Prepare for take-off: Aviation is set for rapid growth in both public and private sectors

Given Mongolia’s large territory and the natural barriers that cross it, along with a low density of road and railway, air transport has provided a vital link within the country ever since civil aviation began in 1946.

Yet Mongolia’s thinly spread population and its relative isolation from the rest of the world have meant air transport has remained relatively undeveloped. Of the country’s 46 airports in 2010, only 14 had paved runways, only one of which – Chinggis Khaan International Airport (ULN) in Ulaanbaatar – was over 3047 metres, the length necessary to accommodate wide-body aircraft. Most airports in the country are built to accommodate point-to-point traffic by small aircraft, with generally low volumes of passengers and freight.

Yet there are now signs of expansion, with private operators in the field and plans for a new airport for the capital. At the same time, given the country’s key geographical position, overflight fees are an important source of revenue for the government.

PLAYERS, PORTS & PASSENGERS: The national carrier is the 100% state-owned MIAT Mongolian Airlines, which until recently had a complete monopoly on international routes. It currently flies to Berlin, Moscow, Beijing, Hong Kong, Seoul, Tokyo and Osaka. In mid-2011, its fleet consisted of two Boeing 737-800s and two Boeing 767-300ERs on lease, with orders for another 767 (2013) and two 737s (2016) in the pipeline. Since 2008, MIAT has been on the State Property Committee list for privatisation, with rumours strong in late 2011 that this might go ahead in the first half of 2012.

There are also three private sector airlines in the field, Aero Mongolia, Eznis Airways and a new entrant, the Bodi Group’s domestic service Mongolian Airlines. Aero Mongolia was the first privately owned airline to begin operations, back in 2003, and now flies to 11 domestic airports internationally to Irkutsk in Russia and Hohhot and Urumqi in China. Its fleet consists of two Fokker 100 and two Fokker 50 turboprop aircraft.

Eznis Airways began its operations in 2006, and is now the largest domestic airline in terms of fleet size, with four Saab 340B turboprops and two Avro RJ85s jets. These are planes that have been specially designed for harsh conditions and short landing strips. Eznis currently flies internationally to Ulan Ude in Russia and Hailar in China, and domestically to 14 destinations, either seasonally, scheduled or charter.

A new airline offering domestic service, Mongolian Airlines carried out its first flight on January 2, 2012. The fledgling carrier is 70% owned by the Bodi Group, with the remaining 30% held by the MAK Group. The airline plans to fly five or six domestic routes and start servicing international routes by summer 2012.

TRAFFIC CONTROL: Overseeing and regulating the aviation sector is the Mongolian Civil Aviation Authority (MCAA), which operates under the 1999 Civil Aviation Law. The MCAA provides air traffic services and is responsible for the country’s airport operation. Air navigation services for international overflights accounted for 95% of the MCAA’s revenue of $71.8m in 2009 (the last year for which data was available). Approximately $25m of this then went on to the government.

The MCAA’s Airport Services Department operates all the country’s airports, while it also issues licences and certification of air operators. As of mid-2011, it had certified 10 air operators, including the three domestic airlines and four foreign operators – Air China, Aeroflot, Korean Air and Tianjin Airlines, all of which have regular flights to ULN. The other three certified operators had not begun services at the time of writing.

The year 2011 also saw an important step forward in airline safety and security, with a memorandum of agreement signed between the MCAA and the US Federal Aviation Authority (FAA). This may see the FAA providing training programmes and assistance to help develop Mongolia’s civil aviation sector.

GROWING BUSINESS: Passenger numbers have been increasing steadily since 1990. According to the National Statistical Office, in the first eight months of 2011, 378,900 passengers were carried by air either into or around Mongolia, up 45.3% on the same period of 2010. At the same time, cargo numbers were also up, with the first eight months of 2011 showing a 47% rise over the same period in 2010. Revenue from air transport collected by the government thus also went up, comparing the first eight months of 2011 with those of 2010, by 34.9%, to some MNT108.1bn ($84.3m).

Given this rapid growth in business, along with the age of many of the existing facilities, the government has embarked on a programme of airport development, starting with plans to build a new airport for Ulaanbaatar. In May 2011, the government thus announced it had secured a $270m soft loan from Japan to pay for the airport, which is to be located some 54 km from Ulaanbaatar, in the Khoshigt Valley.

Work on this project is expected to be complete by 2015, with a high-speed motorway connecting the new terminal with the capital included in the project specs. The new terminal will also significantly boost passenger and cargo capacity for Ulaanbaatar’s airport. Currently, ULN has a 500,000-600,000 passenger-per-year capacity, while the new airport will be designed to handle around 1.6m passengers per year.

FUELLING DEVELOPMENT: It is in providing links to other aimag (provinces) that some of the most significant challenges occur. One major issue for domestic airlines in particular is aviation fuel, which, like all refined fuel products, is imported from Russia, from a single supplier, Rosneft. It in turn sells to a single Mongolian outfit, Sod Mongol, which until recently sold to one aviation fuel provider, A-Jet. A second provider has begun operations, although it is still a joint venture between Rosneft and Sod Mongol. This has left the fuel market vulnerable to price hikes and shortages. In 2008, for example, when global oil prices soared, the price in Mongolia was $1471.80 per MT, while the Asia-Pacific average was $543.50. By September 2011, the local price had eased to $1260 per MT after value-added tax, although it is around $900 per MT in China – providing an advantage for airlines with flights south.

At the same time, given the small size of the aircraft in use on most domestic routes, airlines try to maximise revenue by increasing passenger numbers and cargo at the expense of fuel payload, preferring to ship fuel for the return journey by truck. This can take four to five days to reach the more far-flung airstrips, given the poor state of roads, with a corresponding increase in cost. Thus, it can often be the case that to fly within Mongolia is more expensive than to fly internationally, although passengers who need to be at their destination quickly have little other choice, given that road and rail are exponentially more time consuming.

INCENTIVES: The government does offer some incentives to private airlines to fly domestic routes, however, with recognition that the airlines are fulfilling an important social and political function by flying routes that have little economic value. Navigation charges, landing fees and handling charges for domestic airports are also currently being kept low by the MCAA.

Private airlines have also suggested the sector’s market structure is in need of reform. The MCAA is both an operator and regulator, which might create conflicts of interest. That MIAT remains 100% state owned also creates some allegations of potential favouritism, too, particularly on international routes. The lucrative Seoul link, for example, is only flown by MIAT and Korean Air, due to an agreement that initially gave rights only to these two. Since then, however, the Koreans have designated a second airline, while Mongolia has not.

S. Batmunkh, director-general at the Mongolian Civil Aviation Authority, told OBG, “For our domestic state airline – as well as private airlines – to become more competitive, we should allow them to grow as quickly as possible so that they could have a fair and equal opportunity to compete with international airlines thinking of entering Mongolia.”

Yet for all these challenges, the aviation sector seems set for a major jump in business. The pressure is on for further liberalisation of the market, and while it may still be some way from open skies, the success of the private ventures will surely create a stronger case in future for competition – over routes and fuel suppliers – with benefits for both passengers, and investors.

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The Report: Mongolia 2012

Transport & Logistics chapter from The Report: Mongolia 2012

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