IndiaEntrepreneursventure along afar from smoothflight pathPage 2

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SingaporeHigh­techmanufacturershead to island ofinnovationPage 2

South KoreaSeoul seeks toconquer foreignmarkets fordefence hardwarePage 3

JapanAirbus for the firsttime has scoreda victory with aBoeing clientPage 4

AustraliaQuantas flies intoturbulence over itsown territoryPage 4

FT SPECIAL REPORT

AerospaceTuesday February 11 2014 www.ft.com/reports | @ftreports

Asia’s growing middle classesand their desire to travel aremaking the region home tosome of the world’s fastestexpanding aviation markets.

For example, Airbus expects Chinato replace the US as the most valuablemarket in the world for passenger jetdeliveries by about 2030, and severalother Asian countries – includingIndia and Indonesia – have hugepotential for aircraft orders.

But at the Singapore air show,which starts today, this optimismabout the long-term future of Asia’saviation markets will be tempered byconcerns about slowing economicgrowth and currency turmoil, andwhether this could result in theregion’s airlines cancelling orderswith Airbus and Boeing.

The last strong year for Asianairlines was 2010, when the continentovertook North America to becomethe largest source of passenger traffic,having overtaken Europe severalyears earlier.

By 2030, 49 per cent of all trafficwill originate in Asia, compared with37 per cent currently, according toBoston Consulting Group.

BCG estimates 1bn people in Asiawill have annual earnings of at least$15,000 by 2030, and will therefore beable to afford to fly. “The vast major-ity of these ‘next billion’ travellers

will come from China, India, Indone-sia, Japan and South Korea,” saysVincent Lui, a BCG partner.

However, these attractive long-termgrowth prospects contrast with recentperformance. The International AirTransport Association (Iata) estimatesthat Asian carriers have seen net prof-its fall from $11.1bn in 2010 to $3.2bnin 2013.

The biggest factor behind Asiancarriers’ declining earnings has beenthe weak state of the air cargo marketsince the onset of the global financialcrisis.

After a brief rebound in 2010, thecargo market has been shrinking andthis hit Asian carriers hard becausethey account for about 40 per cent ofthe world’s freight traffic by value, astheir cargo fleets fly high-priced prod-ucts made in the region to westerncountries.

Asian carriers’ average freightcharges – called yields – have beenpushed down by excess capacity, inpart as a result of airlines expandingtheir passenger fleets.

“Yields for cargo have been fallingquite sharply partly because of thesuccess of the passenger business,which has brought on new aircraft toserve passenger markets with cargocapacity in the hold,” says BrianPearce, chief economist at Iata.

“That has led to more and morecapacity chasing less and less cargovolume, forcing prices down and dam-aging profitability in [the cargo] partof the business.”

But it would be wrong to think ofAsia as one homogeneous travel mar-ket.

Rather, it is a series of discrete –mainly country-specific – marketsthat are expanding at different rates.

Iata estimates that China’s domesticpassenger traffic increased 11.7 percent last year, reflecting robust,albeit slowing, economic growth. Thiswas well ahead of global trafficgrowth of 5.2 per cent.

By contrast, Indian domestic trafficincreased by 4 per cent, as growthslowed markedly and the country’sairlines struggled with poor infra-structure and high fuel taxes. King-fisher Airlines, which was groundedby regulators in 2012, is seen asemblematic of the financial problemsaffecting Indian carriers.

“The Indian market has huge poten-tial, but has been a bloodbath for car-riers for several years,” says AndrewHerdman, director-general of theAssociation of Asia Pacific Airlines.

Countries in the Association ofSoutheast Asian Nations (Asean),whose members include Indonesia,Malaysia, the Philippines, Singaporeand Thailand, have taken severalsteps towards a liberalised aviationmarket that supports more flightsbetween big cities. This initiative hasunderpinned the emergence ofAirAsia as the region’s largestlow-cost short-haul carrier.

But Kuala Lumpur-listed AirAsia,founded by Tony Fernandes, the flam-boyant entrepreneur, faces intens-ifying competition from other budget

airlines. Last year, Lion Air, alow-cost carrier based in Indonesiathat has placed large orders with Air-bus and Boeing for short-haul passen-ger jets, started a business in Malay-sia.

Rising competition in Asia is notconfined to short-haul routes. Someairlines that focus on long-distanceroutes are also under pressure.

Singapore Airlines spoke of “intensecompetition” as it reported a 3.5 percent fall in average fares in the firsthalf of its 2013-14 fiscal year comparedwith 2012-13. This competitioninvolves fast-growing Gulf carriers,led by Emirates Airline, which areflying between Asia and Europe.

Andrew Lobbenberg, analyst atHSBC, says Singapore Airlines is thecompany “most exposed” to Gulf car-riers because of its large Europe-Australia business, but he also high-lights Malaysia Airlines and Thai Air-ways as vulnerable.

With more liberalisation in the off-ing, there are likely to be moreentrants in Asian aviation markets.And the liberalisation will not just bewithin the region – through the pro-posed completion of the single avia-tion market between Asean members– but also on routes outside Asia.

For example, the European Commis-sion, the EU’s executive body, is hop-ing to negotiate an agreement withthe Asean countries that will enableEU carriers to do more flying to thisbloc.

Consultants say that, in the longterm, there is a compelling case forconsolidation involving Asian air-lines, but they acknowledge that itwill probably be contingent on somegovernments being willing to relin-quish control of their flag carriers –

and even letting some of them go outof business.

Alex Dichter, a director at McKin-sey, the global consultancy, says:“While we admit that the cultural,political and regulatory barriers toconsolidation in Asia are significant,we see no way round this end-game.

“The combined pressures of Mid-East carrier growth and intra-Asiamarket liberalisation, alongsideincreases in labour costs, airportcharges and fuel, will eventually betoo much to bear.”

Meanwhile, some analysts are ques-tioning whether Airbus and Boeingmay have to cut production of theiraircraft – several of which are beingmade at record rates – if emerging-market economies suffer a crunchsimilar to the Asian financial crisis ofthe late 1990s.

Asia accounts for a third of manu-facturers’ order backlogs – larger thanany other region – and analysts sayany drawn-out crisis could reduce airtravel and force some airlines to can-cel orders or defer deliveries.

Nick Cunningham, analyst atAgency Partners, does not see the cur-rent weakness in developing coun-tries’ financial markets as being likelyto lead to reduced production by Air-bus and Boeing in the short term.

Rather, he sees as a more plausiblescenario that reduced Asian economicgrowth will accentuate a predictedslowdown in orders for the aircraftmakers, that, in the medium to longterm, could result in production cuts.

“If we are going to see the impact ofany significant [short-term] weaknessin Asia or emerging markets gener-ally,” he says, “it will be as a weaken-ing of order intake rather than animpact on [aircraft] deliveries.”

