

don’t think they want to totally deregulate 

the market. They are not concerned about the 

shortage impact, but there is pressure from 

the big three [Air China, China Eastern, 

China Southern Airlines], which still 

consciously or unconsciously behave like 

monopolistic state-owned enterprises. But I 

have heard officials saying they should treat 

private and state-owned airlines the same as 

they are all contributing to the development 

of the market. 

Q : W h a t a r e t h e b i g g e s t 

challenges facing UEA? 

A: One area is pilot shortages, 

another is finding the right aircraft. 

There is a big shortage of second-hand 

aircraft. If you buy new, you have to 

wait 20 months at least. 

We recruited some pilots from 

other Chinese carriers and some are 

air force retirees. Also, we signed 

a contract with a foreign leasing 

company to hire foreign pilots [of its 

30 pilots UEA has several from the 

West]. We are also sending students 

to pilot training school. We are still 

actively recruiting. 

Q : W h a t a r e t h e m a i n 

opportunities for UEA? 

A: The CAAC has announced a new 

policy opening up the aviation environment, 

encouraging private investment in different 

aviation-related markets like airport 

construction. Under our licence we can 

operate any aviation-related business, it 

can even be a food company or aviation 

investment. But currently we still want to 

focus on our primary business, but, yes of 

course, we want to expand into other areas. 

Q: Where do you see the future 

of UEA? 

A: We need more capital injection 

to support our development. We need 

to find domestic or even international 

airline partners to open up our marketing 

possibilities. United Eagle has a very 

aggressive development plan. Within two 

years we want to look at expanding by 

introducing international cargo or passenger 

services. 


EXECUTIVE PROFILE 

Those who k now Si r Rod 

Eddington are certain of one 

thing; he will not be retiring 

when he returns to Australia. 

He is not the kind of man to 

spend his days by a quiet stream hoping the 

fish will bite. 

Neither will he be making any demands 

on his friends to call him anything other than 

just plain Rod. 

“I am humbled and honoured by the 

award,” he told Orient Aviation. “I do know 

it reflects not just on my efforts here at BA, 

but those of so many of our people. 

“Companies drive forward based on 

collective will, not just because one man 

believes the journey is necessary.” 

It is a response one might have expected of 

the modest, no-nonsense Sir Rod, who once 

explained his philosophy this way: “The 

plains of Siberia are littered with the bones 

of sled drivers who thought they would rest 

up for the night and that the pursuing wolves 

would do the same.” 

During his 26 years in the rarefied 

atmosphere of airline management – 14 of 

them as a CEO – trusting to luck that the 

chasing pack is having a break is something 

he never did in his airline career. 

The man who BA staff quickly dubbed 

“Skippy” (from a cult Australian television 

show featuring a kangaroo of that name) after 

his arrival in London, is simply entering a 

new phase of corporate life that will see him 

play a leading role in some of the world’s 

largest non-airline companies. 

Speaking exclusively to Orient Aviation, 

Sir Rod talked candidly about the primary 

reason he is leaving an industry he loves. 

“I want to go back to live in Australia. 

I have been outside Australia for over 30 

years,” he said. He has spent only three 

years of his working life in Australia, from 

1997-2000. 

“My little boy starts high school at the 

beginning of next year and while I am 

delighted my kids have had many of their 

primary school years in the U.K., I want them 

to be Australians. 

“That means I want them to have their 

high school years in Australia,” he said. 

While born in West Australia – current 

Federal Opposition leader Kim Beazley 

describes him as “one of the brightest blokes 

ever to leave these shores” – Sir Rod and his 

family will be settling in Melbourne, 

mainly because he has been appointed to 

the board of mining giant Rio Tinto, which 

is headquartered there. 


Farewell, 

Sir Rod 

Knighted recently by Queen Elizabeth for services to civil aviation, 

outgoing British Airways (BA) chief executive and former head of 

both Cathay Pacific Airways and the now defunct Ansett Australia, 

Sir Rod Eddington, will leave the airline industry this month to 

pursue other interests. Most of all he is looking forward to moving 

back to his beloved Australia with his family. 

TOM BALLANTYNE reports.

He will continue to be a non-executive 

director on the boards of Rupert Murdoch’s 

News Corporation and John Swire and Co. 

Pty. Ltd. – an arm of Cathay Pacific owner, 

the Swire Group. 

But his ties with the U.K. transport 

industry will not be severed just yet. 

He has already begun a “substantial 

bit of work” for the British Government’s 

Department of Transport – at the request 

of the Chancellor of the Exchequer, Gordon 

Brown, and Transport Minister, Alistair 

Darling – on the country’s long-term 

transport infrastructure needs. 

Sir Rod will work full-time on that 

project until the end of the year 

and move to Melbourne at the 

end of January. 

“I’ll then have to scoot back 

and forth between the U.K. and 

Australia a couple of times until 

that work is finished, probably 

around the middle of next year,” 

he said. 

Sir Rod will leave BA with 

praise ringing in his ears. The 

airline’s chairman, Martin 

Broughton, said earlier this 

year his CEO had “performed 

miracles” at the airline. 

When he arrived, BA was 

in dire financial straits. It lost 

some US$360 million in 2002, 

but a year later against the 

background of the Iraq War and 

SARS, BA recorded a profit of 

$242 million. 

Last year, the national 

carrier announced a massive $996.5 million 

operating profit to March 31, up from $967.8 

million the year before. The results speak for 

themselves. 

Sir Rod has no regrets about the time he 

has spent in the airline industry or the fact 

he is leaving it. 

“It is a remarkable industry and the people 

who work in aviation are wonderful. I will 

miss the people. I have been lucky. I’ve had 

an extraordinary career. I won’t miss the 

executive responsibility because I’ve had it 

for a very long time and it’s time to pass the 

baton,” he said. 

He does believe, however, that 

aviation is an industry with major 

problems. 

“When you look at its economic 

performance over the last hundred years 

you have to recognise there is no rational 

economic foundation for the current 

structure of the industry. 

“In my view, until governments are 

prepared to stand back and let the industry 

behave like a normal rational economic 

industry it is going to struggle from financial 

crisis to financial crisis,” said Sir Rod. 

“Given that the people in the aviation 

industry are fantastic it can’t, in my view, be 

people that are the problem. 

“I think it is the broad structure and until 

that gets addressed it is going to struggle 

from crisis to crisis.” 

He said the multi-billion industry losses 

of recent years have forced many – though 

not all – legacy airlines to address their 

facturers. There are not 400 individual 

pharmaceutical companies. There are not 

400 different companies around the world 

making aeroplanes or engines. So you have 

to ask yourself: why is the global aviation 

industry so fragmented?” he said. 

“It is very clear to me the answer to that 

[question] is the ownership and control clause 

in bilateral agreements… It’s that provision 

which means the industry is massively 

fragmented.” 

He has felt for some time fragmentation 

is one of the main reasons why the industry 

has performed so appallingly. 

“You have all those sub-economic 

British Airways: Eddington reduced the airline’s workforce by 13,000 during his five years 

in charge 

long-term issues. “They have been forced to 

address them in part because of the pressure 

on the bottom line from higher fuel prices; 

in part because of the challenges the no-frills 

[operators] present on short-haul flights and 

in part because some of the new longer-haul 

carriers like Emirates present a challenge to 

the established carriers on a global basis,” 

he said. 

Sir Rod said there are more than 400 airlines 

in the world and it would be unthinkable to 

have that number of independent companies 

in any other industry. 

“There are not 400 global car manu- 

‘China will not be the gold mine 

a lot of people expect it to be’ 

Sir Rod Eddington 

entities, if you can call them that, operating 

in an industry that cries out for consolidation. 

Whether or not consolidation is going to 

happen is a very good question,” he said. 

“My view is it will not happen until 

governments are prepared to walk away from 

that ownership and control provision. 

“Once governments move out of the 

business of owning an airline they become 

much more relaxed about the traffic rights 

issue.” 

“I remember when I first joined Cathay 

Pacific, the Australian Government was 

much more protective of Qantas (then 

government-owned) than it is now… 

What happens now is that when 

government negotiators sit down to 

negotiate traffic rights they will often 

include people from the tourism industry 

as well as the airline industry. That never 

happened in the old days. It is an indication 



of how government thinking has changed.” 

The problem today is ensuring a level 

playing field, he added. 

“What does a government that has chosen 

this course (to privatise its airline) do when it 

believes its national carrier is being forced to 

compete with an airline that is either still in 

the hands of the state or is clearly a recipient 

of state aid? 

“In most industries – steel or agriculture 

for instance – there are established entities 

like the WTO (World Trade Organization) 

or GATS (General Agreement on Trade in 

Services) to which a dispute can be taken. 

None of that applies to aviation,” he said. 

“That is a real conundrum for aviation 

because there is not a court of disputes.” 

