24-Jul-2014 10:20 AM

Cambodian aviation's surge in airline start-ups as Chinese traffic drives rapid growth

Analysis

Cambodia's aviation market continued to grow rapidly in 1H2014 despite political instability in neighbouring Thailand and weaker demand from its largest source market, Vietnam. But Cambodia has been able to take advantage of the turmoil in Thailand and the sudden unpopularity of Malaysia by successfully marketing itself as an alternative destination to Chinese tourists. With Cambodia's liberal airline policy, investors are using the opportunity to establish locally in order to serve the China market from the other end of the route.

Visitor numbers from China are up about 20% so far this year, making Cambodia an exception to the overall slowdown in China-Southeast Asia tourist traffic. The Cambodia-China market is expected to continue booming in 2H2014 as more flights are launched, including new charter flights operated by at least two Cambodian start-ups backed by Chinese investors.

The total Cambodian aviation market grew by about 10% in 1H2014 with both of the country's main airports, Phnom Penh and Siem Reap, recording similar growth. The growth rate represents a slowdown from 2012 and 2013 but is impressive given other Southeast Asian markets have seen bigger slowdowns so far this year, and in some cases contractions.

Summary

Cambodia's aviation market has continued to grow rapidly in 1H2014 despite political instability in neighbouring Thailand and weaker demand from its largest source market, Vietnam.
Cambodia has successfully marketed itself as an alternative destination to Chinese tourists, taking advantage of the turmoil in Thailand and the sudden unpopularity of Malaysia.
Visitor numbers from China are up about 20% so far this year, making Cambodia an exception to the overall slowdown in China-Southeast Asia tourist traffic.
Cambodia's three commercial airports handled 5.1 million passengers in 2013, representing 18% growth compared to 2012.
Siem Reap has seen the most rapid growth and overtook the capital Phnom Penh as Cambodia's largest airport in 2012.
Cambodian authorities are banking on a new group of Cambodian charter carriers, backed by Chinese investors, to help unlock the growth opportunities in the Cambodia-China market.

Cambodia aviation market has seen steady rapid growth since 2010

Cambodia has been one of the world's fastest growing aviation markets since 2010. As CAPA previously analysed, Cambodia's three commercial airports handled 5.1 million passengers in 2013, representing 18% growth compared to 2012. Cambodia Airports also recorded growth of 18% in 2012, 13% in 2011 and 14% in 2010.

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Popular tourist town and UNESCO heritage site Siem Reap has seen the most rapid growth and overtook the capital Phnom Penh as Cambodia's largest airport in 2012. Siem Reap has been one of Asia's fastest growing airports over recent years, recording 20% growth in 2013 and 22% growth in 2012, while Phnom Penh also recorded impressive growth of 13% and 15% respectively.

In 1H2014 both airports grew at about a 10% clip, with Siem Reap's throughput reaching 1.5 million and Phnom Penh reaching 1.3 million. Cambodia's third commercial airport, the costal town of Sihanoukville, is much smaller and only handled 18,000 passengers in 1H2014.

Monthly traffic figures at Siem Reap were in the double digits year-over-year for three of the first six months in 2014 - February, April and May. Traffic was up by 7% in the most recent month, Jun-2014. Siem Reap relies almost entirely on the leisure sector and is a highly seasonal market, with traffic figures during the peak months of December, January and February roughly double the figures from the weakest months of May, June and September.

Siem Reap monthly passenger traffic: Jan-2010 to Jun-2014

At Phnom Penh there also has been double digit growth for three of the six months so far this year - January, February and April. In Jun-2014 Phnom Penh recorded growth of 7%, equalling Siem Reap.

Phnom Penh has a large inbound leisure market but unlike Siem Reap also has significant business and outbound leisure traffic.

Phnom Penh monthly passenger traffic: Jan-2010 to Jun-2014

China growth offsets Vietnam weakness and Thailand issues

The slower growth in 1H2014 at Siem Reap and Phnom Penh compared to 2013 is not surprising as Bangkok is the largest destination from Cambodia based on seat capacity. Cambodia's tourism sector has traditionally relied heavily on connections via Bangkok with most European tourists visiting Cambodia spending part of their holiday in Thailand.

Bangkok has experienced a drop in visitor numbers since late 2013, when a prolonged period of civil unrest began impacting not only demand for Thailand but other Southeast Asian countries. The number of Thai visitors in Cambodia was also down by 7% to 90,000 in the first five months of 2014, according to Cambodia Ministry of Tourism data.