Optimism tempered by jittersHopes and fears arefocused on the crucialAsian market, writesAndrew Parker

The biggest factor behindAsian carriers’ decliningearnings is the weak stateof the air cargo market

On FT.com »High FlyingA window into theworld of privateand corporateaviationft.com/high­flying

Twitter chatA bumpy ride foraerospace in Asia?Join us at noonGMTft.com/aero

Rising stakes: an AirAsia aircraft prepares to depart Singapore’s Changi airport. The Kuala Lumpur­listed carrier is the region’s low­cost, short­haul market leader, but it faces increasing competition Getty

Even before he retired lastmonth, the former head ofRaytheon’s internationalbusiness talked franklyabout what drives the salesof the US defence com-pany’s Patriot defensivesystem, which shoots downenemy missiles.

“When North Koreathreatens, it helps oursales,” Thomas Culligansaid, noting that whenPyongyang test-fired mis-siles last year, Congressreceived expressions ofinterest from countriesintending to buy or upgradePatriot missile systems.

North Korea is one of sev-eral threats stoking Asia’sarms race, to the advantageof western defence contrac-tors such as Raytheon, non-western suppliers such asRussia, and emerging com-petitors from Singapore toSouth Korea.

Regional rivalries, theneed to keep shipping lanesopen, disputes overresource-rich territories,and China’s growing mili-tary heft have contributed

to Asia’s defence spendingspree – as has the growingwealth of its countries.

For western defence com-panies hit by decliningbudgets at home, Asia hasbecome a prime target.China, however, remainsout of bounds as a customerbecause of US and EU sanc-tions that have restrictedarms sales to Beijing sinceits bloody TiananmenSquare crackdown on dem-onstrators in 1989.

In 2013, Asia spent $322bnon military budgets, upfrom $262bn in 2010, withChina growing more domi-nant. Military spending inChina grew 43.2 per centfrom 2008 to 2013, accordingto data this month from theInternational Institute forStrategic Studies.

Asia’s outlays “are fuel-ling heightened militaryprocurement in a regionreplete with conflicting ter-ritorial claims as well aslongstanding potentialflashpoints,” the IISS warnsin its annual review of theworld’s military balance.

The dispute between thesix nations that claim theoil-rich Spratly Islands inthe South China Sea hasbeen a catalyst, especiallyfor ships and submarines,analysts say.

In 2011 – after Chinesepatrol boats attacked

Vietnamese oil explorationships and China’s navystaged live fire drills nearthe Spratlys – BenignoAquino, president of thePhilippines, told his Chi-nese counterpart: “Whenwe have these incidents,does it not promote an armsrace within the region? Andwhen there is an arms race,does not the potential forconflict increase?”

Acknowledging that hiscountry was no match forChina, he warned thatinternational incidentsaround the islands mightforce Manila to upgrade itsarms. However, its militaryspending grew just 4 percent from 2011 to 2012.

By contrast Vietnam,another party to the Sprat-lys dispute, has ratchetedup its spending, doubling itsince 2005 to $3.4bn in 2012,according to the StockholmInternational PeaceResearch Institute. In thepast two months, it hasreceived two of six Kilo-class diesel-electric subma-rines ordered from Russia.

Russia has benefited fromits close trade ties withVietnam, and still sells onein every four military air-craft in the region.

Meanwhile, China andUkraine are making inroadsin areas such as vehicles,where two-thirds of south-

east Asian defence budgetswent to non-western suppli-ers between 2008 and 2012.

Europe and the US stilldominate the region in gen-eral defence sales. But theyare especially dominant assuppliers of sophisticatedequipment, with three-quar-ters of Asia’s market forhigh-tech equipment suchas radar, sonar, communi-cations systems and com-plex weapons, according toIHS Jane’s, the analysts.

Executives and analystsexpect their dominance tocontinue as they try to com-pensate for decliningdomestic sales.

But there are rivals onthe horizon, and some areworking hard to be able tooffer more sophisticatedand valuable equipment.

When South Korea soldits KAI T-50 fast jets to thePhilippines, and SingaporeTechnology supplied mili-tary communications sys-tems to Thailand, the coun-tries revealed themselves as

two of the biggest threats towestern dominance in Asia.

Asian countries are alsoforcing suppliers to offereconomic benefits – or off-sets – along with their mili-tary hardware.

“The days of grabbing adhoc benefits by relying onlow-value counter-trade –such as chickens for air-craft and palm oil for sub-marines – are largely over,”says Guy Anderson, an ana-lyst at IHS Jane’s.

“Buyers in southeast Asiaare asking for – and increas-ingly getting – partnershipstatus in the joint develop-ment of military equip-ment.”

Asian governments areusing this access to techno-logical knowhow to helpdomestic businesses grow.

If Asia’s governments getthis approach right in thelong term, their companiesalso stand to benefit fromthreats such as NorthKorea’s missiles andregional territorial disputes.

Tensions in Asia helpkeep sales buoyantDefence

Rivalries are drivinga regional arms race,says Carola Hoyos

Last May, bad weatherforced a China SouthernAirlines Airbus A380 air-liner to make an unsched-uled landing.

The airliner was halfwaythrough its journey fromBeijing to the southern cityof Guangzhou and the onlynearby airport with a run-way long enough to accom-modate the superjumbo wasWuhan’s Tianhe Interna-tional Airport.

The runway at the nextbig airport along the route,Huanghua in Hunan’s pro-vincial capital, Changsha,was too short.

Currently, just nine air-ports in China can handlean Airbus A380. Anothereight that have long enoughrunways are designated asalternate landing sites incase of emergency.

At present, these emer-gency sites lack the neces-sary facilities to handle reg-ular flights. However, inanother example of China’scontinuing aviation con-struction boom, by 2016Huanghua will be able to

accommodate the world’slargest passenger aircraft.

Marc Allen, Boeing’s out-going China head, says:“When you realise howmany large cities in Chinaare going to have major air-ports built in the 2008 to2018 timeframe, it’s going tobe important that an aero-plane that arrives in 2020 to2025 fits the current infra-structure.

“We’re not talking about

one so-called national air-port, such as a Heathrow,we’re talking about a coun-try that’s going to have 20,30 major airports.”

According to the Chinesegovernment’s 12th five-yearplan, the total number ofairports is set to expandfrom 175 in 2010 to 230 in2015.

One of the biggest on theplanning board is an inter-national hub that will bebuilt on Beijing’s southernoutskirts. The capital’s

current international air-port is located northeast ofthe city.

With a planned area ofmore than 15,000 square kil-ometres, the four-runwayfacility will be bigger thanBermuda and is scheduledfor completion by 2018. Atleast 116,000 people living inthe area will have to berelocated.

