13-Feb-2014 10:07 PM

Myanma Airways to pursue major government-backed international expansion following 737 GECAS deal

Analysis

Myanma Airways has unveiled an ambitious expansion plan which will see the government-owned domestic carrier pushing into Myanmar's fast-growing but highly competitive international market. Myanma Airways plans to use a new fleet of 737-800s to launch services to North Asia in 2015, with a focus on Korea and Japan.

The carrier on 11-Feb-2014 signed an agreement with GECAS to lease 10 new 737s, including six 737-800s and four 737 MAX 8s, which will roughly double the carrier's fleet. Myanma Airways currently operates a fleet of 10 regional aircraft, including two Embraer E190s which were leased from GECAS just over one year ago.

The expansion at Myanma Airways is somewhat controversial as it will lead to the country's only government-owned carrier competing more with Myanmar's fast-growing private airline sector, which includes seven carriers with up to four more to be launched in 2014. The Myanmar government is keen for local carriers to capture a larger share of Myanmar's international market and stimulate tourism, but investing in a potentially over-ambitious expansion at Myanma Airways is a risky proposition.

Myanma Airways to return to international market after 22-year hiatus

Myanma Airways has a long and colourful history, dating back to 1948 when it was known as Union of Burma Airways (it still flies under the UB code). For several decades it was one of Southeast Asia's largest flag carriers, operating domestic and international services to several destinations throughout Asia. But since 1993 it has only operated scheduled services in the domestic market.

The introduction of 737-800s in Jun-2015 will enable Myanma Airways to return to the international market after a long hiatus. Myanma Airways managing director Capt Than Tun said at the 11-Feb-2014 press conference in Singapore announcing the deal with GECAS that the carrier aims to launch services from Yangon to Seoul Incheon and Tokyo Narita. China is also being evaluated along with short-haul international routes within Southeast Asia, including Bangkok and Kuala Lumpur.

A final network decision will be made after a study is completed with AviaSolutions. Adjustments in the new international network strategy are also possible depending on how market conditions change over the next year and what routes competitors end up launching. The Yangon-Seoul and Yangon-Tokyo routes are currently only served by Korean and Japanese carriers but some of Myanmar's other carriers have also been looking at entering these fast-expanding markets.

AviaSolutions, which is GECAS' consulting arm, will also advise Myanma Airways on other strategic issues as it restructures and prepares for international expansion. Myanma Airways is embarking on a reform process that will result in institutional, management, financial and commercial changes. The carrier also plans to invest in raising its profile overseas and could potentially be re-branded in conjunction with taking its first 737 and launching international services.

Capt Tun says the company will be corporatized in 2014. Corporatization of a government-owned flag carrier is often followed by privatisation but the government at least for now has no intentions of selling a stake in the carrier.

Myanma Airways to add three 737-800s in 2015

Myanma Airways will have the capacity to launch several international routes in 2015 as it takes three 737-800s, with the first to be delivered in Jun-2015. Two more 737-800s are slated to be delivered in 2016 followed by the last of the six aircraft in the 737NG commitment in 2017.

GECAS has not yet disclosed specific delivery dates for the four 737 MAX 8s Myanma Airways has agreed to lease but says they will come late in the decade. The 737 MAX 8 is now on track to enter service at the end of 2017. Myanma Airways plans to operate its 737s in two-class configuration and is expected to finalise a seat count and configuration in Aug-2014.

Myanmar's only international carrier during the last two decades has been Myanmar Airways International (MAI), which operates a fleet of A320 family aircraft. The government also had a stake in MAI until last year, when Kanbawza Bank (KBZ) purchased the stake. KBZ also owns one of Myanmar's seven domestic carriers, Air KBZ, which launched in 2011 and operates a fleet of ATR 72s. MAI operates almost entirely in the international market while Air KBZ is only a domestic operator (although MAI has been considering expanding domestically).