Cambodia's tourism sector also has relied heavily on Vietnam. Ho Chi Minh is the second largest international route for Cambodia, driven by local Vietnamese tourist traffic and to a lesser extent connecting traffic originating in other source markets. But rising anti-Vietnamese tensions in Cambodia have impacted Vietnamese demand in recent months.

Vietnamese arrival numbers were still up in the first five months, but by less than 1%, to 344,000. In 2013 Vietnamese numbers were up by 12% to 854,000, according to Cambodia Ministry of Tourism data.

China visitor numbers meanwhile have grown rapidly including by 39% in 2013 to 463,000. In the first five months of 2014 visitor numbers from China increased by another 19% to 241,000, enabling China to overtake South Korea as the second largest source market after Vietnam.

Visitor numbers for Cambodia's top 10 source markets: 5M2014 vs 5M2013

Total visitor numbers in Cambodia were up by 18% in 2013, including a 17% increase in visitors by air. In the first five months of 2014, there was a 6% increase to 1.9 million but a 13% increase in visitors by air to 1 million, as there was a drop in land crossing due to the instability in Thailand.

The 13% figure for air included a 10% increase in visitor arrivals at Phnom Penh and a 15% increase in arrivals at Siem Reap.

International tourist arrivals to Cambodia: 5M2014 vs 5M2013

Cambodia bucks the overall Southeast Asian trend

The increases recorded by Cambodia are an exception in Southeast Asia, which this year has generally experienced a drop in visitor numbers from China. Some countries including Thailand have also recorded overall reductions.

For example in Apr-2014 Chinese visitor numbers were down by 20% in Malaysia, 22% in Thailand and 39% in Singapore. In the same month in Cambodia, China visitor numbers were up by 18%.

Demand for holidays in Thailand has been impacted by the civil unrest in Bangkok while Malaysia demand has been impacted by the Mar-2014 Malaysia Airlines MH370 incident. Singapore figures have fallen as most of its Chinese visitors combine Singapore with Malaysia and or Thailand. Vietnam also has seen demand decrease from China - resulting in moderating growth rates - due to rising anti-Chinese tensions in Vietnam.

Cambodia's tourism authorities see the crisis in other Southeast Asian countries as an opportunity and have been doubling up on efforts to promote Cambodia as a destination to the Chinese. Cambodia, particularly the temples around Siem Reap, are an ideal destination for the growing Chinese middle class, many of whom are travelling overseas for the first time as their discretionary incomes rise.

Cambodia is close to China, cheap and culturally relatively similar, making the Chinese comfortable with eating and travelling around Cambodia. Another advantage for Cambodia is most Chinese tourists holidaying in Cambodia visit only Cambodia.

As Thailand, Malaysia and Singapore are overall much bigger destinations for the Chinese, Cambodia has only had to attract a small fraction of Chinese residents who have been foregoing holidays in other Southeast Asian countries. Most of the Chinese that have been avoiding Thailand or Malaysia have instead been holidaying in North Asia. But by just attracting a small portion of the travellers seeking alternates, Cambodia has been able to continue to grow its visitor numbers and offset the slowdown from Vietnam and Thailand.

Cambodia's Europe visitor figures also continue to increase

European visitor numbers in Cambodia were also up 10% in the first five months of 2014 to 350,000 while Oceania (primarily Australia) was up 1% to 63,000. Southeast Asia was up 3% to 732,000 including the 7% decrease to Thailand to 70,000.

While a lot of the focus has been on Chinese tourism, Cambodia tourism authorities have also been actively marketing Cambodia in Europe. Cambodia seems to have been successful in efforts to persuade Europeans not to cancel their Southeast Asian holiday plans entirely and fly through rather than stopping in Bangkok, which is still the most common connection point for Europeans.

Europe remains an important market, accounting for 18% of total visitors, compared to 13% for China. But China is clearly where the largest opportunities are. With the right marketing in China the growth rate is likely to accelerate beyond the 19% rate recorded for the first five months of 2014.

New Cambodian charter airlines will drive further growth in the Cambodia-China market

Cambodian authorities are banking on a new group of Cambodian charter carriers to help unlock the growth opportunities in the Cambodia-China market. The new Cambodian carriers are all Chinese owned, with stakes held by Chinese travel agents and, in at least one case, a Chinese airline.

Cambodia has no foreign airline ownership restrictions, making it an ideal market for foreign investors keen to start an airline. Chinese investors have recognised there is a huge opportunity to start an airline in Cambodia and cater to the inbound Chinese market.

As it is much more difficult to start an airline in China, establishing a Cambodian airline to pursue the China-Cambodia market represents a far more attractive solution.

