Opening a Promising Future

Malaysia

Economic News

22 Jul 2010
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With air travel into and across Asia on the rise and an Open Sky Policy scheduled to come into effect in the region in 2009, Malaysian Airlines (MAS), the country's national carrier, and Air Asia, the country's low cost carrier, are looking forward to a period of growth and competition.



On January 1, 2009, an agreement calling for the 10 member countries of the Association of South East Asian Nations (ASEAN) to open and liberalise air services between their capitals will come into effect. The deal is anticipated to boost regional tourism, trade, and aviation related investments between the member countries. According to the Pacific Asia Travel Association (PATA), since Europe moved to a single aviation market in 1993, the number of air passengers has increased by 44m, and over that same period, air travel related industries have recorded $85bn in economic growth.



The route between Singapore and Kuala Lumpur is considered to be one of the more lucrative South East Asian flight routes, and the two countries, in a bid to boost travel and tourism, are in discussions to open up the route sooner than the January 2009 deadline.



To date, an agreement going back 34 years has allowed the two countries national carriers, Malaysian Airlines (MAS) and Singapore Airlines, to dominate the route, accounting for more than 200 flights a week and 80% of the market. At present, the 45- minute flight costs an average of $400 round trip. In comparison, tickets between either city and Bangkok, a route that is currently open to low cost airlines and takes over two hours to fly, can be purchased for half that amount.



When the route is opened up, budget airlines such as Air Asia and Singapore's Tiger Airways stand to be the leading beneficiaries. Both are currently lobbying for the route to be opened up prior to the agreed upon date.



Air Asia, a Malaysian low-cost carrier, was founded by Malaysian entrepreneur Tony Fernandez in 1993, and commenced operations in 1996. Now operating 75 routes, it has grown to become the most extensive budget airline in the region and has opened sister companies in both Thailand (Thai AirAsia) and Indonesia (Indonesia AirAsia).



Since Air Asia's entry to the market, Malaysia's passenger growth has increased significantly, with passengers to Thailand, for example, having grown on average by 37% per year. The airline is now requesting two flights a day to Singapore so that it can tap into Changi Airport's international and regional traffic for greater connectivity to other cities in the ASEAN region. Fernandez told the press last week, "With two daily flights, it will provide the access and thrust not only to accelerate the growth of Kuala Lumpur as the low cost hub in Asia, but also to make Malaysia the global hub for low cost travel."



Access to Singapore is especially important to the airline as later this year it will commence operations on a new venture called Air Asia X, its foray into long haul flights, with plans to fly from Kuala Lumpur to Australia, India, China, the Middle East and eventually Europe.



Idris Jala, CEO of MAS, is against accelerating the plan to liberalise air services, calling it a "Malaysia lose, Singapore win situation" in the press last week. According to Jala, local airlines are not ready to operate in a fully liberalised environment. Jala told OBG, "I like that a timeline is in place to liberalise air routes within ASEAN by January 2009 and believe it is important that we stick to this target."



Fernandez, however, believes there is enough room for both airlines to prosper, citing Bangkok, where MAS has four flights a day and Air Asia six as evidence that there is demand for both a full service and budget airline to operate.



Regardless of how the situation plays out, there appear to be promising times ahead for Malaysia's air travel industry. According to PATA, the Asia Pacific region recorded 4.1% growth in passenger arrivals for 2006, and Malaysia currently accounts for 10% of all Asia Pacific arrivals.



Bashir Ahmad, managing director of Malaysia Airports Holdings, the company which runs all 39 international and national airports across the country, told OBG, "In the next five years, Asia will be seeing a strong demand and growth in air travel, and Malaysia, with a history of focus on aviation, is well suited to facilitate it and take advantage."



While growth is expected, Munir Majid, chairman of Malaysian Airlines, told OBG, "It's a tough industry. Margins are narrow, airplanes expensive to operate and there are tremendous overall cost pressures. Competition is fierce. Over 400 aircraft, replacement or new, are coming into the Asia Pacific market in 2008, and over 500 in 2009."

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