Myanma Airways has Myanmar's largest domestic network but only 13% share of domestic market

Myanma Airways has the largest domestic network, serving 26 airports compared to approximately 12 to 18 for the country's main domestic private carriers. As a government-owned carrier Myanma Airways is required to serve several rural destinations which are difficult to sustain on a purely commercial basis.

Myanma Airways says it transported 500,000 passengers in 2013, which gives it a 13% share of Myanmar's domestic market. There were 3.8 million domestic passengers in Myanmar in 2013, according to Myanmar Department of Civil Aviation data.

Myanma Airways' domestic traffic has more than doubled in recent years from a base of only 230,000 four years ago. Myanmar's total domestic market has also grown by over 60% since 2010. But year-over-growth slowed to only 8% in 2013 compared to 16% in 2012 and 30% in 2011.

Myanmar annual domestic passenger traffic and year-over-year growth: 2010 to 2013

Myanma Airways competes on virtually all of the main trunk routes against Air KBZ, Air Bagan, Air Mandalay, Asian Wings and Yangon Airways. All five of these domestic private carriers have smaller fleets, ranging from two to seven aircraft compared to 10 for Myanma Airways, but generally have higher utilisation levels.

Myanma Airways also now competes with Golden Myanmar, Myanmar's first low-cost carrier, on Yangon-Mandalay, which is by far the country's largest domestic route. Golden Myanmar currently operates one domestic and two international routes with a fleet of two A320s but is planning to launch several domestic regional routes around mid 2014 after taking delivery of two new ATR 72-600s from Air Lease. (Golden Myanmar initially was slated to take its ATR 72s in early 2014 but the deliveries have been pushed back to 2Q2014.)

Competition in Myanmar's domestic market is reaching ridiculous levels

More competition is coming to the domestic market in 2014 with the launch of up to four new carriers. The first new carrier, Mann Yatanarpon, is planning to launch services within the next couple of months. Myanmar DCA officials tell CAPA that Mann Yatanarpon has already taken its first ATR 72 and is seeking to operate scheduled services from a base in Mandalay.

Three other carriers are in the process of applying for air operators' certificates - APEX, FMI and Saga. DCA officials say APEX seeks to offer scheduled services using A320s while FMI plans to operate CRJ200s. FMI already offers charter services using aircraft wet leased from other carriers. Of the four new carriers only Saga will not compete directly with Myanma Airways as it plans to offer charter services using small Piaggio aircraft.

The prospect of a domestic market with 10 private carriers operating scheduled services along with a government-owned carrier is clearly not sustainable. Domestic load factors in Myanmar are already low - about 60% to 65% on average, according to DCA officials. There are opportunities for growth in the domestic market as inbound tourism numbers increase rapidly, leading to more foreigners flying between various tourist attractions. But only a handful of Myanmar's domestic airports attract significant tourist traffic and an overwhelming majority of the country's population do not have the discretionary income to afford air travel.

Over the long term the middle class will expand and a larger portion of the local population will be able to afford to fly. Myanmar has by far the lowest air travel propensity figures among the 10 ASEAN countries. But for the short to medium term there are more opportunities in the inbound international market.

Myanmar's international market is growing fast but is very competitive

While Myanmar's domestic market grew by only 8% in 2013, the international market grew by over 30%. The outlook for 2014 is similar with much higher international growth expected.

Myanmar annual international passenger traffic and year over year growth: 2010 to 2013

Myanmar's international market has more than doubled in size since 2010. Growth in the international market far exceeded the rate of domestic growth in 2012 and 2013 as several foreign carriers launched services to Myanmar while almost all of the existing carriers pursued significant expansion. Current international seat capacity levels in Myanmar are up almost 130% compared to Apr-2012, when Aung San Suu Kyi's National League for Democracy won landmark elections.