Of one thing he is certain: China, a 

country close to his heart because of his long 

association with Cathay Pacific, will play a 

growing role in global aviation. When Sir 

Rod spoke to Orient Aviation he was about 

to fly to China to welcome British Airways’ 

first flight to Shanghai under a new, wider 

bilateral air services agreement. 

“The fact all this additional capacity 

is being agreed, which means foreign 

carriers can expand their networks into 

China and the Chinese carriers can expand 

their own global networks, is a powerful 

demonstration of how China has changed,” 

he said. 

“China is generally opening [up], but it is 

not just China that is doing it. India is doing 

Career track 

Cathay Pacific Airways: Its strengths are the quality of its management team 

and people, plus the geographic and economic importance of the Hong Kong 

hub, said Eddington 

the same. India was, in my view, even more 

restrictionist than China. 

“China and India are both hugely 

important for Asian and global growth, 

but they are not the only Asian countries 

that are important. Look at Vietnam. It is 

a country with 70 million people and there 

are plenty of other countries in Asia that are 

important. 

“Clearly, China and India dominate the 

landscape. What I do know is that China will 

not be the gold mine a lot of people expect 

it to be. There will be intense competition 

and people will have to work hard for their 

returns.” 

While he agreed low-cost carriers (LCCs) 

have played a role in the region’s growth Sir 

Rod believed rising traffic numbers in Asia 

have never been dependent on low-cost. 

“I was in Japan from 1982 to 1985 and 

when I left the country there was something 

like five million Japanese tourists going 

overseas every year. Ten years later it was 

15 million. It was a huge increase,” he said. 

“I lived in Hong Kong and watched the 

explosion of Taiwanese outbound [traffic], 

Sir Rod Eddington was born in Perth, West 

Australia in 1950. He attended the University 

of Western Australia before moving to 

England, where he was a Rhodes Scholar at Oxford 

University, obtaining a degree in nuclear physics. 

His future, however, did not lie in science. In 

1979 he joined the Swire Group, working for its 

subsidiary airline, Hong Kong’s Cathay Pacific 

Airways in a number of roles, including stints in 

Japan and Korea, before becoming chief executive 

and managing director of the carrier in 1992. 

His career in the airline industry continued 

when he was appointed executive chairman of Ansett Australia 

in 1997. In 2000, he replaced Robert Ayling as chief executive 

at British Airways after the carrier reported losses of US$445.7 

million (£244 million) and revealed record debts of US$11.8 

billion (£6.5 billion). 

Putting BA back on its feet was a tough assignment, but Sir 

Rod set about the task with determination. He began slashing 

costs and cutting staff numbers – more than 13,000 were 

ultimately to go – sold low-cost carrier Go, as well 

as improving the inflight service product. 

In 2003, BA was back in the black. Against a 

backdrop of unsettled airline markets around the 

world, in 2003 the airline reported a profit of £135 

million. 

“The luck I have had has been all bad. I’ve had 

the [Air France] Concorde crash, 9/11, Foot and 

Mouth [cattle disease in England], the Gulf War, 

SARS and high fuel prices. You might doubt my 

sanity, but I’ve enjoyed it.” 

Married with two children, Sir Rod is an avid 

sports fan. He is particularly fond of cricket and rugby union, plays 

bridge and enjoys “a good red wine”. 

He also speaks Chinese and Japanese, although he said his 

Korean-born wife “is the real linguist in the family”. 

For a number of years he has also chaired the Hackett 

Foundation, a major fund-raiser for his old alma mater, the 

University of Western Australia. His successor at BA is Irishborn 

Willie Walsh (44), former chief executive of Aer Lingus. 



and the Koreans after 

the Seoul Olympics of 

1988. 

“As these economies 

in Asia have matured, 

this hunger for 

international travel has 

grown very quickly. It usually starts with a 

desire to travel short-haul to see places close 

to home, but very quickly broadens into a 

global view.” 

There have always been many airlines 

in Asia ready to expand quickly, as Cathay 

Pacific did during the 1980s and 1990s, he 

pointed out. 

“ T h e l ow - c o s t industry is clearly a 

critical part of the global industry now, but 

the bottom line is you are not just dependent 

on low-cost,” he said. 

Looking back, Sir Rod says he has 

wonderful memories of his time with 

Cathay Pacific, the airline where he began 

his aviation career in 1979. 

It was where he developed his love of the 

industry, not only running offices in Korea 

and Japan, but holding senior positions in 

Hong Kong, including a stint as the carrier’s 

airport manager at the old Kai Tak facility 

and being the airline’s marketing and sales 

manager. 

“Cathay and Swire are fantastic 

companies. They really grow their people. 

Cathay Pacific is a wonderful airline.Its 

strengths are the quality of its management 

team and people, plus the geographic and 

economic importance of the Hong Kong 

hub,” he said. 

Already one of the world’s leading airlines 

when Sir Rod left in late 1996, Cathay Pacific 

has built considerably on its success in 

recent years. Today, Cathay is well placed to 

benefit from Asia’s remarkable 

growth opportunities for both 

passenger and cargo traffic, he 

added. 

“I was very lucky to work 

for CX [Cathay] and the 

Swire Group,” he said. 

Sir Rod became executive 

chairman of Ansett Australia 

in 1997. It was some time after 

he left the airline to join BA 

that Ansett collapsed, but it 

was an event that “saddened” 

him. 

“Again, it was the people I 

worked with at Ansett which 

made my time there special. 

Ansett was in a difficult 


‘Until governments are prepared to stand back 

and let the industry behave like a normal, 

rational economic industry it is going 

to struggle from financial crisis to financial crisis’ 

Sir Rod Eddington 

position – the number two player in a market 

with a strong, well-run number one – Qantas. 

It had some legacy challenges. 

“It had too many aircraft types, a weak 

cost base and a tiny inter national feed 

among them. But the people there worked 

very hard to put these right, to strengthen the 

balance sheet and the cost base and to deliver 

great customer service. 

“Ansett made real progress and did not 

Bowing out in style 

Sir Rod went out on a high at British 

Airways (BA) when he announced the 

airline’s best financial performance in 

nine years in August. 

Putting analysts forecasts in the shade, 

BA operating profit for the three months to 

June 30 rose by 36% to US$264 million (£176 

million), producing a margin of 8.5%. Pretax 

profits increased 65% to $223.2 million 

on revenues 8% higher at $3.78 billion. 

Although they were his last and best set 

of results Sir Rod was not entirely satisfied. 

He said it was with “personal regret” that BA 

had not hit the 10% operating margin target 

before he retired. 

“I always said it would be difficult to 

achieve given the headwinds we are flying 

Ansett Australia: ‘made real 

progress and did not have to fail’ 

have to fail. But aviation 

is a brutal business,” 

he said. 

Sir Rod rated the 

Ansett failure and 9/11 

as the two low points 

during his illustrious 

career. The high points? “The people I have 

worked with along the way and the friends 

I’ve made. I wouldn’t trade them for all the 

tea in China!” he said. 

When Sir Rod walks out of his BA office 

for the last time this month, the industry will 

be all the poorer for the loss of a man who 

has successfully spearheaded two of the 

world’s leading airlines, one in Europe and 

one in Asia, in tumultuous times. He will be 

missed by his peers and many friends in the 

industry. 

into, but 8.5% is not far off,” he said. 

One of the major reasons for the good 

results was an increase in the number 

of passengers flying business class on 

intercontinental routes and also on short-haul 

European routes where the withdrawal of full 

service carriers such as bmi had helped yields 

during the period under review. 

On the other hand, fuel costs rose 38% 

during the quarter. 

BA raised its forecast for the year, saying 

it expected revenues to increase 5.5% to 6.5% 

because of improved passenger traffic, higher 

fuel surcharges and the strengthening of the 

dollar. 

Its fuel bill, however, was expected to be 

$945 million higher than last year.

ENGINEERING 

By Charles Anderson 

Airbus is hoping to persuade 

Lufthansa Technik and Hong 

Kong Aircraft Engineering 

Company (HAECO) to join 

its new maintenance, repair 

and overhaul (MRO) network and help it 

strengthen services in countries such as 

China and India. 

The planemaker launched the network 

last Spring, with 11 leading MRO providers, 

including SIA Engineering, Singapore 

Technologies and Air New Zealand 

Engineering Services, on board. Air France 

Industries joined soon afterwards. 

The aim is to ensure competitive maintenance 

services are available for Airbus 

customers worldwide who are looking 

to outsource the work. Benchmarking, 

satisfaction surveys and improvement plans 

are also part of the package. 

“We believe in an open market approach 

where competition plays its role and, from 

the feedback we have from our customers, 

they certainly seem to like 

that,” said Dr Wolfgang Kortas, 

senior director, MRO support 

management, at Airbus. 

Initial members also include 

Air Canada Technical Services, 

EADS SOGERMA Services, 

I b er ia Mai nt enance a nd 

Engineering, Sabena Technics, 

SR Technics, TACA Aeroman, 

TAP Maintenance and Engineering 

and TIMCO Aviation 

Services. A future total of more 

than 30 MRO companies is 

envisioned. 

