Fuel prices, protectionism hobble Myanmar airline industry

Myanmar’s once lucrative airline industry is struggling to stay afloat with many carriers already halving their fares to draw more passengers. A shortage of modern infrastructure and high import bill is driving up the price of jet fuel, making it exceedingly difficult for many local airlines to keep their fleets airborne.

Already, the Department of Civil Aviation (DCA) has in the past year clawed back the air operator certificates (AOC) of two local airlines. “Air Bagan stopped its operations for years. APEX Airlines had stopped running since six months ago because it did not have any aircraft,” said U Ye Htut Aung, deputy director general of the DCA.

In Myanmar, the DCA has authority under the Myanmar Aircraft Act to revoke the AOC of an airline that stops operations for 60 days. “A domestic airline should also operate at least four aircraft. But there are some airlines operating with only one or two aircraft, which is not good for travelers because if there is a breakdown, they will not have spare aircraft allowing them to keep to the flight schedules,” said U Ye Htut Aung.

The DCA is cracking down on the industry at a time when many local carriers are struggling to stay profitable. U Zaw Min Aung, deputy CEO of Golden Myanmar Airlines, said his airline recently halved fares on certain routes due to declines in the number of passengers traveling during the monsoon season. “At that level of pricing, even if our flights are full, we will still make losses,” he said.

To be sure, the government says it has already asked the loss-making carriers to merge with their stronger peers to stay viable. Yet, despite having opened up the industry to foreign participation in 2013-2014, in May, it rejected a JV proposal between local tycoon Serge Pun’s FMI Airlines and Malaysia’s AirAsia to set up a budget airline covering Myanmar.

That came just months after Japan’s ANA Holdings dropped its Asian Blue JV with Golden Sky World, owned by local conglomerate Shwe Than Lwin, after the government turned down its application for an AOC, which had been pending for a year. It was ANA’s second attempt to enter the Myanmar market after scrapping a 2014 JV with Asian Wings Airways.

What’s ailing Myanmar’s airline industry? Why is the government shutting out foreign investors? And, how might things improve?

Different fares

The main reason for much of the industry’s struggles is the high price of jet fuel. In Myanmar, the price per gallon of jet fuel is almost $1 higher than in Singapore. This is because there is now only one permitted supplier of jet fuel in the country- a JV between Puma Energy and State-owned Myanmar Oil and Gas Enterprise.

“In Myanmar, we have only one seller of aircraft fuel. If they demand a higher price, we have no other choice,” said U Zaw Min Aung.

Other factors also contribute to airlines’ high operational costs, such as expensive aircraft maintenance fees and limited refueling infrastructure. Of the 28 domestic airports in Myanmar, only eight offer aircraft refueling facilities. This is why it is common for aircraft to make stopovers during long-haul domestic flights, for instance from Yangon to Lashio, since Lashio does not have refueling facilities.

Consequently, costs are much higher for domestic airlines compared to other international airlines.

But that isn’t the end of the industry’s woes. Even though Myanmar has a population of more than 50 million, few are accustomed to traveling by air. As such, domestic airlines are forced to charge the locals lower fares to fly.

“Even during the peak season, we have had to reduce the airfares for foreigners by as much as 40pc due to stronger competition now compared to before the industry was liberalised in 2014,” said U Zaw Min Aung.

The result is foreigners are charged as much as double the fare for domestic routes to offset the losses made on local airfares. But as Myanmar only sees an influx of tourists during the six-month period between October and March though, for the rest of the year, the airline industry is typically a loss-making enterprise.

“The level of airfares for domestic travelers is usually loss-making for us. When it is not travel season in Myanmar, it is common for us to make losses,” said U Zaw Min Aung.

In the meantime, the high cost of air travel within Myanmar is already deterring tourists from visiting the country. “Myanmar cannot compete with its neighbours in attracting tourists. As such, we have called on the government to do something to address the high cost in aircraft fuel and hence the expensive air ticket prices,” said U Naung Naung Han, general secretary of the Union of Myanmar Travel Association.

Government support

For its part, the government has taken small steps to ease the industry’s pain, such as removing the 5pc commercial tax requirement for airlines. It has also eased the amount of tariffs on importing spare parts for aircraft.

“There are plans to permit the entry of other jet fuel suppliers to the market, including a JV between Pioneer Aerodrome Services and Golden Myanmar Airlines, which was recently allowed to import and sell jet fuel in Myanmar. As they have just have started business though, they are still operating on a very small scale,” said U Ye Htut Aung.

Meanwhile, airlines with high levels of debt or insufficient capital to expand have been advised by the government to merge with their stronger peers. “The Union Minister of Transport and Communication has called for the merger of 10 struggling airlines. On that front though, it would be difficult for them to do so if they choose not to cooperate,” he said.

The government itself has disallowed deals involving foreign investors despite allowing foreign shareholders to take up stakes of as much as 51pc in a local JV. “When we asked AirAsia, it told us that it wanted to run both domestic as well as international schedules. That would mean it can fly between cities such as Yangon and Mandalay which would add more pressure to the struggling domestic airline market,” said U Ye Htut Aung.

“We did not approve the AirAsia deal because we want to protect the domestic airlines,” he added.

Size matters

Yet, only a handful of larger airlines may have the financial wherewithal to survive in the longer term. Currently, the largest operator in the business is Myanmar National Airlines (MNA) with16 aircraft, including four Boeing 747s. MNA operates routes across 26 domestic cities and between Myanmar and five international destinations.

Formerly State-owned, MNA was corporatised in April 2013, when the country first liberalised the airline industry. Although the business has yet to turn a profit since then, U Myint Aung, a director at MNA, reckons the airline could register a profit as soon as next year.

“There is potential in the domestic market. If we can fill up to 70pc of our aircraft on the domestic routes, we will be able to breakeven on out costs. However, on average, we are still only 40pc-50pc full on our international routes,” he said. MNA’s most popular flight is currently the Myanmar-Singapore route.

To expand its international operations though, even MNA will need funds. “We need better aircraft for our international flights and are seeking investments from foreigners as well as the Myanmar Port Authority to do so,” U Myint Aung said.

In the meantime, the airline has invested in a ground-handling services operation, which includes services such as aircraft refueling and check-in counters for passengers, to generate an additional stream of revenue. According to its website, MNA is already providing these services to 11 airlines.

It is also trying to launch a large-scale maintenance center catering to ATR aircraft. The facility, which was actually complete three years ago, has already been approved by the DCA. However, it has yet to be recognised by the European Aviation Safety Agency.

“Once the Europeans issue us with a certificate of recognition, we would be the only maintenance service center for ATR aircraft in Myanmar,» said U Myint Aung.

Whatever the case though, the industry may need to be restructured further and the weaker players eliminated before MNA and its peers are able to climb back to profitability and grow.

Source: Myanmar Times

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