The expansion is not justhappening in large cities.“The number of new flightsand airports in second- andthird-tier cities will increaserapidly,” says Ren Haoning,an analyst at the CIC Indus-try Research Center.

He adds: “Combined witha decline in governmentintervention in the sector,the industry will see asurge in competition.”

The construction boomwill feed – and feed off – asurge in aircraft sales,although these remain care-fully regulated.

“The government is clearon what the overall macroobjectives are for China’saviation sector,” says MrAllen.

“It is important to avoidthe excess capacity that hasbeen a problem in otherindustries, so the ministriesand the regulator are allvery careful to think at

Continued on Page 3

Pace of airport buildingset to increase rapidlyChina

Boom will help feedsales of aircraft,reports Tom Mitchell

‘We’re talking abouta country that’sgoing to have 20,30 major airports’

Marc Allen, Boeing

On guard: a Vietnamese sailor on duty in the Spratlys Getty

2 ★ FINANCIAL TIMES TUESDAY FEBRUARY 11 2014

When it comes to braggingrights for cutting-edgedevelopments in theaerospace business,Singapore can shout louderthan most.

In the past two years,the world’s two leadingmakers of airliner jetengines – and thesophisticated technologythat goes into one of theirkey components, fan blades– have invested heavily inmanufacturing facilities inthe city-state.

Like many, they pickedSingapore as it offers arelatively low corporate taxrate (at a basic 17 percent), a stable politicalenvironment andpredictable and transparentregulations. Thegovernment has used theseassets to attractinvestment in a series ofstrategic sector “hubs”, ofwhich aerospace is one.

In 2006, that effort movedinto high gear when workstarted on convertingSeletar airport on theisland’s eastern edge –once a Royal Air Forcebase – into what is nowthe 320-hectare SeletarAerospace Park.

In February 2012, Rolls-Royce opened a campusthere, where the UK-listedcompany is assembling itsTrent series of enginesoutside Britain for the firsttime. The facility alsoproduces titanium fanblades that the companysays allow a weight savingof almost a third overconventional fan blades.The rapidly rotatingcomponents, which propela tonne of air per secondthrough the engine, haveto be both strong andlight.

US rival Pratt & Whitneya year later broke groundon facilities – also atSeletar – that will makefan blades from 2015, aswell as high-pressureturbine discs the next year.

With a combinedinvestment of $810m – thebulk of which is beingmade by the UK company– the two developmentsunderscore how rapidlySingapore has become aglobal manufacturing hubfor the aerospace industry.

The city-state alsoaccounts for a quarter ofAsia’s maintenance, repairand overhaul of aircraftand components, accordingto the country’s EconomicDevelopment Board.

Singapore’s initiative hasbeen a calculated bet onthe growth of aerospace inAsia, which is predicted byanalysts to account for oneof every three new aircraftdeliveries by 2020.

“The growth in thecustomer base is in Asiaand that’s influenced ourthinking on where weinvest,” says JulianAscherson, Rolls-Royce’sSingapore-based regionaldirector for countries inthe Association ofSoutheast Asian Nations(Asean) and the Pacific.

Singapore has alsobenefited from the push bymanufacturers to developmore fuel-efficient engines

– hence the investments atSeletar by Rolls-Royce andPratt & Whitney. While theformer has had a presencein the island nation sincethe 1950s, the companyonly began manufacturingthere in 2012.

Similarly, while Pratt &Whitney has a 30-yearrecord in Singapore, theSeletar facility will be thefirst time it will be makingengines in the city-state.This will also mark thefirst time that Pratt &Whitney will make hybridfan blades for thecompany’s new-generationgeared turbofan (GTF)engine outside the US.

The British company’sfacility is operating at 20per cent of its capacitywith production of Trent900 engines, which powerthe Airbus A380 aircraft. Itwill add production of theTrent 1000 – fitted to theBoeing 787 Dreamlinerfamily – by midyear.

By 2016 Seletar is set toproduce 250 Trent engines,representing half thecompany’s projectedannual demand for 500engines over the next sixto seven years. The otherhalf of that demand will besupplied by Rolls-Royce’sDerby plant in the UK.

In Singapore, the supplyof qualified workers hasbeen crucial. About 90 percent of Rolls-Royce’semployees are locals. Mostof the technicians andassembly workers atSeletar are hired straightout of the government-

backed Institute ofTechnical Education, whichhas 25,000 students invocational training at anyone time.

One effect for Rolls-Royce of committing itselfto making sophisticatedengines and parts in Asiais that its suppliers havebeen following it east, andothers have been foundwithin the region.

“From a supply chainperspective, theseinvestments have not goneunnoticed,” says MrAscherson.

RLC Engineering Group,a company based on theUK’s Isle of Man thatmakes titanium alloy thatgoes into fan blades, issetting up a facility next toRolls-Royce’s in Seletar.

“They [RLC] won’t havethe international footprintor experience, necessarily,but they need to expandbecause we are[expanding], so we’ve beenable to work with them,”says Mr Ascherson.

Rolls-Royce continues touse Japanese suppliers thatfor some years have beensupplying parts for enginesmade at its Derby facility.

But it is also usingsuppliers in southeast Asia,including Leistritz ofGermany, which hasmanufacturing facilities inThailand. There are also“three or four” supplierslocally in Singapore.“That’s going to grow, Ithink,” says Mr Ascherson.

Manufacturershead to islandof innovationSingapore

Production hub planis paying off, saysJeremy Grant

The developmentsunderscore howrapidly Singaporehas become amanufacturing hub

The air cargo market hasbeen in the doldrums sincethe global financial crisisbegan, but a few brightspots are providing hopethat recovery is on the way.

The value of the sector,which moves everythingfrom pharmaceuticals tofresh fruit and consumerelectronics was estimatedby Boeing, the aircraftmaker, at $240bn in 2013.

The latest figures fromthe International Air Trans-

port Association (Iata) pointto a moderate improvementover the next five years.

In 2013 there was year-on-year growth of 1.4 per centacross the world, measuredin freight tonne kilometres.Demand picked up in thelatter half of the year, butimprovement was patchy.

After the industry wasdragged through the worstdecline in its history in 2008and 2009, with a briefpick-up in 2010, is this thestart of a recovery?

Brian Pearce, chief econo-mist at Iata, argues it is. “Ithink we’re seeing a cycli-cal recovery, because busi-ness confidence and globalindustrial production arepicking up and we’re seeingair freight respond to that.”

However, it is not quitethe revival the industrywould like. It comes amid

signs of significant struc-tural change. At the sametime, it does not mirror therise in passenger traffic.

Mr Pearce says: “It’s aweak recovery becauseoverall international tradedoesn’t seem to be respond-ing to the increase in spend-ing and production.”

The trend towards reshor-ing of manufacturing backto the developed world addsto the difficulties.