“With the famous exception 

Airbus out to woo top 

names into MRO ‘club’ 

of Lufthansa, we cover the world’s leading 

MROs and biggest MROs that do Airbus 

services. HAECO is the second biggest 

exception regarding people we have been 

talking with, but who have not yet decided 

to come on board. We are still in discussions 

with them both.” 

HAECO handles base maintenance 

for Airbus customer, Dragonair, while 

Switzerland’s SR Technics looks after 

component services and fleet management 

for the Hong Kong carrier, an example 

of a company within the Airbus network 

providing services from outside a client’s 

region, Kortas said. 

W hile HAECO remains a target, 

Lufthansa Technik would be the prime catch. 

Lufthansa Technik’s joint venture with Beijing’s AMECO 

could be a big plus for Airbus’s maintenance network 

Its Ameco joint venture with Air China in 

Beijing, for instance, could help handle 

a significant peak in heavy checks on the 

considerable number of single-aisle Airbus 

aircraft sold there in the Nineties. 

STARCO, ST Aero’s joint venture with 

China Eastern Airlines in Shanghai is on 

the list, but more providers are needed. “We 

have a footprint in the country, but we must 

enlarge that. If we don’t we will be lacking in 

our objective of being capable of providing a 

choice. Obviously, the Chinese market is so 

big and growing so fast,” Kortas said. 

Potential partners have been identified 

in China and active discussions are under 

way. 

The same holds true elsewhere. “We 

do have worldwide coverage 

today, based on the capacity 

of the big members to project 

their services into regions 

where they are physically not 

present. But there are places 

like India, for example, where 

in view of our delivery schedule 

and the contracts we have in 

place, we will need a local base 

maintenance and component 

repair capability,” he said. 

“We are actively working in 

these regions to try to establish 

these kind of facilities and 

capabilities.” 


SUPPLIERS 


Lu f t h a n s a Systems h a s 

fo r m a l ly l a u n c h e d t h e 

information technology (IT) 

joint venture with Garuda 

Indonesia first mooted last 

year while at the same time announcing 

a separate, 40 million Euro investment in 

widening the scope of passenger systems 

offered globally. 

The two developments point to a new 

direction for the German company. One 

represents its first outsourcing joint venture 

with an airline. 

The other is a key component in a push to 

win business from the many legacy carriers 

facing expensive upgrades to old systems 

and from low-cost start-ups whose business 

models call for outsourcing. 

The first task of the new joint venture, 

Lufthansa Systems Indonesia, will be to 

modernise Garuda’s IT applications by 

increasing their reliability, preparing for e- 

ticketing and adding applications that boost 

efficiency and profitability. 

It also will try to tap the fast-expanding 

Indonesian market before looking elsewhere 

in the region for business. 

It believes its software development 

capabilities and high quality data centre 

services will find favour with airlines keen 

to buy elements of a system rather than pay 

the cost of a full service that may call for all 

data to be processed at a far-off centre. 

Ralf Cabos, currently in charge of 

Lufthansa Systems Asia-Pacific in Singapore, 

is chief executive of Lufthansa Systems 

Indonesia. 

Fifty Garuda IT employees are joining 

other Lufthansa specialists to form the core 

of the workforce. 

A key element in the joint venture’s 

development will be the availability of the 

FACE (future airline core environment) 

project due to be introduced by Lufthansa 

Systems in 2007. 

As well as providing an updated framework 

for the core processes of reservation, 

inventory and check-in, this new platform 

allows flexible communication across 

distribution channels. 

That way airlines can cut down their 

reliance on global distribution systems 

(GDS), Lufthansa said. 

“There is huge potential in the Indonesian 

market,” said Lufthansa Systems’ new chief 

executive officer Wolfgang Gohde, who took 

over from Dr Peter Franke late last year. 


Garuda, Lufthansa 

Systems lock into 

IT joint venture 

‘ The classic GDS approach is 

coming to an end. GDS fees will 

come down and traditional GDSs 

will have to find their way.’ 

Wolfgang Gohde 

chief executive officer 

Lufthansa Systems 

“The new platform has products that can 

scale in modular fashion for a large network 

as well as for local, low-cost operators. 

The functionality on offer from 2007 can 

include different business models and can 

even accompany an airline while it changes 

its business model.” 

Gohde knows Asia well. As senior 

vice-president with maintenance, repair 

and overhaul (MRO) provider, Lufthansa 

Technik, he oversaw expansion at Lufthansa 

Technik Philippines and the setting up of the 

Lufthansa Technik Shenzhen joint venture. 

Now he is in charge of a Lufthansa 

company keen to cement its place alongside 

such players as Sabre and Amadeus in the 

fast-changing IT services market. “Our 

focus has shifted a little bit. 

“Traditionally, Lufthansa Systems was 

focused on large legacy carriers and allianceintegrated 

carriers,” said Godhe. 

They will still be catered for, but so too 

will smaller and low-cost operators who 

represent the strongest current growth. 

“The trick simply is that you don’t force 

airlines into upfront investments any more. 

They pay for standard software with minor 

adaptations for local markets and they do that 

in a modular fashion,” he said. 

“They pay, in fact, by the numbers of 

passengers boarded. That’s the concept in 

Indonesia as well.” 

Godhe sees changes to distribution 

systems brought about by Internet advances 

as vital to the International Air Transport 

Association’s (IATA) aim to bring booking 

costs down from an average of US$12 to $3. 

He believes, in fact, that the cost can be cut 

to $1. 

“The classic GDS approach is coming 

to an end. GDS fees will come down and 

traditional GDSs will have to find their 

way,” he said. 

Amadeus and Sabre, which both provide 

GDS services, know that full well, Godhe 

said. 

He sees the two companies as strong 

competitors for Lufthansa, but with his 

company as the only GDS-independent 

provider. 

“As such we are very attractive to new 

entrants,” he said. 

“There will be many airlines interested 

in an independent approach that allows 

their sales organisations to switch between 

the large number of sales channels available 

today.” 

Orient Aviation web site 

www.orientaviation.com

HELICOPTERS 


Mo s t of t h e m a j o r 

helicopter manu - 

facturers keep a keen 

eye on China. The 

market potential is 

enor mous and the manufact u r ing 

opportunities hold great promise. But, as 

with general aviation, the going can be slow. 

Two of the market leaders, Eurocopter and 

Bell, are to sign new “teaming agreements” 

with Aviation Industries of China II (AVIC 

II), which includes helicopter makers Hafei 

Aviation and Harbin Aircraft Industry 

(HAIG), at this month’s China Aviation 

Expo in Beijing. 

Bell has already linked up with HAIG 

to produce airframes, tails and wings for its 

multi-purpose 439 to be assembled at Bell 

Textron in Canada. Eurocopter, which has a 

20-year history of cooperation in China, is 

in talks about the co-development of a new 

medium to heavy twin-turbine model. 

Meanwhile, Shanghai Sikorsky, the joint 

venture between Shanghai Little Eagle and 

the American helicopter company, has won 

type certification from the Civil Aviation 

Administration of China (CAAC) for its 

Shen 4T model, the Chinese market name 

for the Schweizer S-333 it makes there along 

with other Schweizer 300 and 333 models, 

again under the Shen brand. 

Enstrom is looking hard at a delayed 

manufacturing deal with Wuhan Helicopter 

Industrial Corp. in the context of market 

potential as a whole. It has opened offices in 

Beijing and Shanghai. 

Yet still there are under 100 helicopters 

in this vast country. Less than 50 of the 

registered aircraft are turbines and some 40 

of those are Eurocopters. 

Last year, the European manufacturer 

sold four helicopters to COHC GAMEC, 

the Shenzhen-based maintenance company 

in which it has a 21% stake. “That’s 100% of 

the turbine helicopter market in China [that 

year],” said Henri Stell, Eurocopter’s chief 

representative in China. “We are a major 

player in a very small market. That’s why 

we want to help them develop the market, 

to come up with its regulations and train 

people.” 

A key plank in the company’s strategy is 

the setting up of maintenance and training 

centres in major cities across the country. 

“What we are trying to do is set up 

some bases to help the Chinese develop the 

market. Everybody says it is going to be a big 

A need to kick-start 

China’s ‘heli’ market 

Lack of pilots, training and maintenance 

bases; need for regulations 

There are less than 100 helicopters in service in China 

market, but there are no regulations today 

for licensing pilots, for instance. We want to 

propose to help them.” 

The maintenance and training bases 

are still being planned. “It’s quite a long 

process. This is not easy in any sphere, but 

when you are talking about aviation, it is 

more complicated. We are progressing, 

but nothing is firmly established yet,” said 

Stell. 

He pointed to the obvious example of the 

Beijing Olympics in 2008 as an area where 

helicopters would be needed. 

However, Eurocopter strongly believes 

the market will start to develop throughout 

the country by police acquisitions. 