Sources suggest there are currently several Cambodian start-ups preparing to launch services, including three Chinese backed charter airlines which have already submitted applications for a Cambodian air operator's certificate. All the airlines have relatively similar business models and plan to operate narrowbody aircraft in all-economy configuration to China and work closely with major travel agents in China. These airlines will not need to invest heavily in marketing as the travel agents will block book the seats and sell the flights as part of packages.

Cambodian authorities have been receptive to the proposed start-ups and are keen for the airlines to launch operations as soon as possible, provided they meet the regulatory requirements. Cambodian authorities believe if they do not rapidly increase capacity in the China-Cambodia market they could risk losing out on an opportunity to attract traffic because the other Southeast Asian markets will eventually recover. The hope is to get at least a couple of carriers launched in time for the peak tourist season, which begins in December.

The new airlines will also benefit from an open skies agreement which was forged between Cambodia and China earlier this year and is expected to be implemented in 2015. Cambodian authorities have also been looking at further incentivising travel from China by providing free visas for Chinese citizens. Currently Chinese citizens pay USD20 for a visa on arrival; only citizens from other ASEAN countries are able to enter Cambodia without a visa.

Bassaka Air plans Sep-2014 launch with A320s; Bayon Airlines to follow in Dec-2014

Bassaka Air is poised to become the first of potentially several Cambodian charter carrier start-ups to launch services. Bassaka has already sourced its first aircraft, a used A320, which is expected to arrive in Phnom Penh by 25-Jul-2014.

The airline has already started recruiting crew and aims to launch services in Sep-2014, pending regulatory approvals. A slight delay is possible but Bassaka should be operating multiple routes to mainland China by the start of the peak season.

The second start-up to launch services is expected to be Cambodia Bayon Airlines. Bayon is aiming to launch services in Dec-2014 using Chinese-built Xian MA60 turboprops on domestic routes and A320s on flights to China.

Cambodia domestic market could see second competitor

The domestic operation is an additional component unique to Bayon's business model. Bayon sees an opportunity to fly tourists, particularly Chinese, around Cambodia to a variety of tourist destinations as Siem Reap generally can be visited in about three days.

Domestic flights from Siem Reap to Sihanoukville and Phnom Penh are the most likely routes as these are the only two current domestic routes in Cambodia. But other unserved destinations are also possible at a later stage.

Cambodia Angkor Air is currently the only carrier operating scheduled domestic services in Cambodia and offers about 40 weekly frequencies on the Siem Reap-Phnom Penh route and one daily flight between Siem Reap and Sihanoukville. Cambodia Airports have been keen for some time to attract a second domestic carrier and stimulate demand, particularly to the sleepy beach town of Sihanoukville, which has attracted very limited traffic since opening several years ago.

Another proposed start-up, Cambodia Airlines, also has been planning to operate domestically. But the Cambodia Airlines project has been repeatedly delayed since the company was established in Apr-2013 by Philippine Airlines parent San Miguel and Cambodian conglomerate Royal Group. The joint venture, which envisioned domestic operations with Bombardier Dash 8 turboprops and international flights with A320 family aircraft, is reportedly likely to be abandoned entirely.

Other Chinese backed start-ups in addition to Bassaka and Bayon appear at this stage more likely to launch services than is Cambodia Airlines. But not all the proposed airlines will come to fruition. Over the years Cambodia has had several proposed start-ups, most of which have never materialised.

Cambodia currently has only two local airlines

Cambodia currently has only two local airlines (excluding air taxi operators), Cambodia Angkor Air and leisure carrier Skywings Asia Airlines. Another Cambodian airline, charter operator TonleSap, ceased operations in 2013.

TonleSap was backed by Taiwanese investors while Skywings is backed by Korean investors. Skywings traditionally has operated mainly in the Cambodia-Korea market and currently serves Seoul Incheon and Busan from Siem Reap with A320s. But Skywings also serves Hanoi in Vietnam and has been expanding to China over the past year, recognising the huge opportunities in the Cambodia-China market.

Skywings currently has two weekly scheduled flights to Xiamen, according to OAG data. It also has been operating seasonal charters to a limited number of destinations in China. Siem Reap to Hefei and Nanning were added in late Jun-2014 and early Jul-2014 respectively, with Hefei being operated temporarily.

While Korea is still an important source market for Cambodia - and hence for Skywings - it is not growing nearly as fast. Visitor numbers from Korea were up by only 3% in the first five months of 2014 to 221,000. Korea is the third largest source market for Cambodia after China and Vietnam.

Cambodia Angkor Air pursues rapid expansion in the Cambodia-China market

Cambodia Angkor Air also has been pursuing rapid expansion in China. The airline was established in 2009 as a joint venture between the Cambodian government and Vietnam Airlines but in its first three years only operated domestically and to Vietnam. Bangkok was added in late 2012 as the carrier's first international destination outside Vietnam.