That said, Asia is amongthe regions that haveshown some glimmers ofhope, despite a decline of 1per cent in 2013 comparedwith 2012. In Europe, cargovolumes grew almost 2 percent last year.

Iata points to a reboundin November, and a pickupin trade volumes in recentweeks to herald rosier pros-pects ahead for Asian cargo

carriers, which make upabout 40 per cent of the glo-bal market. The trade bodyalso sees these data as anindicator of a wider upturn.

Hong Kong-based CathayPacific, the biggest Asiancargo airline by freight car-ried, remains cautious, how-ever. “Our view is that 2014will be pretty similar to2013,” says Mark Sutch,general manager of cargosales. Mr Sutch suggeststhat this year will be a “bitbetter” than last but “notan all-singing, all-dancingrecovery”. He explains theNovember boost as a fillipseen every year.

“What we saw [then] ...was the traditional fourth-quarter peak. That didn’tsustain itself much beyondthe middle of December.”

Overcapacity is thebiggest problem facing

carriers. Middle Eastern air-lines such as Emirates, theworld’s biggest freight air-line by tonnage carried,have been taking deliveryof wide-body aircraft suchas the Boeing 777 and Air-bus A380.

With the deliveries ofthose passenger aircraft hascome a glut of extra freightcapacity in their holds: theMiddle East freight marketgrew nearly 13 per cent lastyear.

Singapore Airlines Cargoreported an operating lossof $167m in the year toMarch 2013, down 5.1 percent because of weakdemand and depressedyields.

“In 2008, Cathay ran 32freighters a week fromHong Kong to Europe,” saysMr Sutch. “This year andlast, it will average about 11

a week.” He adds: “Iwouldn’t be too hopefulabout [the market] evercoming back to the year of2010, but if there is a part ofthe world you want to bein, then we’re very wellplaced in Hong Kong.”

Cathay is working on

other opportunities, involv-ing Mexico, India and Viet-nam, among others. “It’sabout where the new mar-kets are and making sureyou’re there,” says MrSutch.

Iata identifies tradebetween emerging marketsas particularly promising,for example between Chinaand Africa, where MrPearce expects to see “verystrong growth as new tradelanes open”.

But Thomas Cullen, ana-lyst at Transport Intelli-gence, cites another factorin the market’s malaise: therise in the volume of freightcarried by sea.

Industry figures point toApple’s decision to shipsome of its iPad tablets bysea rather than air as anexample of this trend.

“The problem is the

market has changed,” MrCullen says. “The questionis to what extent a recoverywill benefit air cargo.”

Alternative modes oftransport are not the onlythreat.

High fuel prices willcontinue to put pressure onairlines. Competition issuesloom if, as seems likely, thecargo industry follows thepassenger market in form-ing closer relationships thatrequire regulatory approval.

This sense of pessimismmight be explained by thetough times the industryhas already gone through,says Mr Pearce at Iata.

“There is undoubtedly abit of conditioning byrecent experience. Everyonehas seen two to three yearsof shrinking. That dullsconfidence in a dynamicupturn.”

Bright spots as cargo market struggles for signs of modest upturn

Mark Sutch: cautious

Since New Delhi decided toallow foreign airlines toown stakes in Indiandomestic carriers 17 monthsago, Etihad, AirAsia andSingapore Airlines haveunveiled plans to capitaliseon what they see as theuntapped potential ofIndia’s aviation industry.

Indian entrepreneurs arealso hoping for a slice of theaction. An Andhra Pradesh-based private carrier, AirCosta, began operating inOctober and two more aimto lift off soon.

Entrants face a bumpyride. Operating costs areamong the world’s highestand potential passengersare very price sensitive. In2012, this combinationforced Kingfisher Airlines,owned by Indian liquor

baron Vijay Mallya, out ofthe skies. Most remainingIndian carriers are lossmak-ers and the industry has acombined debt burden ofabout $20bn.

Analysts are not expect-ing a substantive improve-ment quickly. Kapil Kaul,chief executive for southAsia of the Centre for AsiaPacific Aviation (Capa),says: “The domestic airlinebusiness in India is not via-ble. Luckily, we have [own-ers] who are very brave andcontinue to absorb massivelosses and keep the systemalive structurally.”

India’s domestic airlineindustry has huge potential;just 61m domestic flightswere taken last year by apopulation of 1.3bn.

But local airlines areweighed down by policiesrooted in New Delhi’s oldsocialist-era vision of flyingas an elite luxury, ratherthan as an essential build-ing block of a modern econ-omy.

States still subject jet fuelto punitive taxes as high as

30 per cent, making pricesamong the world’s highest.Airport charges are alsohigh, as infrastructuredevelopers finance glitter-ing airports after years ofdelay.

Indians have shownthemselves to be highlysensitive to even small fareincreases. This makes ithard for carriers when fuelcosts rise or the rupeedepreciates.

Pressures on carriershave been exacerbated byAir India, the unpopular,lossmaking state-owned air-line, which has been keptaloft by a seemingly endlessflow of taxpayer funds.

The state carrier has longbeen a highly aggressive –and many argue, deeply dis-torting – competitor. Itslashes fares to discomfitrivals, even as it losesmoney, and is unable to payits bills and sometimes staffsalaries.

The grounding of King-fisher Airlines broughtsome relief in reducingcapacity and increasing

pricing power. Carriershave since been hit by thedepreciation of the rupee,which has once again putpressure on costs.

The picture is not improv-ing. Capa estimates thatIndia’s carriers – led by AirIndia and Jet Airways,India’s second-largest pri-

vate airline by marketshare – lost a combined$500m from September toDecember. This is normallyone of the two best quartersfor an industry withextreme seasonal fluctua-tions.

“When the industry isreporting losses in peak sea-son,” reported Capa, “it isclear the domestic Indian

aviation industry has a fun-damental problem.”

IndiGo, India’s largestdomestic airline, which car-ries some 30 per cent ofdomestic passengers, is themain exception to this dis-mal picture, managing toreport steady profits.

However, competitivepressure in the market isexpected to intensify in themonths ahead. Etihad, theAbu Dhabi state carrier,has invested $380m for a 24per cent stake in Jet Air-ways.

AirAsia, the Malaysia-based low-cost carrier, andSingapore Airlines are set-ting up Indian carriers.Both will have the Tatagroup, the powerful Mum-bai conglomerate, as theirpartner.

Analysts say these for-eign carriers have a strongrationale for venturing intoIndia’s domestic market,which will help them steermore of the growingnumber of Indians flyingabroad on to their owninternational networks.

Further Indian playersare plunging into the fray.Aside from Air Costa,which was started by aVijayawada-based realestate group, Air Pegasus,owned by a Bangalore-based ground-handling com-pany, is due to start flyingregional routes in the com-ing months. A charter air-line, Air One, is also seek-ing a licence to start ascheduled service.

