Foreign Investors Rethink Enthusiasm on Myanmar’s Aviation Sector

ANA’s Cancellation of Deal With Asian Wings Exemplifies Fading Interest

YANGON, Myanmar—Once thought to be one of Myanmar’s most promising sectors, aviation is losing its shine with foreign investors, offering a window into the slowdown in investment into the country.

With the number of visitors to the country expected to hit a record three million people this year, industry experts had forecast a surge of foreign investment into the airlines and planes needed to ferry those customers. But analysts say little money has materialized, as would-be investors get a better look at what they are getting into.

In April 2012, Sydney-based consulting firm CAPA-Centre for Aviation published a report titled, “Myanmar set to become Asia’s next big aviation growth market,” which stressed the emerging market’s potential for growth. But titles of the firm’s reports in the past few months reflect a less sanguine view: “Myanmar international aviation outlook: After two years of rapid expansion, growth starts to slow,” and “Myanmar domestic aviation market outlook: long-term potential but intensifying competition.”

The infrastructure for the airport terminal, air-traffic control and baggage handling already is overburdened at Yangon, the country’s busiest airport, discouraging investors from expanding existing airlines or starting up new ones, aviation experts say. A host of domestic carriers are fresh off a run of adding planes, heightening competition for passengers. Some of the country’s airlines are too small to make attractive targets; others are owned or backed by businesspeople on a U.S. government sanctions list. Investors use the list as a guide on ties to avoid in Myanmar because they fear the reputational risk and compliance issues that might arise for them or their business units in the U.S.

In an example of the cold feet some foreign investors are getting, the parent of Japan’s All Nippon Airways last month canceled a planned investment of $25 million to buy a 49% equity stake in little-known Myanmar carrier Asian Wings Airlines. ANA Holdings Inc. 9202.TO -0.32% cited intensified competition in the industry for dropping the plan.

Asian Wings has a strategic partnership with another Myanmar carrier, Air Bagan, which, along with its owner Tay Za, is on the U.S. Treasury Department’s Specially Designated Nationals List, because of their ties to the military junta that ran Myanmar for decades. Individuals and companies on the list face asset freezes, and U.S. citizens are prohibited from dealing with them. Yangon Airways, another Myanmar airline, and members of its murky ownership structure are also on the U.S. sanctions list.

A guide for potential aviation investors produced by trade conference group Sphere Conferences for one of its conventions last year listed Air Bagan and Tay Za as owners of Asian Wings airlines, though ANA denied any such links when the deal was announced last year. Local media reported on claims of Air Bagan’s ownership of Asian Wings before ANA canceled the deal. Lwin Moe, executive director of Asian Wings, said that Asian Wings and Air Bagan are “strategic partners,” though Air Bagan hasn’t directly invested in the airline.

ANA said there was “no problem” with the ownership and that the link to Air Bagan had nothing to do with its decision to withdraw from the deal.

Myanmar-watchers say the second thoughts exemplified by ANA aren’t limited to the aviation industry.

U.K.-based Standard Chartered STAN.LN +0.25% PLC last month decided not to apply for a banking license in Myanmar, despite expressing interest in previous years. People close to the bank said the move reflects a worry over navigating complicated regulatory and due-diligence processes, when the payoff for entry remains small. Some U.S. and European companies say privately that they remain hesitant to park money in Myanmar except in a few sectors—primarily oil, natural gas and consumer goods—complaining of due-diligence processes that are expensive, lengthy and cumbersome because of the wide-ranging, labyrinthine influence of people on the U.S. sanctions list.

More broadly, investment in Myanmar remains tenuous for other reasons as well. A consortium led by South Korea’s Incheon International Airport Corp. last year was named the preferred bidder by the government to build a $1.1 billion airport near Yangon. However, the two parties later had disagreements, a person familiar with project said, and are no longer involved with the project. Myanmar is now speaking to new investors, according to the person, potentially delaying the airport that was scheduled to open in 2018 with a capacity to handle 12 million passengers a year. Incheon International Airport didn’t respond to request for comment Friday.

“This reluctance of foreign investors to invest in Myanmar’s aviation sector is a microcosm of a broader reluctance to be exposed to sanctions compliance risk, and the business opacity that gives rise to it,” said Sean Turnell, an expert on Myanmar’s economy at Macquarie University in Sydney, referring to ANA’s decision to cancel its Asian Wings investment.

Even after the relaxation of sanctions in 2011, U.S. companies have committed only about $243 million in Myanmar since 1988, an amount that pales in comparison with investments in Myanmar made by its neighbors Thailand and Singapore, with $10 billion and $4.7 billion respectively.

The aviation sector has been a particular disappointment for foreign investors, because the democratic changes that ushered in a new era of openness in Myanmar in 2011 have resulted in droves of foreigners eager to explore the country’s golden Buddhist temples, untouched forests and huge tiger reserve. International passengers more than doubled to 2.7 million in 2013 from just three years earlier.

Yet an expected boom in travel between cities in Myanmar has yet to materialize, and the domestic aviation market remains tiny. Malaysia, for example, has 20 million fewer people than Myanmar’s roughly 50 million, but an aviation market 14 times larger in passenger terms.

And, underscoring the exuberance now being questioned by investors, three domestic airlines have started operations in the past two years alone—none with foreign investment. Load factor, or the portion of planes filled, is between 60% and 65% among domestic airlines, according to CAPA estimates, meaning there are now too many domestic flights for current demand. “It is much easier to purchase aircraft than build airports and air-traffic management systems,” said Ron Bartsch, the chairman of AvLaw International Pty. Ltd., a Sydney-based aviation legal and consulting firm.

“Too much capacity has been added too quickly since the market opened up,” said Brendan Sobie, an analyst at CAPA. “It will take some time for the market to absorb this capacity, and for infrastructure, such as hotels, to be in place to support the growth.”

A few small deals in the domestic aviation industry have happened this year, but they are smaller in scale than analysts had expected. State-owned Myanma Airways, for example, earlier this year signed a contract to lease 10 Boeing Co. BA -0.31% jets through GE Capital Aviation Services, the aircraft leasing arm of General Electric Co. GE +0.46% It also announced a plan to buy six turboprop planes from European aircraft maker ATR, a joint venture between Airbus Group EADSY +0.72% NV and Finmeccanica FNC.MI +0.42% SpA’s Alenia Aermacchi SpA unit.

“To further fuel the growth of its airline industry, there need to be more hotels in Myanmar, so there are more places for tourists and business travelers to stay,” said Antony Snelleman, senior vice president and regional manager Asia at GE Capital Aviation Services.

Source: WSJ

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