Demand from that sector may help lift 

regulations which restrict helicopter and 

general aviation use, often through military 

oversight of air space, while also pushing the 

country to put the right rules in place in areas 

where they do not exist today. 

“A lot of municipalities, police forces 

and fire services want helicopters. That 

may push the CAAC and the air force into 

doing something because these are public 

services,” said Stell. 

A lack of pilots is also a problem. Most 

come from the armed forces and there are 

only a few training centres in the country 

authorised to deliver a licence. “They train 

two or three people a year maximum. Today, 

it’s very hard to find a pilot,” said Stell. 

Pilots from outside are sometimes brought 

in. For instance COHC GAMEC, originally 

formed by Citic Offshore Helicopter Co, 

Hong Kong distributor, Samwell Aviation, 

and Britain’s Bristow company, still has 

many Bristow pilots on its books. Eurocopter 

came on board in late 2002. 

The European manufacturer first sold 

a production and maintenance licence 

in China in 1980 when the Dauphin was 

produced there under the Z-9 designation. 

That agreement continues for the AS365N 

Dauphin, with HAIG now taking on the work. 

The Harbin company also assembles the 

popular EC120 Colibri as the HC120, after 

first manufacturing parts for that model, 

using an assembly line that has the capacity 


HELICOPTERS 

to produce 30 helicopters a year. 

“We just became a kit supplier for the 

HC120,” said Stell. 

Top of the Frenchman’s list of priorities 

are discussions on the development of a new 

model in the 6.5 tonne to 10 tonne class, 

dubbed the EC175, with several companies 

within AVIC II, including HAIG. The plan 

is to position it between the Dauphin/Panther 

and Super Puma/Cougar families. 

A cooperation framework agreement 

between Eurocopter and AVIC II was signed 

late last year, witnessed by the Chinese and 

French presidents, Hu Jintao and Jacques 

Chirac, during the latter’s trip to Beijing. 

The aim was to launch a programme to 

develop and manufacture a new advanced 

helicopter that will complement both 

companies’ existing products, Eurocopter 

said at the time. 

The model, to be on the market by 2010, 

would be available both inside and outside 

China. 

“Since then we have continued discussions. 

It’s a big project and it takes quite a while to 

solve all the details,” said Stell, who would 

not comment further on the talks. 

Li takes to 

the air – at last 

Li Linhai, the Shanghai businessman 

who became the first owner of a 

private aircraft in China, has at last 

taken off in his helicopter some 18 months 

after it first arrived from the U.S. 

He bought his Robinson R-44 for some 

four million yuan (US$500,000) in late 

2003, hoping to use it for business and 

family flights. His problems started when it 

arrived at customs, the Shanghai Star said. 

As a private plane, it could not be flown to 

its next destination. It had to go by road. 

Li’s family also might not be allowed 

on board, because the CAAC at that time 

said only the owner of a private plane could 

actually travel in it. 

Li could not train to fly in Shanghai. It 

had no facilities. He was forced to go south, 

to Guangdong, for that. And then there 

were the complexities of parking approval, 

flight planning and re-fuelling rules, which 

did not exist for private helicopters. 

But the country’s helicopter trailblazer 

has finally made it. He took to the skies in 

his own aircraft early this summer. 

COMMUTER AVIATION 

Hong Kong’s fledgling CR Airways is flying deeper into China territory traditionally 

served by Dragonair, while new carrier, Hong Kong Express, will start on the same 

path this month when its inaugural schedule service to Guangzhou begins. 

CR Airways, owned by businessman Robert Yip, added daily flights from Hong Kong to 

Sanya and Haikou on Hainan island in July. It already flies daily to Nanning and thriceweekly 

to Jinan, the only one of the four destinations not already served by Dragonair. 

The carrier has added two Bombardier CRJ700s bought from Danish carrier, Maersk 

Air, to its existing two CRJ200s as it plans more routes to secondary Chinese cities. 

Hong Kong Express will add Hangzhou to its start-up schedule early in October, to be 

followed in stages by Nanjing, Chongqing and Ningbo, all cities to which Dragonair flies. 

Services to Guangzhou, slated for early this month, will be daily. Hong Kong Express 

has taken delivery of two of the four Embraer 170s it is obtaining from the Brazilian 

manufacturer. 

Low-cost Jeju Air opts 

for Bombardier Q400s 

Bombardier has won the contest to 

supply aircraft for a fledgling South 

Korean regional carrier while also 

delivering the first turboprop in a major order 

to an Air New Zealand subsidiary. 

Jeju Air, formed in early 2005 by the 

Seoul-based Aekyung group of companies 

and the Jeju provincial government, has 

placed an order for five 74-seat Q400 

turboprops plus options on three more. It 

evaluated aircraft from Bombardier, ATR 

and other manufacturers, including jets. 

The start-up, which is based on the 

famous tourist island at the southern tip of the 

country, plans to begin operations between 

there and cities on the Korean mainland in 

time for the peak summer travel season next 

year, giving low-fare competition to major 

carriers Korean Air and Asiana Airlines. 

Hong Kong Express: first schedule flights in September 

Hong Kong new boys 

expanding on Mainland 

Jeju Air president, Sang Kil Joo, said the 

carrier chose the Q400 for its economics and 

comfort. “The competitively low operating 

costs will enable us to plan to price our airfares 

30% lower than the competition,” he said. 

Meanwhile, Air Nelson has accepted the 

first of 17 50-seat Q300s ordered in 2004 by 

Air New Zealand to be operated under the Air 

New Zealand Link brand, giving it a capacity 

increase of up to 60% on its internal routes 

over the next three to five years. 

The US$235 million deal will see an 

aircraft delivered every six weeks until the 

order is completed. The new turboprops 

will replace Air Nelson’s 17-strong fleet of 

33-seat Saab 340A aircraft, which have an 

average age of 17 years. Seven of these are 

leased and will be returned to their owners. 

The remaining 10 are to be sold. 



Airport & Airline Security 


AIRPORTS 

‘FLAWED’ 

Security experts call for tighter personnel screening, a re-think on 

priorities and a consolidation of responsibilities at airports worldwide 

It was the kind of security breach 

that quickly caught the media’s 

attention. Drug smuggling gangs 

were at work at Australia’s largest 

airport, diverting bags as they 

made their way through the mammoth 

baggage handling infrastructure in Sydney. 

Other criminal conspiracies at the 

facility, detailed in a customs report leaked 

to journalists, were said to involve aircrew, 

ramp and trolley workers, cleaners and 

security screeners. 

A nationwide airport security revamp was 

quickly announced. Emergency measures 

were put in place and employees fired. A wideranging 

review was announced. 

But, while politicians scored points and 

the agencies concerned passed the buck on 

blame, experts who take the long view of 

aviation security saw this as a disturbing 

example of the flaws inherent in operations 

at today’s giant international airports. 

The risk, they say, is not just from 

criminal activity. Terrorist elements can 

exploit the same loopholes. And this does 

not only apply to Australia. Major airports 

in the Asia-Pacific and the rest of the world 

are just as vulnerable. 

The solutions they propose range from 

much tighter personnel screening to a 

rethink on priorities and a consolidation 

of responsibilities. They acknowledge, 

however, that this is no easy task. 

“On a broader spectrum this serves as a 

warning to everyone,” said Mal Macginnis, 

president of Smiths Detection Asia-Pacific, 

who supplies security technology to airports 

across the region. 

‘ Almost every day there is another 

report … about people who 

have proved themselves unworthy 

of holding an airport ID card’ 

Philip Baum 

chief executive, Green Light 

“Airports are just big cities. They have 

issues you find in a normal city or town – 

security issues, normal civilian processes, 

people coming in and out, contractors on 

site all day. 

“To manage that within a rigorous 

security environment is tough. It’s the most 

challenging environment in the world. These 

are very complex places.” 

Aviation security consultant Philip Baum 

agreed. “Almost every day there is another 

report from somewhere around the world 

about people who have proved themselves 

unworthy of holding an airport ID card. If 

those people can work in such areas, then 

that poses a threat to the security of flights 

as well,” he said. 

Workers prepared to cross the invisible 

line between the legal and the illegal may 

also be a terror risk. 

“Apart from anything else, somebody 

involved in drugs leaves themselves open 

to being used by the terrorist community, 

possibly without being aware of it. They are 

prepared to do an illegal act, usually for a lot 

of money,” said Baum. 

Don Robertson, director of the Australian 

Centre for Security Research at the University 

of West Sydney, is just as blunt. 

“Employees and contractors entering 

an airport should be screened as if they are 

entering a war zone. But they are not. Each 

of the agencies [involved] seems to have 

different methods of access control,” he said. 

Robertson, one of Australia’s top 

independent security observers, wants 

to see that remedied by coordination of 

security under a single agency across an 

airport and through the acceptance that 

the risks are just as great during landside 

operations as they are on airside. 

