12-Nov-2013 10:00 AM

Myanmar’s airlines face challenges as playing field expands and competition intensifies

Analysis

Myanmar's aviation market has huge potential for both local and foreign carriers as the country has recorded some of the highest passenger growth rates in Asia since opening up in 2012. But there are also huge challenges, including infrastructure constraints, over-capacity and unprofitability.

Myanmar currently has eight carriers with at least another four preparing to launch services. Most of these carriers focus on the domestic market, operating similar routes with similar aircraft, a similar product and a similar business model. It is too many carriers given Myanmar's domestic market consists of less than four million annual passengers. Consolidation is inevitable.

Burmese carriers are also now struggling to compete in Myanmar's international market as foreign airlines have nearly tripled capacity since the market opened up. Burmese carriers transported less than 300,000 international passengers in the first three quarters of 2013, accounting for less than 16% of the total market.

Summary

Myanmar's aviation market has seen significant growth since opening up in 2012, but faces challenges such as infrastructure constraints, over-capacity, and unprofitability.
Myanmar currently has eight carriers, with four more preparing to launch services, leading to over-capacity in the domestic market.
Burmese carriers are struggling to compete in the international market as foreign airlines have tripled capacity since 2012.
Consolidation is inevitable in Myanmar's airline industry due to the large number of carriers and limited domestic market size.
Myanmar's domestic market has seen slower growth compared to the international market, with increased competition and low load factors.
Yangon Airport is facing capacity constraints, and a new airport is being developed outside Yangon to address this issue.

This is the fourth part in a series of reports on Myanmar's dynamic market. The first three reports analysed the huge increases in capacity in the international market, driven by foreign carriers. This report analyses the position and outlook for Myanmar's local carriers.

See related reports:

Myanmar has eight airlines but only 40 aircraft

Myanmar has a fragmented airline industry with eight carriers, two of which currently operate international services. These eight carriers currently operate about 40 aircraft, only 13 of which are jets, according to the CAPA Fleet Database.

Only two carriers currently operate more than five aircraft - government-owned domestic carrier Myanma Airways and privately-owned domestic carrier Air KBZ. This hardly provides any economies of scale. Myanma Airways has 11 aircraft in service but four types, excluding its three Xian MA60s which have been grounded since Jun-2013 following two runway over-run incidents. (Myanmar has a less than stellar safety record with four crashes, one of which was fatal, in 2012 alone.)

The ATR turboprop is the backbone of the domestic fleet, with 24 aircraft accounting for more than 60% of Myanmar's in-service fleet. The 13 jets include two E190s, three Fokker 28/100s and eight A320 family aircraft.

Myanmar fleet share by aircraft type: as of 12-Nov-2013

There are currently 20 ATR 72s across six carriers - Air KBZ, Myanma Airways, Air Bagan, Air Mandalay, Asian Wings and Yangon Airways - and four smaller ATR 42s which are operated by Myanma Airways, Air Bagan and Air Mandalay.

Myanmar ATR operators ranked by fleet size: as of 12-Nov-2013

Golden Myanmar Airlines will become the country's seventh ATR operator in 1Q2014 when it takes two ATR 72-600s from ILFC. Golden Myanmar launched services in Jan-2013 and currently operates two A320s on two domestic and two international routes. The ATR 72-600s will be used to launch several domestic routes - markets which are already served by as many as six carriers.

Prospect of more start-ups does not bode well for Myanmar domestic market

Myanmar Airways International (MAI) is primarily an international carrier, operating five A320 family aircraft. But the carrier currently competes on Yangon-Mandalay, the country's largest domestic route, and has been looking at launching more domestic services.

Meanwhile Asian Wings plans to launch international services in 2014. The carrier launched in early 2011 with ATR 72s and for the past year has also operated one A321, which it is now only being used domestic services between Yangon and Mandalay. The A321 is the largest aircraft currently registered in Myanmar.

As CAPA previously reported, there are four new scheduled carriers which have submitted applications with the Myanmar DCA and are preparing to launch services - Apex, FMI, Saga and Yadanabon. These carriers plan to initially serve the domestic market but some have ambitions to also operate international services. Apex and FMI are more advanced, with Apex seeking A320s and FMI planning to operate Bombardier CRJ200 regional jets.

The prospect of 12 carriers in a market the size of Myanmar is absurd. The Myanmar Government has a policy that is open to new airlines launching as long as they meet the minimum requirements. The government should look at raising the barrier to entry as having so many airlines competing is not healthy for the industry over the long term.

Only one country in Southeast Asia, Indonesia, has more carriers than Myanmar. But Indonesia is by far the region's largest market and has a domestic market that is about 20 times larger.

Malaysia, the Philippines and Vietnam also have larger domestic markets than Myanmar but significantly fewer carriers. Malaysia has seven carriers or four brands; the Philippine market also has seven carriers or four brands; and Vietnam has four carriers and three brands.

Consolidation is inevitable

Myanmar has eight airline brands with four more in the works. There is some common ownership among some of the carriers but limited cooperation. Stronger partnerships and mergers or acquisitions are a likely outcome as competition intensifies.