Such launches might reapa good reward. AmberDubey, partner and head ofaerospace at KPMG, theconsultancy, says India stillhas dozens of small citieswith airports that have noregular flights – which is apotentially huge untappedmarket for carriers with air-craft of less than 100 seats.

“There are opportunitiesin certain locations,” MrDubey says. “With reducedairport charges, tax rebateson jet fuel, and local gov-ernment support, thisopportunity is likely togrow over the next twoyears.”

Entrepreneurs venture along bumpy flight pathIndia

The potential is hugeand the hurdles high,says Amy Kazmin

The airline industry is nostranger to personality-driven battles. Now, twosoutheast Asian heavy-weights are facing off, as

Tony Fernandes, the big-talkingMalaysian founder and chief execu-tive of AirAsia, takes on RusdiKirana, the publicity-shy founder ofIndonesia’s Lion Air.

The two biggest and fastest-growinglow-cost carriers in Asia have becomeimportant customers for airlinermanufacturers Boeing and Airbus,with hundreds of aircraft on orderbetween them, and their ambitiousexpansion plans are pushing them tocompete head-to-head.

Last year, Lion entered AirAsia’shome market after setting up a jointventure, called Malindo Air, withMalaysia’s National Aerospace &Defence Industries, while AirAsia hasbeen trying to expand in Indonesiaafter the jet-setting Mr Fernandessymbolically acquired an apartmentin Jakarta.

In an industry where profit marginsare thin and susceptible to volatileoutside factors such as oil prices, willintensifying competition betweenLion and AirAsia develop into a Dar-winian battle of survival? Or is thereenough demand from the fast-growingmiddle class in this region to keepboth going strong?

Raman Narayanan, AirAsia’s headof government relations for southeastAsia, says his airline is convincedthat, with the air travel industry stillso under-developed, there is plenty ofroom for both to thrive.

“The market is definitely bigenough,” he says. “Southeast Asia has600m people who are divided by largebodies of water. Compare that withthe US, where there are 320m peopleand a fantastic highway network. Or

Europe, where there are 400m peopleand fantastic rail networks. And yet,while the US has 7,050 commercialaircraft in use and Europe has 4,200,southeast Asia still only has 1,050.”

It is no surprise, he adds, that thisregion currently has 1,200 more air-craft on order, led by Lion and AirAsia.

Underpinning his bullish view arethe robust rates of economic growthin the region’s big emerging markets– Indonesia, Vietnam and thePhilippines – and the large middleclasses in these countries.

In Indonesia, southeast Asia’s big-gest economy, the middle class willnearly double from 74m to 140m by2020, according to projections fromBoston Consulting Group, whichdefines this grouping as those house-holds spending more than Rp2m ($164)a month.

“Over the next 10 years, there willbe more competition, but the region isgrowing quickly and more people willbe able to afford to travel,” says MrNarayanan. “When people get moneyin southeast Asia, the first thing theydo is buy a car and then they taketheir family on an overseas holiday.It’s all about status.”

Brendan Sobie, a Singapore-basedanalyst at the Centre for Aviation,a consultancy, agrees that, againstthis macroeconomic backdrop, compe-tition between Mr Fernandes and MrKirana is “not necessarily a zero-sumgame”.

But, he says, while the tycoons’

airlines supplement each other insome areas, helping to deepen the airtravel market, they are going head-to-head on some routes.

“Lion has gone into AirAsia’s twolargest markets in Malaysia and Thai-land and AirAsia is trying to expandin Lion’s largest market,” says MrSobie.

Taking on a powerful incumbent isnever easy. AirAsia tried to get aleg-up by taking over Batavia Air, anIndonesian carrier, in 2012. But itaborted the $80m deal because ofcorporate governance issues and its 49per cent owned local affiliate, Indone-sia AirAsia, remains dwarfed by Lion.

There are also questions aboutLion’s Malaysia venture, according toShukor Yusof, an aviation analyst atStandard & Poor’s Capital IQ, part ofthe debt rating agency.

“In the first six months, their num-bers were terrific but then they’vecome to a point when they need tomake money instead of just winningvolume,” he says.

The biggest victim of Mr Kirana’saggressive strategy in Malaysia seemsto be Malaysia Airlines, the state-owned flag carrier, not AirAsia.

Over the next decade, analysts

expect full-cost legacy carriers to bethe main losers from the rise of low-cost operators in southeast Asia.

Low-cost carriers already accountfor more than half of the capacity inprice-sensitive Indonesia, Malaysia,the Philippines and Thailand, com-pared with just 30 per cent in NorthAmerica and 37 per cent in Europe,according to the Centre for Aviation.

Yet, despite the sense that there issufficient growth to go round, thefuture dynamics of the AirAsia andLion rivalry are hard to predict, giventhe lack of information about MrKirana’s business.

While AirAsia is listed on the stockmarket in Malaysia and Mr Fernandesregularly gives interviews about hisplans, Mr Kirana rarely talks to themedia, his privately owned airlinedoes not divulge financial informationor statistics and his occasional publicpronouncements tend to be aimed atbeguiling rather than elucidating.

“Given their scale, their sizeableorder books and what’s behind them,it would be smarter to continue pick-ing on the weak guys rather thaneach other,” says Mr Sobie. “But egosalways come into play in the airlineindustry.”

Heavyweightsstake claims forsupremacy insoutheast AsiaLow­cost airlines Ben Bland sizes up theprotagonists as AirAsia of Malaysia and LionAir of Indonesia enter each other’s markets

‘It is clear thatthe domesticaviation industryhas a fundamentalproblem’

Lion’s share: theIndonesian carrierhas ambitiousplans Reuters

‘It would be smarter to pickon the weak guys . . . butegos come into play’

Aerospace

Freight carriers

Tough times havetaught industryleaders to err on theside of caution,reports Jane Wild

FINANCIAL TIMES TUESDAY FEBRUARY 11 2014 ★ 3

Aerospace

Ben BlandIndonesia correspondent

Geoff DyerUS foreign affairs writer

Jeremy GrantAsia corporate correspondent

Carola HoyosDefence correspondent

Amy KazminSouth Asia correspondent

Ben McLannahanTokyo correspondent

Tom MitchellBeijing correspondent

Simon MundySeoul correspondent

Andrew ParkerAerospace correspondent

Jamie SmythAustralia correspondent

Jane WildTransport reporter

Rohit JaggiCommissioning editor

Steve BirdDesigner

Andy MearsPicture editor

For advertising inquiries,contact Liam Sweeney:liam.sweeney@ft.com,+44 (0)20 7873 4148

Contributors »

each step about what themarket will bear.”

Assuming average annualGDP growth of 6.4 per centin the two decades to 2032,US aircraft maker Boeingpredicts that the size ofChina’s civil aviation fleetwill increase by 78 per centto 6,450 airliners.