Myanmar's carriers are eager to tap into the growing demand for international services and close the gap with foreign carriers, which currently account for about 85% of Myanmar's international market. But foreign carriers have a competitive advantage as Burmese carriers do not have strong brands overseas and the market is dominated by inbound tourist traffic. Foreign carriers can also more easily respond to the huge seasonal fluctuations in the market by adding and up-gauging flights during peak seasons.

For example in the Yangon-Seoul market, Myanma Airways will have to compete against Korean Air (KAL) and Asiana. KAL currently serves Yangon daily with A330s (with 737-800s being used during non-peak periods) while Asiana serves the market twice weekly with 767s. The two Korean carriers have strong brands in Korea and are also big players in the North America-Myanmar market. KAL also has a codeshare partnership with MAI.

In the Yangon-Tokyo market, Myanma Airways will have to compete with All Nippon Airways (ANA), which currently operates daily services on the route using 767-300s. Competing with ANA will be challenging given that the Myanmar-Japan market is dominated by inbound tourists. ANA will have a huge advantage as it has a known brand in Japan and is also able to offer connecting flights to markets beyond Tokyo, in particular to the US.

ANA also plans to start offering connecting flights beyond Yangon using Asian Wings. ANA announced in Aug-2013 plans to buy a 49% stake Asian Wings. If the deal is completed, Asian Wings will give ANA a local sales presence in the Myanmar market. ANA also is helping Asian Wings expand into the international market, providing a potentially formidable competitor to Myanma Airways.

Myanmar cannot support several international airlines

A year ago there was only one local international carrier in Myanmar - MAI. Golden Myanmar launched services in the international market in Apr-2013.

With Asian Wings aiming to launch international services by the end of 2014 and Myanma Airways in mid-2015, Myanmar is poised to have at least four international carriers. Some of the other domestic carriers - existing and start-ups - are also looking at expanding into the international market.

It is unlikely Myanmar can sustain such a large number of international players. While the international market has huge potential, competing with larger and stronger foreign carriers will be challenging. Myanmar's private carriers are also concerned that Myanma Airways' international expansion will distort the playing field as the government will cover operating losses.

Myanmar has an open door policy authorising the launch of new airlines and the expansion of existing domestic carriers into the international market. This has led to a dynamic private airline sector which would seem to make the need for a government-owned carrier unnecessary except on regional domestic routes which cannot be served viably without subsidies. Myanmar's private carriers prefer to see the government limit its role to simply encouraging growth, with investments in infrastructure and other areas, rather than become involved in pushing an international profile for its own carrier.

The existing carriers would also like to see an increase in the barriers to entry for new carriers. So far Myanmar has not changed regulations or policy relating to new start-ups. But the DCA is encouraging existing carriers to merge, realising the market can probably not sustain such a large number of airlines.

Consolidation in the Myanmar aviation sector is inevitable. While the government has no intention of selling Myanma Airways, its decision to start investing heavily in the carrier as part of an effort to promote tourism could be reconsidered as the market evolves.

Myanma Airways also plans to expand domestic fleet with ATR 72-600s

Myanma Airways plans to use its new 737 fleet purely in the international market, leaving its current fleet primarily for domestic operations. Capt Tun says the carrier is looking at potentially using its two newly acquired E190s on some regional international routes, pointing out the type has already been used to launch charter services to Chiang Mai in Thailand and Gaya in India. But the E190s are mainly intended for domestic routes, where they have taken over the carrier's fleet of Fokker 28s.

Capt Tun says the carrier operated its last Fokker 28 flight in early Feb-2014. Myanma Airways also does not plan to reactivate its MA60s, which have been grounded since mid-2013 after two runway overrun incidents.

The carrier says its active fleet currently consists of one ATR 42, three ATR 72, two Beechcraft 1900s, two Embraer E190s and two Cessna Grand Caravans. The 10-seat Grand Caravans were added at the end of 2013 and are used to serve smaller regional airports. The carrier also added an ATR 72-500 in late 2013 while the two E190s were added in late 2012 and early 2013. With the exception of the Caravans the newly acquired aircraft were obtained used, with the E190s previously operated by Republic Airlines from the US and the ATR 72-500 by Aer Arann from Ireland.

