Sabah: Partnering in air travel

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The New Year has started out on a turbulent note for Sabah’s air transportation sector, with some fearing that recent developments may spell hard times ahead for investment in the state and its tourism sector. Yet a possible partnership with neighbouring Brunei Darussalam’s national carrier may hold a solution to Sabah’s air travel troubles.

Difficulties began when national carrier Malaysian Airlines (MAS) announced the cancellation of a number of flights to and from the East Malaysian state. On the chopping block are flights from Kota Kinabalu to Osaka, Perth, Tokyo and Seoul. These cuts account for more than 16m available seat kilometres (ASKs), or almost 70% of MAS’s international capacity at Kota Kinabalu Airport.

In December 2011, MAS unveiled a new business plan to reduce system-wide ASKs by 12%. The capacity reductions are designed to improve the airline’s bottom line by RM220m ($70.69m) to RM302m ($97.04m) by the end of 2012.

In the first nine months of 2011, MAS reported a net loss of RM1.24bn ($398.44m) compared with a net profit of RM8.55m ($2.75m) recorded a year earlier. Its cash and cash equivalent fell to RM968.5m ($311.19m) during the same period, compared with RM1.92bn ($616.93m) in 2010.

In anticipation of this, MAS and low-cost airline AirAsia agreed to a landmark share swap and cooperation deal in August 2011, with MAS subsequently focusing more on the premium end of the air travel market. Under the deal, Tune Air – AirAsia’s major shareholder – now holds a 20.5% stake in MAS, and MAS’s major shareholder, Khazanah Nasional, now holds a 10% stake in AirAsia.

As MAS reduces its presence in the region, AirAsia’s market share in Kota Kinabalu is thus expected to increase. Kota Kinabalu is AirAsia’s second-largest Malaysian base, but it currently does not serve any of the four discontinued MAS routes, though it is expected to revive some of them.

AirAsia is already the largest carrier at Kota Kinabalu Airport, with a total capacity of 52%. Its domestic and international capacity shares are 54% and 43%, respectively.

Many of Sabah’s politicians and tourism operators have voiced their concerns regarding the national airline’s decision, accusing it of crippling business and investment. Additional concerns have been raised that the absence of competition resulting from the MAS-AirAsia swap will result in more expensive airfares for locals.

Indeed, local media reported that opposition Sabah Progressive People’s Party (SAPP) president, Datuk Seri Panglima Yong Teck Lee, a former Sabah chief minister, had even described the share-swap as a form of “collusion” between the two corporations and warned against a “monopoly” of the nation’s air-travel industry.

The high degree of concern is partly explained by Borneo’s isolated geography and difficult terrain, which makes air travel the easiest – and sometimes the only – way to get on, off and around the island.

The controversy continued when Sabah Malaysian Chinese Association (MCA) chief Datuk Edward Khoo, who is also the assistant minister to the chief minister, told reporters in January he thought MAS should rethink its business plan in Sabah.

“Being a national airline, you have such a thing called social responsibility,” he said, “especially to Sabah and Sarawak, because you are also responsible to help promote the integration of Peninsular and East Malaysia.”

He added that MAS also has a responsibility to promote business and tourism in Sabah and Sarawak, and that if it was abandoning this responsibility, perhaps it was time to open up Sabah to other airlines on international and domestic routes.

Stepping into the fray, Sabah Air Aviation (Sabah Air) announced it was seeking approval to become a full-fledged airline that would operate domestic and regional routes. However, many question whether the relatively inexperienced state-owned airline is equipped to take on such operations.

Indeed, Yong cautioned against Sabah Air starting its own carrier. “It’s too high a risk for Sabah Air to start its own airline,” Yong said. “Sabah Air is not suited as an airline to even fly within Sabah, as there are many risks and costs involved.”

According to Yong, a better alternative would be for Sabah Air to partner with an established regional airline, such as Royal Brunei Airlines (RBA). “I would feel that the first airline to talk to is RBA using Bandar Seri Begawan as a hub. RBA … want passengers coming to Sabah and Sarawak to stop over in Brunei. So it is possible that Brunei can be the hub. This is part of BIMP-EAGA,” Yong stressed, referring to the regional cooperation group.

Whether RBA is interested in partnering with Sabah Air is unknown. The Bruneian carrier has seen cut backs of its own recently, but expanding its presence within Borneo, given its aim to establish itself as a regional air centre, could be a strong incentive.

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