It is hard to overestimate the positive impact air transport has had on the country’s economic development over the past decade. The sector has played a vital role in the rapid expansion of trade and the thriving tourism industry, for starters. Kuala Lumpur International Airport (KLIA), the nation’s primary international facility, has become one of the busiest hubs in South-east Asia. In 2011 the airport welcomed more than 37m passengers, up by around 3m from the previous year. Malaysia Airlines (MAS), the state-owned flag carrier, is responsible for a substantial percentage of the growth of the airport in recent years. KLIA is also home to AirAsia, one of the first low-cost airlines in the region, which has posted solid growth in recent years, and Firefly, MAS’s low-cost subsidiary. Taking into account Malaysia’s growing popularity as a tourism destination and increasing importance as a centre for business and trade in South-east Asia, the airlines and other air transport players are expecting to see continued development for the foreseeable future.

LOFTY CHALLENGES: That said, the segment faces a number of challenges. The 10 member states of ASEAN have tentatively agreed to institute an open-skies agreement by 2015. Under the new policy, Malaysia will face competition from a number of other major regional air transport hubs, including Singapore and Thailand, both of which have been investing heavily in their airports and airlines for years. Historically, deregulation in a market such as ASEAN, which currently has excess capacity in terms of air transport, has resulted in rapid consolidation. Additionally, a number of local airlines and other related firms are still recovering from revenue-stream issues brought about by the 2008-09 international economic downturn. With these challenges in mind, the government is working to shore up Malaysia’s position as a leading regional air transport hub in a variety of ways. A new terminal is currently under construction at KLIA, which will replace the existing low-cost carrier terminal (LCCT). KLIA2 is expected to bump capacity at the airport to 70m passengers annually, from around 43m (including traffic at the LCCT). Due to the new capacity and in part to the steadily expanding regional economy, local carriers and other ancillary firms are poised for continued growth in the coming decade. AirAsia, in particular, has been adding new destinations on a regular basis over the past few years, and plans to continue to expand through 2012-13. MAS, meanwhile, recently cut a number of long-haul routes in order to focus on regional destinations, which is expected to have a positive impact on the airline’s bottom line.

Regional demand for air travel in South-east Asia is quite strong, fuelled by the rising incomes of countries and increasing ASEAN trade. A burgeoning middle class in China and India, in particular, bodes well for the expansion of Malaysia’s tourism industry in the coming years. With this in mind, the air transport segment is preparing for continued growth.

BY THE NUMBERS: Passenger travel accounts for the majority of activity in the sector. In 2011 passenger traffic at KLIA reached 37.7m, up 10.6% from 34.1m the previous year, according to Malaysia Airports Holding (MAH), the government-controlled firm that manages the airport. This was up substantially on early 2011 government estimates of 7% growth for the year. In the first half of 2012 the airport welcomed 19.3m passengers, up 4.8% from 18.4m in first-half 2011 and down slightly on January 2012 growth projections from the Ministry of Transport (MoT) of around 6% for the year.

Visitor arrivals during the second half of 2012 were expected to be up slightly over the first half of the year, primarily as a result of an anticipated increase in the number of passengers arriving from Middle Eastern countries in August 2012. This period corresponded with the Islamic celebration of Ramadan, a time when many Muslims typically take the opportunity to travel abroad. In the first six months of 2012 international passengers accounted for 70% of total traffic at KLIA, while domestic travellers made up the remaining 30%, up by 5.1% and 4%, respectively, on the first half of 2011.