It’s important, he said, to make sure all 

facets leading up to airside are managed 

securely, such as information technology, 

communications and power systems as well 

as aspects of operations which encourage 

crime and could lead to security breaches. 

JULY/AUGUST 2005 ORIENT AVIATION 52



The Sydney scandal broke in early 

summer when The Australian newspaper 

published details of a customs report 

written some months earlier detailing 

breaches of security at the city’s Kingsford 

Smith airport. 

Baggage handlers with security clearance 

diverted bags containing narcotics from 

incoming international flights to domestic 

baggage carousels to avoid customs 

examination, it said. 

Smuggled goods were also placed in 

innocent passenger bags during their 600- 

metre journey through airport basement 

corridors, an unnamed official told the 

newspaper. Theft from baggage was 

common. Other groups of workers were 

involved in different criminal conspiracies, 

it was alleged. 

The report came soon after the drug 

smuggling conviction in Indonesia of 

Australian Schapelle Corby, who claimed 

marijuana discovered in her luggage 

in Bali had been planted by baggage 

handlers between Brisbane and Sydney. 

The customs report, however, found no 

evidence of domestic drug smuggling 

between Australian airports. 

The government security shake-up that 

followed called for the re-examination of 

70,000 airport and airline workers’ security 

passes nationwide, rigorous police checks 

on personnel and the stationing of federal 

police officers at all Australian international 

airports. 

Briton, Sir John Wheeler, was quickly on 

a plane from Heathrow, heading out to lead a 

comprehensive countrywide airport probe. 

His report, which will recommend action 

on criminal and organised crime and review 

the terrorism risk, was due, at the time of 

writing, to be delivered early in September. 

He conducted a similar exercise in Britain 

in 2002 

Qantas Airways sacked two of its 

baggage handlers implicated in the claims, 

although chief executive, Geoff Dixon, 

was quick to point out in a statement 

these were isolated incidents among the 

38,000 “decent, hard-working and honest” 

workforce. Its security manager left the 

airline as well. 

The airline then moved swiftly to beef 

up personnel inspections, introduce covert 

CCTV where it could and close a significant 

number of airside access gates at airports 

around the country. 

Sydney airport also closed some access 

gates and supplied more airside security 

guards, increased a wide range of inspections 

and offered passengers a shrink-wrapping 

service that sealed their baggage, keeping 

it free from interference. Br isbane and 

Melbourne, which also introduced random 

staff searches, already offered that service. 

Don Robertson, however, does not 

believe such measures will work fully 

until airport security is gathered under a 

single umbrella, either in Australia’s case or 

‘Airports are just big cities… to 

manage that within a rigorous 

security environment is tough’ 

Mal Macginnis 

president 

Smiths Detection Asia-Pacific 

in countries throughout the region. He ticked 

off those involved at the Sydney airport: 

airlines, airport regulators, local police, 

federal police, Australian Protective Service 

and the Group 4 security company. 

“Whenever you have different government 

and private agencies all protecting their own 

security patch, allegedly being coordinated by 

the Sydney airport security people, you are not 

going to have the communications they say 

they have,” he said. 

The situation extends to other airports. 

“From my studies, within the region and 

beyond, they all have the same structure. 

They have regulators, contracted security, 

airline security, airport security. 

“They all meet, they all have their ICAOapproved 

national security programmes,” he 

said. “But when it comes to the practise of 

it, with so many disparate agencies running 

their own security patch, my question is, how 

many holes does this allow? 

“We focus on passengers at check-in. 

That is getting better. We are screening 

the bags, screening the people, before they 

get anywhere near airside. But I’m talking 

about all the employees who can pass things 

around, onto, through, over, under. 

“We’ve got to ensure there is common 

screening and checking across every aspect 

of every part of the airport. And it just is 

not there. 

“You have got people screening bags, 

people screening caterers, people doing 

checks on freight forwarders and people 

wandering in and out of the airport, just by 

flashing their ID.” 

Modern airport designs do not help 

either, Robertson said. 

Security people should be on hand to 

talk to architects right from the start of the 

planning stage, about incorporating designs 

that help aspects of security. He does not 

believe this has been the case in many Asia- 

Pacific facilities. 

Robertson accepts that Australian airport 

security acts on intelligence and responds to 

incidents and developments. “The problem 

is that we still get these breaches and, 

whenever there is not a uniform approach 

to having the same standards across all the 

agencies, then you cannot argue security is 

adequate,” he said. 

“We cannot say security will ever be 

100% [effective]. But I’d like to see an 

international airport model that takes into 

account the physicality of security and the 

systems with the human resources, and 

brings all that together. Then we can say we 

are on the right track.” 

Philip Baum, chief executive of Green 

Light consultants, editor of Aviation 

Security International and an International 

Air Transport Association (IATA) training 

faculty member, points to the large numbers 

of baggage handlers, security guards, toilet 

cleaners and menial workers needed by airport 

operators and the huge staff turnover that is 

inevitable within a low-paid workforce. 

“The only way you can really respond is 

by having a whole set of checks and balances 

which incorporates everything to do with 

staff screening,” said Baum. 

“You need to have a reasonable number 

of checks to prevent somebody from 

believing they stand a very good chance of 

getting something through the system.” 




Baggage screening upgrade 

U.S. playing catch-up 

… and it’s costing the rest of the world dearly 

It’s been a mammoth operation 

and it has cost the industry a 

great deal of time and money but, 

by January 1 next year, virtually 

ever y commercial passenger 

airport in the world will have installed a 

system that screens checked baggage for 

dangerous contents. 

The date was stipulated by the International 

Civil Aviation Organisation 

(ICAO) following 9/11. The U. S. called for 

its airports to be similarly equipped by the 

end of 2002, the same deadline adopted by 

Europe. But Europe had started the process 

a decade earlier. 

The U.S. gave itself just over a year and 

also set itself a higher standard. It was an 

impossible task, the experts say, but in the 

climate of the times, something the industry 

could not oppose. 

The result: an incomplete system in the 

U.S. and higher bills for the rest of the world. 

“They [the U.S.] haven’t caught up. They 

are still working on it,” said aviation security 

consultant, Norman Shanks, who has written 

a guidance book for airports on checked 

baggage screening on behalf of Airports 

Council International (ACI). 

U.S. regulations call for certified 

explosion detection equipment which costs 

more, is slower and has a higher false alarm 

rate. That has led to compromises at many 

U.S. airports that make sure the job is done, 

but not as yet to the standard set by the 

politicians. 

“The problem is the technology is quite 

expensive and limited in availability. They 

will not allow the European standard, 

which in reality is between 5% and 10% less 

effective on a single type of explosive – just 

one of the number of explosives which might 

be used,” said Shanks a former group security 

head of the British Airport Authority who 

helped design security systems at Hong 

Kong International Airport. 

“Most of the rest of the world, Asia 

included, has a fast, highly accurate system 

‘ The ACI position is that 

governments have created 

this terrorism problem. They 

should pay. The reality is that 

many governments say the 

industry must pay.’ 

Norman Shanks 

former group security head 

British Airport Authority 

which will cope with the majority of threats 

posed by international terrorism.” 

None of this would matter to the Asia- 

Pacific if it was not for the fact the U.S. 

government is footing the bill for its 

screening equipment while airports in the 

rest of the world are generally paying their 

own way. 

“As long as the U.S. is prepared to pay 

the high cost of the equipment, it is unlikely 

manufacturers will be willing to reduce the 

price to other world markets,” said Shanks. 

And that is an important consideration 

when the most modern detection equipment 

costs some US$1.2 million per unit before 

baggage handling is taken into account. 

Many large airports need two or three such 

units. Around US$10 million is a bargain 

basement price for a full whizbang system. 

“The ACI position is that governments 

have created this terrorism problem. 

They should pay. The reality is that many 

governments say the industry must pay,” 

he said. 

Shanks is a former ACI security standing 

committee chairman and was heavily 

involved in the British response to the 

Pan Am aircraft bombing over Lockerbie, 

Scotland, in 1988 which included a 

commitment to full baggage screening. 

The weighty guidance document, which 

he first helped produce in 2003, is now being 

updated to include the latest technological 

developments. Contents include breakdowns 

on the best and worst aspects of detection 

systems including manual searches, trace 

detection, use of dogs, conventional and 

smart X-rays, passenger profiling and 

various combinations of them all. 

There are sections on location of 

devices, planning, installation, traffic flow, 

airport structures, space needed, staff 

requirements and what to look for when 

screening baggage – all of which point to 

the complexity of the task in hand. 

The handbook aims to cover all airport 

needs, including small or low-profit 

airports that cannot afford to buy much 

new technology and must still rely on 

conventional X-rays and hand searches. 

It recognises the realities of life outside 

the U.S. where it makes sense to install a 

system that meets the bulk of likely threats 

and can be improved and upgraded as more 

accurate technologies are developed. 

Shanks believes most facilities will 

have a system up and running by January 

1, although it may not be the final solution 

to be deployed in any particular case. 