Myanma Airways fleet summary: as of 14-Feb-2014

Aircraft	In Service	In Storage	On Order*
Total:	8^	5	*12^**
ATR 42-320	1	0	0
ATR 72-212	1	0	0
ATR 72-212A(72-500)	2	0	0
Beech Aircraft Corporation BEECH1900C	1	0	0
Beech Aircraft Corporation BEECH1900D	1	0	0
Boeing 737 MAX	0	0	4
Boeing 737-800	0	0	6
Comac ARJ21-700	0	0	2
Embraer ERJ190-100IGW(AR)	2	0	0
Fokker F-28-4000	0	2	0
Xian Aircraft Industry Company Y7-MA60	0	3	0

While the 737 deliveries will not begin until 2015, Capt Tun says the carrier aims to add two more Grand Caravans in 2014 along with two more ATR 72s. He says the government is discussing acquiring new generation ATR 72-600s although it is not clear yet if the aircraft will be purchased or leased. "In our country ATR is a very good aircraft. We have made a lot of profit from ATR," Capt Tun says.

Myanma Airways currently has a mixed ATR fleet consisting of ATR 72-500s which are about six years, older model ATR 72-200s which are almost 20 years old and an ATR 42-320 which is about 24-years old, according to the CAPA Fleet Database. The 1900s are 16 to 18 years old while the E190s are five to six years old.

New fleet comes with higher costs and need to push up utilisation rates

The acquisition of E190s, 737NGs and ATR 72-600s will completely modernise Myanma Airways' fleet. But new aircraft come with significantly higher monthly lease rates. Myanma Airways has the confidence it will have the revenues to cover the leases, pointing out it has been profitable the last couple of years as revenues have increased significantly.

But most of Myanma Airways' profits are believed to be generated by its ground handling business. Myanma Airways currently handles about 12 foreign carriers as well as some of the other local carriers. (Only three carriers in Myanmar have handling licences, forcing the other carriers to use competitors.)

None of the domestic carriers in Myanmar are believed to be profitable on a purely operational basis given the relatively low load factors and stiff competition. Like other Burmese carriers, Myanma Airways also has very low average aircraft utilisation rates - which it will need to address as it modernises its fleet.

The carrier has even been under-utilising its new fleet of E190s since adding the type just over a year ago. There have been long periods with one of the aircraft sitting idle. Currently the carrier says it is utilising the aircraft about six hours per day - which is well below industry norms.

Myanma Airways has potential but it will be an uphill climb

The low utilisation rate on the E190, however, has not discouraged GECAS from placing more aircraft with Myanma Airways. GECAS is attracted to the Myanmar market as it sees encouraging fundamentals, including rapid GDP growth. It believes Myanmar over time can emerge as another Thailand, which has over 200 jets compared to only 12 in Myanmar. There are currently no widebodies in Myanmar, compared to over 100 in Thailand. Capt Tun says Myanma Airways may consider acquiring widebody aircraft at a later stage, "depending on the market".

In announcing the lease deal for 10 737s with Myanma Airways, GECAS CEO Norman Liu held it up as "one of the largest investments by a US company in Myanmar since re-establishing relations in 2012". US Ambassador to Myanmar Derek Mitchell also attended the signing ceremony, calling it a "landmark moment" in US-Myanmar commercial relations.

The Myanmar government and GECAS have confidence Myanma Airways will emerge as a strong player following the implementation of new strategy and marketing plan along with a possible rebranding. But placing new aircraft into a pioneer market such as Myanmar comes with potentially huge risks.

Myanma Airways will need to overcome big challenges as it restructures and expands in Asia's highly competitive international market. Foreign carriers will compete aggressively on overlapping routes and could end up backing several of Myanmar's private carriers, forcing the Myanmar government to rethink its strategy for Myanma Airways.