One of Myanmar's largest banks, Kanbawza (KBZ), launched Air KBZ in 2011 but also has a stake in MAI. The bank has been negotiating to take over MAI, which is still partially owned by the government. A KBZ-MAI tie-up would be logical as MAI is entirely an international operator with the exception of three weekly flights between Yangon and Mandalay. But MAI is managed independently and has been looking at expanding domestically, which would result in overlap with Air KBZ.

Asian Wings is believed to be affiliated, albeit loosely and not legally, with Air Bagan owner Htoo Group and Tay Za. For now the two carriers are domestic competitors but Asian Wings could potentially replace Air Bagan as Asian Wings pursues expansion following a surprising partnership with Japan's All Nippon Airways, which is in the process of buying a 49% stake in the carrier. Air Bagan has been struggling to cope due to US-imposed sanctions against Mr Za and Htoo Group companies, which remain in place because of his links to the former military junta.

ANA's interest in the Myanmar market is an indication of the opportunities. If the deal is completed it could pressure the remaining domestic carriers to seek foreign capital or pursue mergers or acquisitions. None of the other seven carriers in Myanmar are currently affiliated with an overseas brand or group. Only one of Myanmar's eight carriers currently codeshare or interline with foreign carriers - MAI, which codeshares with Korean Air and Jetstar Asia but does not partner with these carriers beyond Seoul or Singapore.

A tie-up with one of Asia's LCC groups is also a possibility, in particular for Golden Myanmar or one of the pending start-ups. VietJet, Lion and AirAsia have all showed interest in the Myanmar market, with VietJet being the closest to securing a local partner.

Myanmar domestic market traffic growth slows down

The domestic market has grown over the past few years, including by 30% in 2011 and 16% in 2012. But competition has also intensified as the number of carriers in the market has expanded from four to seven (excludes MAI) as Air KBZ, Asian Wings and Golden Myanmar entered.

Since Myanmar opened up in 2012 following landmark elections won by Aung San Suu Kyi's National League for Democracy, the international aviation market has grown significantly faster than the domestic market. International passenger traffic was up 33% in 2012, more than double the clip of the growth seen in the domestic market. So far in 2013 international passenger traffic in Myanmar is up another 31% while the domestic market is up by only 5%. (Based on latest available Myanmar DCA data, which covers first nine months of 2013 in the international market and first eight months of 2013 in the domestic market.)

As in the case with the international market, domestic capacity has been increasing at a much faster clip than passenger traffic. Load factors and a traffic breakdown by carrier are not available for the domestic market, but the total number of flights in the market for the first eight months of 2013 increased by 17% to 71,761. Seat capacity likely increased at an even faster clip as larger capacity aircraft have been introduced in the domestic market since late 2012 with the E190 at Myanma Airways, the A320 at Golden Myanmar and the A321 at Asian Wings. Previously the only aircraft in the domestic market with more than 70 seats was the Fokker 28/Fokker 100, which is operated by Myanma Airways and Air Bagan.

In the first eight months of 2013 there were 2.434 million domestic passengers in Myanmar and an average of 33.9 passengers per flight. In the first eight months of 2012 there were 2.309 million domestic passengers in Myanmar and an average of 37.5 passengers per flight.

The average domestic load factor in recent months is believed to be below 50% even with a high number of cancellations and combinations. Airlines in Myanmar often cancel flights and move passengers to their next flight or to another carrier. On the main routes, competing airlines offer similar schedules, making it easy to consolidate passengers.

Yangon and Mandalay are the only big markets in Myanmar; Nay Pyi Taw is still very small

Yangon Mingaladon is by far the largest airport in Myanmar, accounting for 33% of all domestic passengers or 803,000 in the first eight months of 2013. Mandalay Airport accounted for 14% or 351,000 domestic passengers during this period. Myanmar's third and newest international airport, at the new capital of Nay Pyi Taw, handled only 44,000 domestic passengers in 2013.

Yangon, Mandalay and Nay Pyi Taw are the only airports currently handling A320 family aircraft. Golden Myanmar, Asian Wings and MAI all operate A320/A321s on the Yangon-Mandalay route although a majority of frequencies in this market are still operated with ATR 72s. Golden Myanmar is launching on 13-Nov-2013 A320 flights from Yangon to Nay Pyi Taw although this route is not generally thick enough to support 180-seat aircraft.

Demand for Nay Pyi Taw services are still limited although should increase over time as the new city continues to develop. Nay Pyi Taw will see a large influx of passenger traffic in Dec-2013, when Nay Pyi Taw hosts the 2013 Southeast Asian Games. Several airlines are adding capacity to Nay Pyi Taw, including with A320s, which will provide a boost to Myanmar's domestic passenger numbers, but this is only a temporary reprieve for a market that is generally struggling.

There are 12 airports in Myanmar which had more traffic than Nay Pyi Taw in the first eight months of 2013. This illustrates how small the Nay Pyi Taw market is although the Myanmar Government is keen to develop Nay Pyi Taw into a major domestic and international airport.