The world’s airports were moving in this 

direction anyway, 9/11 notwithstanding. 

“But, like the U.S, they will have to 

look for a compromise,” he said. “If too 


many countries or companies are trying to 

buy equipment from the same number of 

manufacturers there is a limit to what can be 

produced and what they can have installed. 

“The big ones, Hong Kong, Kuala 

Lumpur, Changi, most of the larger 

Japanese airports are pretty well on board. 

China probably meets the requirement 

today, but it is using older equipment.” 

Mal Maginnis, president of Smiths 

Detection Asia-Pacific, points out that the 

region’s facilities were better equipped than 

many others to handle the task. 

“Asia was in a relatively strong position 

even before that direction came out,” he 

said. “Because of their security problems, 

certain countries had other systems in place. 

For example, India inspected all baggage in 

front of house. China did the same. Lots of 

other countries had partial systems. 

“Philosophically, the countries understood 

the need for this sort of process. What we 

have seen is a significant improvement in the 

technology, the mechanics and the logistics.” 

The challenge, however, is to supply 

something that fits individual needs. 

“You would think there is some sort of 

standardised design,” said Maginnis. 

“But every airport’s baggage system and 

methodology of transporting bags is different. 

They are designed to fit the architecture and 

flow-throughs of each airport. 

“You have to look very carefully at the 

check-in counters, the baggage conveyors, 

how they get them to the laterals. The 

physical dimensions and design are 

completely different in every airport.” 

So, what happens if an airport does not 

meet the deadline? In reality, ICAO has few 

teeth. It expects signatory states to abide by 

its requirements. There is little it can do to 

enforce them. 

Biometric identification systems 

have been heralded as one 

sure way to simplify travel 

and boost security. But, while 

important trials continue in 

two Asia-Pacific countries, there has been a 

plea for better integration to ensure that the 

full potential of chip-enabled passports, in 

particular, is met. 

In Australia, the SmartGate initiative run 

jointly by Qantas Airways and the Australian 

Customs Service has been 

extended as an option for 

the airline’s frequent flyers 

arriving from overseas at 

Syd ney a nd Melbou r ne 

airports. 

Launched five years ago 

as an automated processing 

system for Qantas crew, 

SmartGate’s technology 

compares facial features 

as screened at a checkpoint 

with those on an original 

photograph held within the 

system. 

In Japan, All Nippon 

Airways (ANA) and Japan 

Airways (JAL) are continuing 

the use of biometrics – facial 

in ANA’s case, facial and iris 

for JAL – to identify some of 

their passengers. 

The next step could be for them to 

collaborate with government authorities such 

as immigration and passport departments to 

use biometrics all the way through the travel 

process. 

That, however, needs full official 

involvement, something that the Association 

of Asia Pacific Airlines (AAPA) says has 

been lacking in some parts of the region. 

‘Governments have 

been slow to commit 

to the development 

of common 

standards’ 

Andrew Herdman 

Director general, AAPA 

Biometric ID: a call 

for common standards 

Malaysia already issues smart passports 

that use radio frequency identification 

(RFID) chips holding facial images and 

fingerprint data. 

Australia, New Zealand, 

Singapore and Japan are all 

moving in that direction as 

well. 

The International Civil 

Aviation Organisation (ICAO) 

has already chosen facial 

recognition as the biometric 

that should be used for identity 

confirmation by machine. 

T h e A A P A b a c k s 

machine-readable and chipenabled 

passports, but it argues 

that individual initiatives may 

not be enough. 

“Unfortunately, governments 

have been slow to 

commit to the development 

of common standards,” said 

its director general, Andrew 

Herdman. 

“A series of practical trials have also 

demonstrated serious shortcomings in the 

reliability and inter-operability of reader 

equipment for these kinds of electronic 

documents. 

“This, taken with continuing differences 

over the preferred biometric data, such 

as facial, fingerprint, iris, has held back 

widespread implementation.” 

Herdman believes that a fix will be 

found. “We remain optimistic that these 

implementation challenges are now being 

overcome,” he said. 

He is not, however, as upbeat about 

another possible change. 

At present, adva nced passenger 

information (API) is limited to what is 

included in the machine-readable zone 

of most modern passports. Now some 

governments, particularly the U.S, want to 

know more – home addresses and intended 

destinations, for instance. 

And they plan to call for it up to 60 

minutes before departure, as compared to 

the present 15 minutes. 

“This could result in massive disruption 

to air travel in terms of longer passenger 

check-in times, reduced schedule reliability 

and poorer connections,” said Herdman. 

“The AAPA wants to see harmonisation 

of regulations and along with other industry 

stakeholders, we have expressed support for 

an alternative approach using interactive- 

API. This would use real-time screening of 

passengers during the check-in process and 

allows governments to scrutinize passenger 

data prior to travel and that way giving the 

necessary clearance to fly.” 

Australia has already adopted that 

system. Japan, South Korea, Hong Kong 

and Thailand plan to introduce it and 

the European Commission has called on 

European states to do so by 2007. 




Man and machine 

It’s a winning combination; neither can succeed in the security battle alone 

Mal Maginnis works 

in the rarefied world 

of trace detectors, 

biometrics and X-ray 

systems. 

He can talk authoritatively about the 

benefits of linking traditional technologies 

with iron mass spectrometry, advanced 

infrared systems and millimetric electronic 

waves. 

There is a new walk-through scanner that 

his company, Smiths Detection, 

is particularly proud of. It uses an 

airflow to dislodge particles from 

passengers’ clothing or skin as they 

walk through a checkpoint. 

Particle samples and vapours can 

be analysed for traces of explosives 

or illegal drugs within seconds. 

“There is a whole range of 

technologies coming into support 

what I would say was a more 

traditional, conservative approach 

to the X-ray in the past,” he said. 

It all sounds like 21st-century 

stuff and an obvious boon to aviation 

security. But Macginnis, president 

of his company’s Asia-Pacific 

wing, does not see such advances 

succeeding in isolation. 

He is among the many experts 

who believe neit her men nor 

machines alone hold the key to a secure 

industry. It takes a combination of the two 

to beat the terrorists and drug smugglers. 

“Humans are still fundamental, the 

airline crew who see someone doing 

something strange, for instance. [It’s] that 

kind of human dimension. But some people 

forget it,” Macginnis said. 

“Our approach as a company is that we 

have to come up with technology we can 

industrialise to make the operators’ job better 

and easier. There is no point in giving them 

this great laboratory system that nobody 

can use. 

“New technologies are going to help, 

though. There is a lot of clever research going 

on and it’s going to be very useful. But none 

of it is going to be a single solution. We must 

continue to adjust, improve and absorb new 

technologies as the threats change. 

“Sometimes it’s diff icult for the 

travelling public. There is a new threat and 

you adjust the system. There is no magic out 

there, but there are good technologies that are 

helping the operators win the game.” 

Smiths Detection, an arm of the giant 

British-based Smiths Group, has installed 

its products at major airports in 25 countries 

across the region such as China, Japan, India, 

Singapore, Australia and New Zealand. 

A non-invasive 

scanner 

that screens 

passengers for 

explosives 

Cargo security is now attracting more 

attention than checked baggage screening 

systems, Macginnis said, because a range 

of solutions already exists for the latter. 

“The problem with air cargo is the 

sheer volume and speed required. It’s a real 

technical challenge. We approach it exactly 

as we approach all the others. We’ve got to 

find a combination of the technologies.” 

Again, a team effort works better. “It’s the 

intelligence services, the customs services, 

the police guys, physical inspections, X-ray 

inspections, trace inspections and control 

and manifest,” said Maginnis. 

“People are looking for silver bullets. 

There is no such thing. Think how complex 

screening people is. Air cargo is just that, 

only bigger, heavier and faster.” 

Security consultant and International 

Air Transport Association (IATA) training 

faculty member, Philip Baum, also wants 

people kept in the picture, but his emphasis 

is a little different. 

“My biggest concern is the overall 

approach to aviation security,” he said. “We 

still put the screening of baggage before the 

screening of people themselves. Passenger 

screening is all based on Sixties technology, 

X-ray machines and metal detection 

technology designed to identify dense 

metallic items. 

“Realistically, we need to be 

looking at the people who carry 

the bags. We need an intelligent 

approach to aviation security.” 

And that, Baum argues, means 

profiling. “There are a few trials 

going on looking at passenger X-rays, 

but realistically we are sticking with 

the same technologies. We are not 

profiling people. We need to start.” 

Baum holds no truck with those 

who find this an objectionable 

process. “In that case, why do we let 

customs and immigration officers do 

it? I find it amazing that we raise all 

these reasons why we must not profile 

people, because it’s not fair, it’s not 

nice, it’s not politically correct. We 

let them go on an airplane without 

any checks other than what the airline 

does and the basic airport security. 

“They arrive at a destination, then they 

are profiled. They go through customs, and 

customs is looking at your appearance and 

your behaviour. 

