Fly the Friendly Asian Skies

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“Airline
service is getting worse because more people are flying at a time
when carriers have slashed their work forces,” according to Dean
Headley,
a co-author of a study on the airline industry and associate professor
at Wichita State University.

According
to Headley, the U.S. airline system is being taxed because more
planes and more people are flying than at any time since the 9/11
terrorist attacks. However, the aviation infrastructure – runways,
airport slots, and air traffic control systems – is essentially
the same as it was in the delay-plagued era just before the terrorist
attacks, while employment at the seven largest carriers was down
12% in January 2004 compared to a year earlier. Ontime performance
worsened in 2004, with 78.3% of flights arriving on time, down from
82% in 2003. (That 78% of flights arrived on time in 2004 surprised
me, since on a recent trip to the United States not a single flight
I boarded was on time.)

In
2004, complaints about airline services increased by 27%, a far
higher increase than the 3.3% growth in passengers. Moreover, according
to Homeland Security’s acting inspector general, Richard Skinner,
the ability of the Transportation Security Administration (TSA)
screeners “to stop prohibited items from being carried through the
sterile areas of the airports fared no better than the performance
of screeners prior to September 11, 2001″, despite the government
having taken over the task at about 450 airports in early 2002 and
hired 45,000 workers.

In
the meantime, U.S. airlines have piled up huge losses and the market
capitalization of AMR Corp. has declined to $1.6 billion, Delta
to $509 million, UAL to $116 million, and Northwest to $486 million.
By comparison, Southwest Airlines has a market capitalization of
$11.5 billion and Jet Blue of $2 billion, while FedEx alone has,
at $26 billion, a larger market value than all of the U.S. passenger
carriers combined!

Across
the Pacific Ocean, in India, an airline started in 1993 by a former
travel agent, Mr. Naresh Goyal, recently went public, commanding
a 45%
share of the Indian airline market and having, following its IPO,
a market value of $2.8 billion. Jet Airways is known for its impeccable
service standards and punctual arrivals and departures, but it will
face increasing competition from a dozen or so new low-cost airlines
that have either already begun servicing or will soon start to service
the Indian passenger airline market, which is growing by approximately
25% per annum.

In
2004 it had “only” 15 million passengers; however, it is expected
to grow to 50 million passengers in five years’ time. What is remarkable
is that India’s Jet Airways, with a market capitalization of $2.8
billion, has only 42 aircrafts, compared to 71 for America’s Jet
Blue and more than 1,000 for AMR Corp., the world’s largest carrier,
with revenues in 2004 of US$18.6 billion.

Now,
I am not suggesting to invest in Jet Airways – at its current price,
it is probably overvalued – but it is nevertheless interesting that,
in Asia, airlines seem to manage not only to make money, but also
to provide excellent services, while in the United States, the airline
industry has not only lost billions of dollars in the last few years,
but also offers poor services.

Not
that conditions are far better in Europe: Air France is by far the
world’s worst airline, while the once proud Swissair, which in the
1960s and 1970s was frequently voted as the world’s best airline,
has been taken over (fortunately) by Germany’s Lufthansa following
massive losses caused by its management’s complete incompetence.
Still, of the ten airports that were voted the best in the world,
Europe managed to have three, with Munich fourth, Amsterdam eighth,
and Copenhagen ninth. All the other ranks among the best ten airports
were won by Asian airports. Not surprisingly, our great service
economy – the United States – had none!

I
recently travelled to Wuhan, a large city in China and an important
transportation and distribution hub. It is located about halfway
between Hong Kong and Beijing on the Yangtze River and is worth
a visit for its museum, which houses the tomb of Marquis Yi of Zeng,
discovered in 1977, which contained not only 21 female consorts,
but also an assortment of weapons, armors, and an L-shaped three-tiered
bell rack made from massive lacquered wooden beams, capped and reinforced
by bronze sheaths and supported by bronze figures on domed bases.
Sixty-four bronze bells on the rack were in graduated sizes, and
most still hung on bronze suspension armatures attached to the rack.
The remarkable state of preservation of the bells, and the wealth
of information supplied by the inscriptions on them, have surprised
musicologists from around the world.

So,
if you find yourself in Wuhan, which is not a particularly nice
city, go and visit its museum and the 64 well-displayed bells of
Marquis Yi, which are not only impressive for their age (over 2,400
years old), but are also highly interesting from a musicology point
of view.

From
Wuhan, I flew to Shenzhen, which lies adjacent to Hong Kong’s New
Territories. I hadn’t been to Shenzhen’s airport for 20 years, when
it had only a landing strip and a shed as a terminal. Today, it
is an impressive airport with heavy traffic to numerous Chinese
cities. It has around 15 flights daily to Beijing and more than
20 flights daily to Shanghai – not bad, given that 20 years ago
it had just a few flights a week, and considering that Hong Kong
Airport has around the same number of daily flights to Beijing and
just a few more to Shanghai.

In
Asia, air traffic is exploding everywhere, with the number of passengers
growing at 20–25% annual rates in countries such as China and
India, and with numerous new airports taking the bulk of the traffic
increase. Last year, Guangzhou opened a state-of-the-art international
airport (Baiyun Airport), which is designed to become the air transport
hub for the Pearl River Delta (certainly for cargo) and southern
China, and connecting with Southeast Asia. Baiyun Airport’s terminal
can currently accommodate 25 million passengers a year with its
two runways and can handle the world’s third-highest cargo capacity.
Once the second phase of Baiyun Airport is completed by 2010, the
airport will be able to handle 80 million passengers! There is little
doubt that both the Shenzhen and Baiyun airports will be mighty
competitors for Hong Kong Airport – especially as far as cargo
is concerned.

Currently,
Hong Kong is the world’s largest handler of international cargo,
with 80% of that freight coming from the Pearl River Delta, which
produces about a third of China’s exports. (In 2004, China surpassed
Japan as the world’s third-largest exporter.) However, with a rapidly
improving infrastructure in China, I would expect the share of Hong
Kong’s international cargo originating from southern China to decline
meaningfully as both Shenzhen and Baiyun gain market share. This
doesn’t necessarily mean that traffic at Hong Kong Airport will
decline, because while the overall Asian passenger and cargo market
is expanding rapidly, it is unlikely to grow significantly. This
is already the case for the Hong Kong port, which has lost market
share to ports located in southern China.

Still,
the point I really wish to make is that in Asia, markets for goods
and services are expanding rapidly because they are not saturated
and they are becoming more and more affordable to the masses, as
a result of personal income gains and price declines arising from
huge capital investments. (In 2004,
China added steel-producing capacities of 51.4 million tons, which
is almost equal to the combined output of Brazil and India.) The
problem in the United States and in Western Europe is that markets
are largely saturated and real incomes are hardly growing, which
has several consequences in terms of economic growth and the profitability
of the corporate sector.

June
6, 2005

Dr.
Marc Faber [send him mail] is the author of Tomorrow’s
Gold
. This first appeared on Bill Bonner’s Daily Reckoning.

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