Total traffic at all of MAH’s 39 airports reached 32.6m in the first six months of 2012, up 4.2% from 31.2m in the same period the previous year. International traffic at all airports increased by 5.1%, while domestic traveller figures grew by 3.5% in the same period. The jump in international passengers during this period is primarily the result of a 12.4% increase in aircraft movements by foreign airlines at MAH airports in the first six months of the year, in addition to an 8.7% increase in AirAsia aircraft movements. Total aircraft movements reached 317,671 in the first half of 2012, up 1.7% on 312,269 during the same period in 2011. While passenger traffic increased, the air cargo segment registered a decline of 0.5% in the first half of 2012, falling from 437,600 tonnes to 435,500 tonnes. This decline is primarily a reflection of stagnant economies in Europe and other regions that are still suffering the effects of the international economic downturn.

OVERSIGHT & REGULATION: Malaysia’s air transport industry is regulated by the Department of Civil Aviation (DCA), which is overseen by the MoT. The DCA was created in 1969 as a result of Civil Aviation Act 3. Until the early 1990s the department both regulated and operated the country’s airports. In 1991 Parliament voted to divide the department in two, with DCA continuing to regulate the sector and the newly launched MAH taking on the role of airport developer and operator. Since then, MAH has become a major presence in the sector. The company recently announced an initial package of RM70m ($22.5m) in incentives in an effort to attract new airlines to fly to Malaysian airports. As of mid-2012, around 60 airlines offer service into the country. Among other incentives, new operators will be given three years of free landing, which is meant in part to counter a recent tax hike on airlines operating in Malaysia’s airports. The air transport industry is the focus of a number of initiatives under the Economic Transformation Programme (ETP), which runs through 2020; and the 10th Malaysia Plan (10MP), running until 2015. Under the ETP, the state has prioritised boosting connectivity between Malaysia and 10 priority medium-haul cities, including Tapei, Osaka, Tokyo, Seoul, Sydney, Melbourne, Delhi, Mumbai, Shanghai and Beijing. As of mid-2012 this initiative was in progress, with the government working to liberalise Malaysia’s air rights allocation policy and attract new foreign carriers from China, India, Australia, South Korea, Japan and Taiwan. The primary air transport target in the 10MP is the construction of the new terminal at KLIA. The 10MP also includes an initiative that will form an air transport council, to be made up of major stakeholders in the industry, with a mandate to address relevant issues.

KLIA2: The new terminal, which is set to commence operations in May 2013, will replace the existing LCCT, which will be turned into a cargo terminal. KLIA2 will to be the world’s largest purpose-built, low-cost airline terminal, with capacity for 45m passengers annually. The facility has undergone a number of changes in recent years. Originally set to cost the government RM2bn ($645m), several expansions and additions to the original plan have bumped the price up to RM3.9bn ($1.03bn) in total. As it stands now, the terminal will cover 257,000 sq metres and include 68 boarding gates, up from 150,000 sq metres and 55 gates in the original plans. Additionally, KLIA2 will include four hotels and retail space. By 2020, MAH forecasts that 67m passengers will arrive.

CARRIERS: MAS, which is owned by a handful of government entities, has faced a number of financial challenges in recent years. After a reorganisation effort in 2005, the carrier performed well until 2011, when it was hit hard by rising fuel prices and reported a loss of RM2.52bn ($812m), the largest in the firm’s history. Since then MAS has worked to slim down, cutting a number of long-haul routes and instead focusing on medium- and short-haul markets, including many of those listed in the ETP. Despite these issues, the carrier has continued to take delivery of a number of new planes, including three of the six Airbus A380 it has on order. MAS currently flies to more than 100 destinations.

AirAsia, meanwhile, is pursuing an aggressive growth policy. In 2012 the airline, which was founded in Malaysia, set up a new regional office in Jakarta in an effort to prepare for the open-skies agreement in 2015. While most of the firm’s operations will remain in Malaysia, the move is meant to give the carrier a foothold in Indonesia, ASEAN’s largest economy. Like MAS, AirAsia has faced rising fuel costs. According to MIDF Research, a KL-based economic research firm, in mid-2012 fuel accounted for 50% of the firm’s operating costs, though this figure is expected to drop in the second half of the year. AirAsia flies to 400 destinations in 25 countries.