The aircraft manufactureralso estimates that some5,580 new and replacementairliners valued at $780bnwill be delivered during thisperiod.

Last year, Boeing sup-plied a record 143 aircraft toChinese carriers, including14 Dreamliners. While mostdemand in volume terms isweighted towards single-aisle planes, Boeing andAirbus both expect ordersfor wide-body planes toincrease rapidly as Chineseairlines expand their inter-national networks.

Boeing estimates thatwide-body deliveries inChina over the next 20years will be worth $400bn,against $370bn in single-aisle deliveries.

At last year’s Beijing airshow, Airbus unveiledplans for a lighter-weightversion of its best-sellingwide-body jet, the twinengined A300-330.

The company hopes areduced fuel burn willattract more buyers,extending the model’s lifein the face of competitionfrom the Dreamliner.

The aircraft is expected toenter service in 2015 or2016.

In addition to fierce com-petition from rival domesticand international carriers,

Continued from Page 1Chinese airlines will alsohave to contend with thecountry’s high-speed railnetwork, which hasemerged as the world’s larg-est in less than four years.

Many of the country’s lat-est high-speed railway sta-tions are, like China’s air-ports, located far from citycentres, but they are pre-ferred by an increasingnumber of travellers fortheir more relaxed securityprocedures, uninterruptedmobile phone connectivity,and more reliable timeta-bles.

Flights, on the otherhand, are frequentlydelayed by everything fromdense smogs to unan-nounced exercises by themilitary, which controlsmost of China’s airspace.

Securing wider corridorsfor civil aviation – andmore approaches into thecountry’s biggest airports –has become a priority forcivilian air controllers.

One of the final links inChina’s high-speed rail net-work was completed inDecember, when servicesopened along the southeastcoast between Shenzhenand Xiamen, with economy-class tickets priced at justRmb150 ($25).

The impact on airlineswas immediate, as theyslashed ticket prices andreduced services betweenthe two cities.

“The rapid developmentof high-speed rail will defi-nitely put pressure on air-lines’ profitability,” says MrRen. “And airport construc-tion might also be affected.”

Additional reporting byWan Li

Airport building setto increase rapidly

South Korea’s export sector isbetter known for cars andsmartphones than fighterjets and helicopters.

Yet the country’s defenceexports have grown at one of the fast-est rates in the world over the pastfew years, led by aerospace. The sec-tor is seeking further expansion, withenthusiastic government backing.

Defence exports were a record$3.4bn last year, having risen steadilyfrom $250m in 2006. “As the SouthKorean defence industry has grownand matured, every year it acquiresmore capability,” says Mark Burgess,director of Honeywell Aerospace’sdefence business in Asia. “I don’tthink they’re taking market sharefrom western companies yet, but theywill.”

A key driver of investment in thedefence industry has been the threatof conflict with North Korea, with

which South Korea remains techni-cally in a state of war. With a hugestanding army across the border –estimates put North Korean troopnumbers at about 1.2m – as well asPyongyang’s extensive if outdatedarray of heavy weaponry, SouthKorea has been forced to invest heav-ily in its military capacity.

Last year’s defence budget of$31.7bn was the world’s 12th biggest,according to the Stockholm Interna-tional Peace Research Institute.

Much of South Korea’s defencehardware has been procured from theUS, a crucial military partner thatstill has about 28,500 troops in thecountry. Seoul has been unusuallyaggressive in insisting on “offsets”that have forced US arms suppliers toco-operate with South Korean compa-nies, helping the latter gain valuabletechnological knowledge.

Current rules oblige the seller in

any deal worth more than $10m tooffset at least half the cost throughbuilding products in South Korea,sourcing components from domesticcompanies, or transferring intellectualproperty.

In one of the most important exam-ples of this strategy, Samsung Aero-space built 72 F-16 fighter jets in themid-1990s, under licence from Lock-heed Martin of the US. Such agree-ments have helped Korea AerospaceIndustries (KAI) – formed from a 1999merger of Samsung Aerospace, Dae-woo Heavy Industries and HyundaiSpace and Aircraft – become thespearhead of South Korea’s defenceexports drive.

The pride of KAI’s export offering isthe T-50 fighter-trainer jet, developedin partnership with Lockheed. Lastmonth KAI delivered the last of 16T-50 aircraft ordered by Indonesia in a$400m deal. A few weeks earlier, the

company had agreed to supply Iraqwith 24 jets in a deal worth $1.1bn,with added services that could takethe total value to $2bn. The companyis negotiating with the Philippines,which has provisionally agreed to buy12 of the aircraft.

KAI hopes to sell T-50 jets to the US,which wants to replace its ageingtrainer jet fleet. This would helpaddress the South Korean industry’slow profile, says Choi Sang-yeol, asenior executive at the company. “So

far, although Korea has great technol-ogy and great products, many custom-ers still don’t have 100 per cent confi-dence in our aeroplanes,” he says.“But if the US chooses the T-50, it is agreat opportunity for it to become abest-seller.”

KAI’s other flagship programme isthe Surion helicopter, developed incollaboration with Airbus Helicopters,for which it is targeting exports ofleast 300 units by 2020.

Industry executives and analysts

say KAI’s growing success in theexport market owes much to strongsupport from the South Korean gov-ernment, building on diplomatic tieswith countries in southeast Asia andthe Middle East. Jon Grevatt, an ana-lyst at the consultancy IHS, says:“They don’t just sell military equip-ment, they back it up with a host ofstrategic deals in areas including con-struction and shipbuilding.”

KAI is able to rely on support fromsome of the country’s leading indus-trial groups: Samsung Techwin, a sis-ter company of Samsung Electronics,provides jet engines, while LIG Nex1,owned by LG Corporation, suppliesradar systems.

South Korea’s efforts to move to thetop end of the value chain by develop-ing a stealth fighter with Indonesia,have been dogged by disagreementover whether the programme is aworthwhile investment.

Even optimists do not expect thatjet to enter service for more than adecade, so South Korea remains reli-ant on foreign groups for now to pro-vide its most advanced aircraft. InNovember it agreed to buy 40 F-35stealth jets from Lockheed Martin in adeal estimated at $6.6bn, says YangUk at the Korea Defence and SecurityForum.

As it seeks to maintain its exportmomentum, KAI is targeting regionssuch as South America: it signed a$208m deal with Peru in 2012 to sup-ply 20 basic trainer aircraft. Suchefforts are crucial if South Korea is toraise exports of defence aerospace.“They have to find new markets,”says Mr Grevatt. “They can only do somuch with southeast Asia.”

