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The Battle Of The Pacific (Int'l Edition)


International -- Intl' Business: ASIA

THE BATTLE OF THE PACIFIC (int'l edition)

When Andersen Consulting's Jay Rein travels to Asia from Dallas, he could easily hop a United Airlines Inc. flight for the 15-hour trip to Tokyo. Instead, he flies to Atlanta to pick up a nonstop Japan Air Lines flight, where Asian flight attendants pamper him and he sups on sushi and noodles. "When I'm going to immerse myself in a foreign culture, I like to do that from the start of the trip," says Rein, who travels to Asia once every three months.

He may soon have a lot more choices. A flock of fast-growing Asian airlines is looking to the lucrative transpacific market for their next wave of expansion. That may be good news for business travelers, but it's bad for United and Northwest Airlines Inc. The two U.S. carriers have long dominated the transpacific travel market. For example, they carry more than 60% of passengers between the U.S. and Japan, the busiest sector of the transpacific market. The threat from Asian carriers is coming just as the Japanese government wants to limit the rights of United and Northwest to pick up passengers in Japan for connecting flights into Asia, a lucrative franchise that has earned the two airlines millions over the years.

The competition across the Pacific will only get tougher. For decades, most U.S. travelers to Asia have had to switch planes at Tokyo's Narita Airport, where Northwest, United, and Japan Air Lines hog much of the terminal space. But now, new, longer-range aircraft such as the Boeing 747-400 are allowing Asian carriers to bypass Narita and either fly directly to the U.S. or stop over at less crowded airports. As the first step in its U.S. expansion, Hong Kong-based Cathay Pacific Airways Ltd. will begin flying daily to New York via Vancouver by next Sept. 1. Also on its agenda: United's home base of Chicago and Northwest's busy hub in Detroit.

ON THE LINE. With a bundle of cash and a balance sheet of steel, Singapore Airlines in July added three new weekly flights to San Francisco via Seoul. That gives it 10 flights a week into San Francisco, United's major jumping-off point for Pacific flights. Singapore just ordered 77 of Boeing's long-haul 777 model worth $12.7 billion. That's the largest single order in Boeing's history. Others bent on expanding their transpacific traffic include Korean Air, Asiana Airlines, and a young Chinese carrier, China Southern Airlines.

United and Northwest have a lot on the line. Despite the lingering effects of Japan's recession, the Pacific is by far the most profitable region for United. Last year, the carrier racked up a $344 million operating profit there, two-thirds of its total 1994 operating profit. "The Pacific is a money machine. It's carrying United," says Jon Ash, managing director of Global Aviation Associates in Washington.

At Northwest, which got its start in Asia carrying cargo for the U.S. forces during World War II, the Pacific division was the airline's cash cow for more than three decades. That ended in 1990, when the U.S. and Japanese recessions slashed passenger traffic. Northwest, which carries fewer first-class travelers than United, posted losses in the Pacific for the next 2 1/2 years. But the

Pacific profit picture turned around in mid-1993, and Northwest posted a $103 million operating profit in the region for 1994, according to Michael E. Levine, Northwest's executive vice-president for marketing.

BIG QUESTION. It's easy to see Asia's attraction. The region's economy is growing at more than twice the rate of Europe and the U.S. And that should create a corresponding boom in air traffic. Korea-based Asiana Airlines Inc. expects transpacific traffic to grow at a 9% pace for the next several years. "We're going to see the Asia market move from 25% of world international traffic to closer to 50% by 2010," says consultant Ash. "The growth rates are pretty spectacular."

As competition in the lucrative intra-Asian market intensifies, Asian carriers are looking to transpacific markets as an increasingly important revenue source, says Peter Jacobs, aerospace analyst with Seattle brokerage Ragen MacKenzie Inc. in Seattle. The big question is whether even this booming market can draw enough passengers to fill all these new aircraft. "There's a real risk that somewhere down the line the new capacity will exceed demand," says David Treitel, president at airline consultants Simat Helliesen & Eichner Inc. in New York.

But United and Northwest have more than deep-pocketed competition to worry about. As part of negotiations to allow other U.S. carriers an increased presence at Japan's airports, the Japanese government wants to limit the so-called fifth freedom rights of United and Northwest. Spelled out in the 1952 bilateral air agreement between the U.S. and Japan, these "beyond" rights allow only two U.S. carriers to pick up passengers in Japan and transport them to other spots in Asia. While United and Northwest operate about 160 flights per week from Japan to other points in Asia, JAL is only allowed to fly from Los Angeles to Brazil twice a week. Japanese carriers gripe that because of this restriction, U.S. airlines dominate the traffic between the U.S. and Japan--even though 90% of the travelers on these routes are Japanese.

To back its demands, the Japanese government is now delaying the approval of new routes for U.S. carriers. American Airlines Inc. Chairman Robert L. Crandall has called on the U.S. government to renegotiate the bilaterals because they unfairly protect United and Northwest at the expense of wannabe Asian players such as American, Delta Air Lines, and Continental Airlines. "Our government's actions in recent years have only enhanced the market domination of the Northwest/United duopoly," Crandall told the International Aviation Club in October. Retorts Northwest's Levine: "He wants us out and him in. While I can't blame him, I can't see why it should be a major part of U.S. policy."

Although Washington doesn't appear inclined to Crandall's view, United isn't taking any chances. It commissioned consulting firm Booz, Allen & Hamilton Inc. to analyze the value of fifth freedom rights for U.S. carriers. Their conclusion: Loss of the rights would decrease service, increase fares, and reduce the U.S. balance-of-trade surplus in passenger air traffic with Japan by an estimated $1.7 billion.

Both United and Northwest say they aren't terribly worried right now about the host of Asian carriers that would like a bigger chunk of the transpacific market. "We're very optimistic about the Pacific," says Christopher Bowers, United's senior vice-president for international operations.

But maybe they shouldn't be. Mark Miller, a Washington restaurateur and frequent flier to Asia, can't say enough good things about the service he receives on Singapore Air: "The efficiency and attention to detail are unmatched." With such rave reviews for their competitors, United and Northwest could be heading for big-time turbulence over the Pacific.

Adding More Seats

Seat capacity in nonstop U.S.-Asia flights

August, 1995

270,525

August, 1990

195,192

Data: Simat Helliesen & EichnerBy Susan Chandler in Chicago, with Mark L. Clifford in Hong Kong, Laxmi Nakarmi in Seoul, and Brian Bremner in Tokyo


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