“Stand at the Heathrow customs area and 

you will see what kind of people they pull 

over every day. “I’m not anti-technology. I’m 

just anti-total reliance on technology versus 

zero reliance on people.” 

Baum sees aviation security in a wider 

context than just the terrorist threat. “It goes 

way beyond terrorism. The aim is to prevent 

any unlawful act in civilian aviation. We do 

stand a reasonable chance, given the system 

we have today, to identify the criminal, the 

mentally disturbed, the asylum seekers who 

are out there,” he said. But there is still room 

for improvement. 


Anyone encouraged by the 

lack of recent attacks on 

mainstream aviation should 

listen to Dr Rohan Gunaratna, 

the Singapore-based 

terrorism expert. To him, the threat remains 

“very significant”. It has not diminished since 

9/11. Instead, it has changed its emphasis, 

with airports now more in the firing line. 

“Terrorists consider airport and airline 

targets as a high priority. They continue to 

probe the gaps or loopholes in their security,” 

said the head of the international centre for 

political violence at the Institute of Defence 

and Strategic Studies based in Singapore. 

“Aviation will be a high value target for a 

long time. An attack on an aviation target is 

much more attractive than a land or maritime 

target.” 

But, in the face of tightened security 

in North America, Europe, Australia and 

New Zealand, terrorists’ primary focus is 

now on weaknesses in the security net in 

parts of Asia, the Middle East, Africa and 

the Caucuses. 

From there they can launch an attack 

on the “white countries”, sidestepping the 

problem of gaining access to an airplane 

near the targets themselves. “Because of the 

difficulty in breaching security in a Western 

country, they will try to do that in the global 

South. Once they get control of an aircraft, 

they are likely to attempt to take a target in 

a developed country,” said Gunaratna, a 

speaker at the International Air Transport 

Association’s (IATA) Avsec World 2005 

conference in Geneva next month. 

He listed four potential terrorist methods. 

“They are still very keen to hijack a plane and 

crash it into a strategic or high-profile target. 

But this is now more difficult. Therefore the 

most likely scenario is a mid-air explosion. 

The third area of attack is the acquisition of 

air missile technology. The fourth is an attack 

when the plane is on the tarmac.” 

That last method means airports are now 

more at risk, said Gunaratna. “Because of the 

difficulty in attacking an airline, terrorists 

have also invested considerably in attacking 

airports. By doing this, a group can achieve 

an effect somewhat close to, although not 

exactly the same as, attacking an airborne 

target.” 

The Asia-Pacific offers two recent 

examples, which clearly denote the threat 

on the ground, he said: 

• In April last year, a bomb blast triggered 

by a mobile phone killed two people at 

Hat Yai airport in Thailand’s Songkhla 

Airports ‘more at risk’ 

from attacks, says 

terrorism expert 

Governments “not adequately protecting 

their airports and aviation assets” 

province, the gateway to its troubled far 

southern region where the government is 

fighting a Muslim insurgency. 

• A year earlier, 21 people died when a 

bomb ripped through Davao City airport 

on the southern Philippine island of 

Mindanao, where rebels from the Moro 

Islamic Liberation Front are active. 

Thailand and the Philippines, together 

with Indonesia, face a significant threat, 

said Gunaratna. 

“That threat cannot be controlled or 

be reduced because of the continuing 

conflicts in those countries. It’s important 

for governments to invest in robust security 

measures to protect their airport and aviation 

assets, something which they have not 

adequately done,” he said. 

Gunaratna also highlighted the risk posed 

by terrorists piloting planes themselves, as was 

the case with 9/11. He gave, as an example, 

admissions by Mohammed Mansour Jabarah, 

the 21-year-old Canadian citizen arrested after 

being sent to southeast Asia to coordinate 

attacks for Al-Qaeda. The U.S. embassy in 

Manila was one prime target. 

“He wrote in his report that the only way 

to attack it was with an airplane. Clearly this 

is a demonstration of how the threshold for 

using airplanes to hit difficult targets has 

been crossed,” Gunaratna said. 

Both Gunaratna and British aviation 

security consultant, Philip Baum, also point 

to the bombing of two Russian passenger 

aircraft last August as evidence that terrorists 

can still hit home, in this case through two 

female Chechen suicide bombers. 

To Gunaratna, the downing of the two 

Tupolevs and the deaths of all 89 on board the 

two planes, was an example of an Al-Qaeda 

style attack in a region that is at risk. 

To Baum it highlighted the failure of 

screening methods and also of the world to 

realise the importance of such events when 

they take place outside the West. 

“Bizarrely, it has gone off the aviation 

industry’s radar screen,” said Baum. 

“Nobody really talks about it any more, 

because it was Russia. Who cares? It was 

not America,” he said. 

“The media has had a huge influence 

there. We just decided the threat of female 

suicide bombers carrying devices internally, 

or underneath their clothing, is too horrific 

for us to think about. But we are now in the 

suicidal era.” 


BUSINESS DIGEST: MAY STATISTICS 

Airline Codes 

RPK Growth by Carrier 

Passenger Load Factor 

Growth by Carrier 

BI 

Royal Brunei Airlines 

MH Malaysia Airlines 

BR 

EVA Airlines 

NH 

All Nippon Airways 

50% 

15 

CI 

China Airlines 

OZ 

Asiana Airlines 

40% 

12 

CX 

Cathay Pacific 

PR 

Philippine Airlines 

30% 

9 

GA 

JL 

KE 

KA 

Garuda 

Japan Airlines 

Korean Airlines 

Dragonair 

SQ 

TG 

VN 

Singapore Airlines 

Thai Airways Int’l 

Vietnam Airlines 

20% 

10% 

0% 

-10% 

6 

3 

0 

Percentage 

(May 05 vs May 04) 

Percentage Points Change 

(May 05 vs May 04) 

-20% 

-3 

Percentage 

(Jun 04-May 05 vs Jun 03-May 04) 

Percentage Points Change 

(Jun 04-May 05 vs Jun 03-May 04) 

-30% 

BI BR CI CX GA JL KA KE MHNH OZ PR SQ TG VN 

-6 


Freight traffic slows 

Compiled and presented by KRIS LIM of the Research and Statistics 

Department of the Association of Asia Pacific Airlines Secretariat. 

The number of international 

passengers carried by the 

Association of Asia Pacific 

Airlines (AAPA) members 

rose 8% to 10.2 million in May. 

In terms of revenue passenger kilometres 

(RPKs), passenger traffic grew 6.7% 

compared to the same month last year. 

Capacity rose 5.9%, enabling the passenger 

load factor (PLF) to reach 69%, up 0.5 

percentage point. 

With the exception of January, capacity 

expansion has been a step behind traffic 

growth this year, contributing to higher 

monthly load factors. However, the gap 

narrowed in March and April, producing 

only marginal improvements in load 

factor. 

On an individual airline basis, Dragonair 

+28.4% (in RPK terms), Malaysia Airlines 

+26.6%, Vietnam Airlines +20.8%, Cathay 

Pacific Airways +13.7% and China Airlines 

+11.6% recorded strong passenger traffic 

volumes. Garuda Indonesia’s traffic 

continued to shrink, however, down 20.7% 

– its seventh consecutive monthly decline. 

Five carriers reported improvements 

in PLF, led by Malaysia Airlines, up 12.9 

percentage points (p.p.). Load factors of 

Dragonair and Vietnam Airlines also 

improved, up 8.2 p.p. and 5.6 p.p. respectively. 

RPK and ASK (In Billions) 

RPK and ASK (In Percentage) 

40 

RPK, ASK and PLF Growth Rates 

(Jun 04 to May 05) 

60 

50 

40 

30 

20 

10 

0 

-10 

J 

J 

J 

J 

RPK, ASK and PLF 


RPK 

ASK 

PLF 

A 

S 

2004 

O 

N 

D 

J 

M 

2005 

RPK 

ASK 

PLF 

80 

60 

40 

20 

0 

A M 

60 

50 

40 

30 

20 

10 

0 

PLF (In Percentage) 

PLF (In Percentage Points) 

-10 

A S O N D J F M A M 

2004 vs. 2003 2005 vs. 2004 

F 

Despite the percentage point improvements, 

the PLFs of the three carriers in May were 

still below the 70% mark. 

Carriers reporting PLFs higher than 

70% were Philippine Airlines (81.5%), EVA 

Air (78%), China Airlines (75.9%), Cathay 

Pacific (75.7%), Asiana Airlines (72.2%) 

and Korean Air (71.2%). 

CARGO 

In contrast with passenger traffic, 

freight traffic fell 1.4% in freight tonne 

kilometres (FTKs). This was partly due 

to weaker traffic on trans-Pacific routes. 

May’s capacity increase, up 3.6%, was 

more modest compared with the previous 

two months. This factor helped to mitigate 

the deterioration in load factor, down 3.2 

percentage points to 65%. 