Seoul seeks to conquerfresh export marketsSouth Korea The threat of conf lict with the north is an importantfactor driving defence investment, says Simon Mundy

Flight control: South Korea’s Black Eagles aerobatic team in T­50 jets Getty

All­aboard: China’s aviation universe is expanding Getty

4 ★ FINANCIAL TIMES TUESDAY FEBRUARY 11 2014

Aerospace

Five years after taking thetop job at Qantas, AlanJoyce is facing a crisis thatcould break his career.

Following a profits warn-ing, a plunging share priceand the loss of the Austral-ian flag carrier’s invest-ment grade credit rating,the 47-year-old chief execu-tive is poised to unveil aturnround plan this month.

“He is under a lot of pres-sure,” says George Cairns,professor of management atRMIT university in Mel-bourne. “Qantas is anational icon at home andthe public face of Australiaabroad.”

Qantas has flown theskies over Australia foralmost a century, develop-ing an unrivalled regionalnetwork and establishingitself as the country’s mostrecognisable company.

But for the first time in adecade the so-called “flyingkangaroo” faces an aggres-sive competitor in VirginAustralia, which is takingon Qantas in its backyard,just as the airline’s interna-tional unit is in trouble.

In December 2013, Qantaswarned it would reportlosses of A$250m to A$300m($223m-$267.8m) in the sec-ond half of that year. Itblamed unfair competitionfrom Virgin on domesticroutes and unveiled aA$2bn programme of cutsto reassure investors.

That has not worked.Since the announcement,Qantas’s shares have lan-guished close to recordlows. Standard & Poor’s andMoody’s have slashed itscredit rating to junk, thelatter citing a “markeddeterioration” in its domes-tic business.

Qantas says Virgin isplaying fast and loose withAustralia’s airline owner-ship laws by restructuringoperations to take on boardforeign capital to absorbmounting losses. “Theagenda of these foreign

airlines is to terminallyweaken Qantas,” Mr Joycewrote in a November emailto staff.

The bitter battle has apersonal edge, as Virgin isled by John Borghetti, a 58-year-old long-time Qantasexecutive who left the air-line shortly after Mr Joycepipped him to the chiefexecutive role in 2008.

Since joining Virgin in2010, Mr Borghetti hastaken over regional airlines,boosted capacity and addedbusiness seats to challengeQantas in its lucrativedomestic market.

In response, Qantas hasincreased capacity ondomestic routes to protectits 65 per cent marketshare, a level Mr Joycerefers to as a “line in thesand”. But the cost of tak-ing on Virgin at home, aswell as other airlinesabroad, is mounting.

Qantas’s internationalunit is haemorrhaging cashas it combats competitionfrom Middle Eastern air-lines, which enjoy costadvantages over the legacycarrier thanks to lowerlabour costs and the loca-tion of their hubs, withineasy distance of Europe andAsia as well as Australia.

Qantas’s market share

has fallen from 32 to 17 percent in a decade.

After shunning alliances,Qantas changed course in2013 and agreed a partner-ship with Emirates. Butrestoring profitability to itsinternational unit will bechallenging.

“Qantas may be anational icon but Austral-ians will follow their wal-lets when booking flights,”says Neil Hansford, chair-

man of Aviation StrategicSolutions, a consultancy.

He says Qantas shouldcopy Virgin and separate itsdomestic division from itsinternational unit to attractforeign capital. By doingthis, Virgin circumvents theAir Navigation Act, whichimposes a 49 per cent for-eign ownership cap on Aus-tralian airlines operatinginternational flights.

This enabled Etihad Air-lines, Singapore Airlines

and Air New Zealand latelast year to back a A$350mcapital raising, which tooktheir combined stake inVirgin to 67 per cent.

But removing regulatorybarriers to allow foreignersto control Qantas is politi-cally sensitive and wouldrequire the repeal of theQantas Sale Act, a law thatlimits any single foreigninvestor to a 25 per centstake and total ownershipby foreign airlines in Qan-tas to 35 per cent.

“It is a regulatory strait-jacket for an airline thatneeds access to capital,”says Dan Tehan, a LiberalMP and convener of the rul-ing Liberal-National coali-tion’s Friends of Tourismgroup.

The coalition is open torepealing the Qantas SaleAct, but the oppositionLabor and Green parties areopposed and can block pro-posed changes in parlia-ment. Labor says it wouldprefer the government tobuy a stake in Qantas. Thisseems unlikely. Instead,Qantas is lobbying Can-berra for a government debtguarantee that would lowerits cost of raising funds.

The airline is also consid-ering raising cash via dis-posals. It is mulling a floatof its frequent flyer unit,which could be worthA$2bn. A partial sale of itslow-cost subsidiary Jetstarand the sale of airport ter-minal assets are also possi-ble. But many analystsquestion whether disposalsalone can fix Qantas.

Cameron McDonald, ana-lyst at Deutsche Bank, says:“Selling assets doesn’t solvethe cost issue. It wouldneed to be a catalyst toaddressing the cost base ofthe company.”

Any further cost-cutting,however, will put Qantas ona collision course withtrade unions, further com-plicating the options forturning round the airline.

Patrick Low, director ofcommunications at theTransport Workers Union,says: “We won’t supportfurther cost-cutting, andneither will the Australianpublic.

“Turning Qantas intoAeroflot with a kangaroo onits tail is not the answer.”

‘Flying kangaroo’ chief facestough battle for air superiorityAustralia

Qantas has flowninto turbulence overits own territory,reports Jamie Smyth

‘Qantas may be anational icon butAustralians willfollow their walletsbooking flights’

Increased competition puts Qantas in a quandary Reuters

Airbus is used to losing. Formore than 30 years, theFrance-based manufacturerwent into tenders to supplyaircraft to Japan Airlines

(JAL), the national flag carrier, andmissed out every time.

Displacing Boeing, which opened itsfirst Tokyo office in 1953 and has dom-inated the market ever since, wasproving impossible.

“The Japanese are somewhatchange-averse,” says StéphaneGinoux, president of Airbus Japan. “Ifthey are comfortable with the rela-tionship, if they are happy with theproduct, if they don’t see too manyissues, they are not going to look forchange.”

But last year was different. JALwanted to replace its ageing fleet ofwide-body, long-distance 777s, andwhile Boeing’s new model – the 777x –was still in development, Airbus’ssimilar-specification A350 was freshfrom test flights. Importantly, the ten-der was overseen by JAL’s chairmanKazuo Inamori, known for his insist-ence on using a range of suppliers atKyocera and KDDI, two huge compa-nies he founded.

And months before the decision wasdue, regulators had grounded all 50of Boeing’s 787 Dreamliners afterproblems with lithium-ion batteries.The incidents prompted Mr Inamori todescribe a complete reliance on onevendor as “abnormal” in a CNBCinterview.

A JAL representative says that theDreamliner groundings had no bear-ing on the decision that followed.