Cambodia Angkor Air, however, over the past year has been focusing growth on China. Guangzhou became its first Chinese destination in Sep-2013 with scheduled service from Siem Reap.

Services to Fuzhou, Hangzhou, Nanchang, Ningbo, Shanghai, Wenzhou and Zhengzhou have all been added since the end of 2013 (with Ningbo, Wenzhou and Zhengzhou being operated as charters; not all routes are served year-round). All the destinations are served from Siem Reap but Shanghai and Guangzhou is also now served from Phnom Penh.

Cambodia Angkor Air added service from Phnom Penh to Guangzhou on 3-Jul-2014; Siem Reap-Ningbo charters were also added in early Jul-2014. Currently about a third of the carrier's international capacity is allocated to China.

Cambodia Angkor Air international capacity (seats) by country: 21-Jul-2014 to 27-Jul-2014

Cambodia Angkor Air is also a small carrier, operating just three A321s and two ATR 72-500 turboprops, according to the CAPA Fleet Database. The carrier's original business plan for 2014 included two more A321s and the launch services to Japan and Singapore. But Cambodia Angkor Air has reportedly put Japan and Singapore on hold.

Even if the flag carrier still expands its A321 fleet to support further expansion to China the market should be big enough to also support the capacity being provided by Cambodia's new charter operators.

Chinese airlines expand in the Cambodian market

Chinese carriers also have been pursing rapid expansion in Cambodia. Seven Chinese carriers now serve Cambodia, of which three provide seasonal services (Air China, Shanghai Airlines and Tianjin Airlines) and four operating year-round services (China Eastern, China Southern, Spring Airlines and Xiamen Airlines).

Xiamen is the latest Chinese carrier to enter the Cambodian market, launching services to Siem Reap from Xiamen and Fuzhou at the end of Jun-2014. Shandong Airlines has also stated its intent to launch services to Cambodia by the end of 2014 with flights from Chongqing to Siem Reap.

China Eastern is currently the largest of the Chinese carriers in Cambodia and is the largest airline overall in the Cambodia-China market with about 4,000 weekly one-way seats. China Eastern added charter services to Siem Reap from Ningbo on 9-Jul-2014, complementing seven existing scheduled routes. China Eastern currently serves Siem Reap from Chengdu, Kunming, Nanjing and Xian and Phnom Penh from Nanjing, Nanning and Shanghai, according to OAG data.

China Southern is the second largest Chinese carrier in the Cambodian market operating about 3,000 weekly seats. It has just two Cambodian routes, Guangzhou to Phnom Penh and Siem Reap, but serves both with two daily flights.

Cambodia to China capacity by carrier (one-way seats per week): 19-Sep-2011 to 18-Jan-2015

The Cambodia-China market should be able to support more capacity

Cambodian authorities and the airline start-ups believe there is sufficient demand to support more capacity in the Cambodia-China market. Charter carriers are ideally suited as they work closely with the travel agents that are now promoting Cambodia and are able to generally undercut schedule carriers by providing a basic all-economy product.

Cambodia Angkor Air for example has a relatively large 16-seat business class cabin, which it has struggled to sell on most of its routes, as well as a full-service economy product, as its A321 fleet has been sourced from Vietnam Airlines. The Chinese carriers serving the Cambodian market also provide a full-service product with the exception of LCC Spring, which currently serves Siem Reap from Shanghai with two weekly all-economy A320 flights.

The start-ups plan to operate some of the same Chinese routes but also serve several secondary cities which are now only served with relatively inconvenient one-stop products by the Chinese majors. In the main cities such as Beijing Guangzhou and Shanghai the start-ups have only been offered middle of the night slots. But the airlines have no problems with these slots as the flights from China to Cambodia are generally three to five hours long, making overnight rotations suitable. Their hybrid budget charter models also focus on keeping costs at a minimum.

Cambodian authorities are taking the right approach in actively promoting Cambodia in the Chinese market and being receptive to Chinese-backed Cambodian charter start-up carriers. As tourism is critical to Cambodia's economy it wll be important for the country's two international airports to continue their growth trajectory. Upgrades are underway at Phnom Penh and Siem Reap to double capacity to five million passengers, a figure which the airports will quickly reach if the China market grows as anticipated.

Cambodia could have easily been caught up in the crisis impacting other Southeast Asian countries. A drop in tourist figures would have had devastating effects for the small country. By seizing on the opportunities created as other markets have fallen out of favour and attracting more Chinese tourists, Cambodia is able to improve its outlook and position itself for rapid growth.