Individually, Dragonair’s FTKs grew 

45.8%, boosted by additional services 

introduced during the past year. Cathay 

Pacific +7.2%, Malaysia Airlines +4.8% 

and Asiana Airlines +2.1% also registered 

FTK growth. But while China Airlines and 

Singapore Airlines reported flat freight 

volumes, EVA Air, Japan Airlines and 

Korean Air had negative growth. 

Freight load factors (FLF) deteriorated 

for the majority of the carriers with the 

exception of Royal Brunei Airlines, Malaysia 


FTK Growth by Carrier 

Freight Load Factor 

Growth by Carrier 

PAX Growth by Carrier 

50% 

40% 

30% 

20% 

10% 

0% 

15 

10 

5 

0 

40% 

30% 

20% 

10% 

0% 

-10% 

-10% 

-20% 

-30% 


-5 

-10 


-20% 

-30% 

-40% 


Airlines, Philippine Airlines and Thai 

Airways International. Carriers with FLFs 

in excess of 70% were Korean Air (78.1%), 

Asiana Airlines (74%), China Airlines 

(72.2%), EVA Air (71.1%) and Dragonair 

(70.4%). 

Results of the 12 months 

to May 31, 2005 

PASSENGERS 

AAPA consolidated passengers carried 

and RPKs increased by 14.5% and 11.7%, 

respectively. Capacity expanded 10.5%, 

which resulted in a 0.8-percentage point 

improvement in load factor to 73.2%. 

FREIGHT 

AAPA consolidated FTKs moderated 

with an increase of 9.7% for the 12-month 

period. Capacity rose 10.7%, which resulted 

in a 0.6-percentage point decline in load 

factor to 66.7%. 

JUNE 

Preliminary AAPA traffic figures 

for June showed the total number of 

inter national passengers car ried by 

member airlines reached 10.6 million, an 

increase of 5.2% year-on-year. RPKs grew 

6.7% on a slower capacity increase of 6%, 

which resulted in a 0.5 percentage point 

improvement in PLF to 74.7%. 

International freight traffic in FTKs 

rebounded from May’s decline to 3.3% 

year-on-year growth in June. Capacity 

increases, however, outpaced FTK growth 

at 5.9%. Consequently, FLF deteriorated by 

1.7 percentage points to 66.6%. 

Commenting on the figures, AAPA 

FTK, FATK and Freight Load Factor 


FTK and FATK (In Billions) 

4 

J 

J 

FTK 

FATK 

FLF 

A 

S 

2004 

O 

N 

D 

J 

F 

M A 

2005 

80 

60 

40 

20 

0 

M 

FLF (In Percentage) 

director general, Andrew Herdman said: 

“The 7.5% g row th in the nu mber of 

international passengers carried in the first 

half of 2005 is quite encouraging and seems 

to indicate that travel demand is holding up 

well despite the impact of high oil prices. 

“Freight traffic growth has been more 

modest, with FTKs up only 3.4% for the 

first half of the year as a result of slower 

global economic growth.” 

FTK and FATK (In Percentage) 

25 

20 

15 

10 

5 

0 

-5 

-10 

J 

J 

E-mail: krislim@aapa.org.my 

FTK, FATK FLF Growth Rates 


FTK 

FATK 

FLF 

25 

20 

15 

10 

5 

0 

-5 

FLF (In Percentage Points) 

-10 

A S O N D J F M A M 

2004 vs. 2003 2005 vs. 2004 

 

 

 


BUSINESS DIGEST 

AAPA MONTHLY INTERNATIONAL STATISTICS 

Summary of Consolidated Results (thousands) 

2004-5 RPK ASK PLF FTK FATK FLF RTK ATK PAX 

Jun 04 41,795,448 56,359,280 74.2% 4,105,388 6,007,392 68.3% 8,031,469 11,206,859 10,051 

Jul 04 46,030,885 60,141,484 76.5% 4,323,330 6,402,332 67.5% 8,638,722 11,935,667 11,027 

Aug 04 45,623,431 60,566,268 75.3% 4,100,539 6,289,565 65.2% 8,377,124 11,937,904 11,112 

Sep 04 41,777,823 57,554,816 72.6% 4,311,551 6,373,665 67.6% 8,220,096 11,660,016 10,091 

Oct 04 43,196,097 59,279,022 72.9% 4,666,657 6,707,738 69.6% 8,727,367 12,155,508 10,564 

Nov 04 42,236,307 57,951,761 72.9% 4,484,965 6,582,391 68.1% 8,446,650 11,903,779 10,614 

Dec 04 44,840,311 60,984,876 73.5% 4,314,997 6,439,015 67.0% 8,530,183 12,059,024 10,861 

Jan 05 45,106,106 60,896,230 74.1% 3,763,438 6,062,753 62.1% 7,999,409 11,742,067 10,473 

Feb 05 39,996,784 54,723,978 73.1% 3,565,824 5,465,310 65.2% 7,310,842 10,505,704 9,814 

Mar 05 43,992,820 60,071,821 73.2% 4,464,535 6,605,761 67.6% 8,593,356 12,152,816 10,720 

Apr 05 42,119,265 58,795,095 71.6% 4,204,155 6,338,316 66.3% 8,156,067 11,773,946 10,309 

May 05 42,123,950 61,030,566 69.0% 4,075,456 6,269,324 65.0% 8,024,522 11,911,530 10,181 

TOTAL 518,839,227 708,355,197 73.2% 50,380,836 75,543,561 66.7% 99,055,808 140,944,819 125,817 

2004-5 RPK ASK PLF FTK FATK FLF RTK ATK PAX 

Jun 04 54.9% 38.7% 7.7 17.1% 20.1% -1.8 32.8% 28.6% 77.2% 

Jul 04 23.8% 20.8% 1.8 21.5% 18.1% 1.9 22.6% 19.4% 28.5% 

Aug 04 10.1% 13.8% -2.6 13.8% 13.3% 0.3 12.0% 14.2% 13.6% 

Sep 04 9.0% 11.6% -1.8 15.7% 14.8% 0.5 12.3% 13.3% 11.3% 

Oct 04 9.5% 8.9% 0.4 12.7% 12.3% 0.2 11.3% 10.7% 11.2% 

Nov 04 7.9% 6.7% 0.9 8.7% 10.5% -1.1 8.3% 8.7% 12.5% 

Dec 04 6.0% 6.3% -0.3 11.9% 10.1% 1.1 9.1% 8.5% 7.9% 

Jan 05 2.9% 5.1% -1.6 13.4% 10.9% 1.4 8.3% 8.8% 2.0% 

Feb 05 6.7% 4.0% 1.8 -4.3% 0.8% -3.5 0.9% 2.4% 9.8% 

Mar 05 11.9% 7.5% 2.9 4.1% 8.8% -3.1 7.6% 8.4% 13.8% 

Apr 05 6.3% 5.6% 0.5 6.9% 7.0% -0.1 6.6% 6.5% 6.9% 

May 05 6.7% 5.9% 0.5 -1.4% 3.6% -3.2 2.2% 4.8% 8.0% 

GROWTH 11.7% 10.5% 0.8 9.7% 10.7% -0.6 10.7% 10.8% 14.6% 

CY RPK ASK PLF FTK FATK FLF RTK ATK PAX 

2000 465,781,253 622,785,732 74.8% 39,250,854 56,551,376 69.4% 83,062,077 113,639,233 106,313 

2001 449,997,481 632,484,230 71.1% 36,254,186 56,302,344 64.4% 78,370,595 114,075,864 105,860 

2002 471,599,221 633,726,957 74.4% 41,760,845 60,792,084 68.7% 86,388,889 118,421,507 112,506 

2003 424,867,398 610,926,830 69.5% 43,587,366 64,971,618 67.1% 83,402,125 121,028,734 98,875 

2004 505,242,763 692,635,360 72.9% 49,704,793 73,735,163 67.4% 97,093,807 137,542,532 122,012 

2005 3 213,338,925 295,517,690 72.2% 20,073,409 30,741,463 65.3% 40,084,197 58,086,062 51,497 

CY RPK ASK PLF FTK FATK FLF RTK ATK PAX 

2001 -3.4% 1.6% -3.6 -7.6% -0.4% -5.0 -5.6% 0.4% -0.4% 

2002 4.8% 0.2% 3.3 15.2% 8.0% 4.3 10.2% 3.8% 6.3% 

2003 -9.9% -3.6% -4.9 4.4% 6.9% -1.6 -3.5% 2.2% -12.1% 

2004 4 18.9% 13.4% 3.4 14.0% 13.5% 0.3 16.4% 13.6% 23.4% 

2005 3 6.8% 5.6% 0.8 3.5% 6.3% -1.7 5.1% 6.2% 8.0% 

Note: 1. The consolidation includes 16 participating airlines, including Dragonair. 

2. NZ do not participate in this report. 

3. Year-to-date (YTD) figures and comparison. 

4. 2000-2004 figures were revised to include Dragonair.

Singapore Airlines - Orient Aviation

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