But other people familiar with thesituation say it was probably a combi-nation of those factors that gave Air-bus a foot in the door. On October 8,JAL announced it had signed an

agreement to buy 31 Airbus A350sworth $9.5bn at list prices, along withoptions for another 25. The single-supplier policy was over.

“It was obviously disappointing thatwe did not win this campaign,” saysGeorge Maffeo, president of BoeingJapan. “Going forward, we will workvery hard to earn their business.”

But Airbus is keen to build on itssuccess. It has set itself a target of a25 per cent share of total passengerand cargo aircraft operating in Japanby 2020, from about 13 per cent now.

Boeing is contemptuous of the Air-bus arithmetic, noting that it has anorder book of 98 planes to deliver inJapan, most of them 787s, betweennow and 2020.

“They’d have to deliver a whole lotof aeroplanes in the very near term to[hit the 25 per cent target],” says MrMaffeo. “Our backlog, even at thispoint, is still higher in total than Air-bus’s backlog. I’m very sceptical thatit is achievable.”

But the Airbus target – and Boe-ing’s tetchy reaction to it – is a sign ofthe company’s determination toadvance in the only leading marketwhere the two manufacturers arenowhere near parity.

“Maybe because Boeing used tohave this market as its private gar-den, it is upset that competition isentering,” shrugs Mr Ginoux.

Analysts are cool on the prospect ofrapid gains for Airbus. If low-costcarriers such as Jetstar Japan, Peachand Vanilla – all using the Europeanmanufacturer’s A320 – grow veryquickly, there is a chance for Airbus“to get within eyesight of that figure,”says Will Horton, analyst at CAPACentre for Aviation in Hong Kong.

But Boeing’s share will not be takeneasily. The Seattle-based company has

had a strong grip on Japan since theend of the second world war, whendomestic manufacturers – bannedfrom making their own aircraft byoccupying forces – turned into suppli-ers.

Now, the so-called “Heavies” – Mit-subishi, Kawasaki and Fuji – makebig chunks of Boeing planes sold allover the world. The US company saysit will spend about $5bn this year onprocurement in Japan, helping to sus-tain 22,000 jobs, or almost half thecountry’s aerospace industry work-force.

“We think it’s an area of differentia-tion for us that we’re doing thingshere in Japan that help the overalleconomy,” says Mr Maffeo. “We hope,at the end of the day, that it providesus with some additional considera-tion.”

Airbus is also battling goodwillaccumulated over decades by the USaircraft maker. In the 1950s, for exam-ple, when JAL was struggling to

Fight for JALbusinessheats upJapan Airbus has won a victory with a Boeingclient for the first time, says Ben McLannahan

Two can play: the national carrier has ended its one­supplier policy Reuters

establish itself as an international car-rier, the Douglas Aircraft Company –later merged into Boeing – helped bypushing it up the delivery waiting listfor its DC-6, one of the first planescapable of flying across the Pacific.

A sense of “obligation” has infusedthe JAL/Boeing relationship eversince, says Geoffrey Tudor, an analystat Japan Aviation ManagementResearch in Tokyo.

All eyes are now on the outcome ofAll Nippon Airways’ current tender toreplace half of its 54-strong fleet of777s. About one in 10 of its planes aremade by Airbus, with almost all therest by Boeing. ANA would not com-ment on timing, but some expect adecision within a few months.

With one manufacturer desperate topreserve its momentum and the otherdesperate to disrupt it, the only clearwinners are the carriers.

“It’s a buyer’s market,” says MrTudor. “They’ll blow away listprices.”

When Barack Obama began his sec-ond term as US president in January2013, he signalled that a “pivot” toAsia would be a central part of hislegacy.

His officials briefed that the presi-dent would use a significant part ofhis time in the White House chartinga strategy to underpin American pres-ence in the Asia-Pacific region for thecoming decades. Yet, one year on, thepresident’s Asia policy is looking a lotmore uncertain.

The basic logic behind the “pivot” –the word given to the new focus onAsia by then secretary of state HillaryClinton in 2011 – was straightforward.Not only has Asia become the cockpitof the global economy, but the rise ofChina and its military build-up haveraised tensions.

With the war in Iraq over and theconflict in Afghanistan winding down,the US realised it needed to raise itsgame in Asia if it were to maintain itsinfluence in the region.

China’s announcement in Decemberof an air defence identification zonecovering the East China Sea and theway it assumed control of the Scar-borough Shoal in the South China Seain 2012 indicated an intention to gaingreater control over the seas that sur-round it – and in the process, squeezethe US navy further out into thePacific Ocean.

“This is part of a broader Chinesestrategy, to push steadily outwardswithout causing a conflict,” says MikeGreen, former Asia director at theNational Security Council.

As part of the pivot, the Pentagonannounced that it would focus 60 percent of its fleet and air force in theAsia-Pacific region and that it wouldstart to train marines in northernAustralia for the first time.

The administration has supportedthe Trans-Pacific Partnership (TPP), a12-country trade negotiation involvingcountries on both sides of the Pacificthat the US sees as a central strategyto bind its economy to many of Asia’sfast-growing markets. Based aroundits core alliances with Japan and

South Korea, US strategy has tendedto focus on northeast Asia. But withits engagement with Myanmar andVietnam and its expanded relationswith the Philippines, the US is tryingto weave southeast Asia into itsframework of regional alliances andpartnerships.

American officials say these policiesare not an effort to contain China, butto deter it from seeking to bully someof its neighbours or dominate theregion. They insist they want the USand Chinese navies to operate in prox-imity in the western Pacific withoutcoming to blows.

There may be no direct linkbetween the new US strategy in Asiaand defence deals, but the renewedfocus on the region – and the tensionscreated by China’s rise – have coin-cided with some big aerospace con-tracts.

Despite cost overruns and intensecriticism surrounding the project,Japan has placed an order for 42 F-35stealth fighter jets. The aircraft arebeing built by a consortium led byLockheed Martin, the biggest defence

contractor by sales, and BAE. SouthKorea is also expected to finalise thisyear an order for 40 of the jets.

Yet budget cuts at the Pentagonhave raised questions among Asiangovernments about the US ability toback up its military commitments.

The succession of crises in the Mid-dle East continue to dominate thedaily agendas of the administration’ssenior policy makers.

US strategy towards the region isalso being buffeted by some of thecontroversies over history involvingJapan, its closest ally in the region.

China has objected strongly to whatit views as the attempts by Japaneseprime minister Shinzo Abe to rewritethe country’s wartime history, whichhave added to the tensions in theregion.

More worryingly for the US, theSouth Korean government is alsoangry at Mr Abe. The result is thatAmerica’s two biggest allies in Asiaare barely talking to each other.

‘Pivot’ to Asia hasyet to reassure alliesUS foreign policy

China’s rise has coincidedwith some big militaryaerospace contracts,reports Geoff Dyer

Asian nations question theUS ability to back up itsmilitary commitments