Myanmar's top 20 airports ranked by domestic passenger traffic: Jan-2013 to Aug-2013

Rank	Airport	Movements	Pax In	Pax Out	Total Pax
1.	Yangon	18885	408383	394570	802953
2.	Mandalay	12777	176021	174528	350549
3.	Heho	8595	112856	125074	237927
4.	Nyaung Oo	5266	79620	93991	173611
5.	Tacheleik	2922	76780	70163	146943
6.	Myitkyina	2638	56721	55426	112147
7.	Kawthaung	1644	49687	45015	94702
8.	Dawei	3082	36923	38383	75306
9.	Myeik	2912	34804	34087	68891
11	Sittwe	2148	32886	34256	67142
12.	Thandwe	1695	24117	26321	50438
13.	Nay Pyi Taw	2809	23057	20775	43832
14.	Lashio	1528	13979	19167	33146
15.	Kengtung	856	14637	16596	31233
16.	Putao	578	12771	15970	28741
17.	Banmaw	576	9532	9871	19403
18.	Kyaukpyu	1092	8371	10273	18644
19.	Kalay	440	8125	8581	16706
20.	Ann	258	5784	6306	12090

Bangkok Airways and Thai AirAsia recently launched the first scheduled international services at Nay Pyi Taw. Singapore Airlines/SilkAir and Malaysia Airlines are also reportedly considering serving the new Myanmar capital although such services are unlikely to be viable in the near to short term.

Two of Myanmar's four planned start-up carriers, Apex and FMI, are also planning to be based at Nay Pyi Taw. All new start-ups in Myanmar will need to be based in Nay Pyi Taw or Mandalay, which has Myanmar's biggest airport and had the most modern terminal before Nay Pyi Taw opened at the end of 2011, as there is limited space at Yangon Mingaladon.

Yangon faces capacity constraints

Yangon Airport's passenger terminal is currently operating above its designed capacity. The terminal has only four gates and the adjacent apron which is used for bus boarding is very tight, leaving no space for additional aircraft during overnight hours. This forces new airlines to be based at Nay Pyi Taw or Mandalay, putting them at a competitive disadvantage to the eight existing carriers (although they can still serve Yangon during periods of the day when there is space on the apron).

There is only one runway at Yangon but terminal and apron congestion rather than runway or airspace congestion is the bottleneck. A terminal upgrade project is underway to expand the airport's capacity from 2.7 million to 5.3 million passengers per annum. But the parking space issue will remain. There is space on the airfield to build new aprons but the rest of the property is controlled by the military, which seems reluctant to give up the land.

The long-term solution is a new airport, which is now being developed at Hanthawaddy outside Yangon. A consortium led by Seoul Incheon was selected earlier this year. But the new airport is not slated to open until 2018.

Myanmar upgrades regional airports

Myanmar also has projects underway to upgrade several regional airports. This includes extending the apron at Heho, Nyaung Oo and Myeik; extending the runways at Sittwe, Kyaukpyu and Coco Island; and expanding the terminal at Thandwe.

Only a few of Myanmar airports currently support night-time operations. Most of the regional airports also have manual check-in systems as Internet connections are lacking or are not reliable. Regional airports generally also only have one handling company.

All of these issues make it nearly impossible for any domestic carrier to have a lower cost base or a differentiating product. This limits the ability of an LCC to lower fares and stimulate demand. While domestic fares are not very cheap, they are reasonable given the cost base, including the high price of fuel, and generally are now too low to cover costs given current load factors. Unusual rules such as requiring free travel for military generals make it even more challenging to be profitable in the domestic market.

MAI sees international market share decline

Myanmar's international market has also become challenging for the country's carriers. Flag carrier MAI transported only 236,000 international passengers in the first three quarters of 2013, a decrease of 14% compared to the first three quarters of 2012. As Myanmar's international market grew by 31% over this period, MAI saw its market share drop from 21% in the first three quarters of 2012 to only 13% in the first three quarters of 2013.

Myanmar international market share (% of passengers carried) by airline group: 9M2013 vs 9M2012

Jan-Sep-2013

Jan-Sep-2012

For the current northern hemisphere winter season MAI is operating only 42 weekly international return flights, including 14 to Bangkok, 10 to Singapore, seven to Gaya in India, five to Kuala Lumpur, three to Guangzhou and three to Phonon Penh and Siem Reap in Cambodia (on a triangle routing), according to the carrier's website. All the flights are operated from Yangon except for three of the Gaya flights, which are operated from Mandalay. MAI operates just three domestic frequencies between Mandalay and Yangon, which are essentially extensions of its Mandalay-Gaya flights.

MAI has kept its overall capacity levels roughly flat over the past two years while international carriers have nearly tripled capacity to Myanmar from about 37,000 weekly seats to about 90,000 weekly seats. Over the past year MAI has seen its share of capacity in Myanmar's international market drop from about 21% in Jan-2013 to a projected 12% in Jan-2014. The Thai Airways and AirAsia Groups both now have significantly larger operations in Myanmar than MAI.

Myanmar international capacity share (% of seats) by airline group: Jan-2014 vs Jan-2013

Jan-2014

Jan-2013

MAI has particularly faced increased competition in Myanmar's three largest international markets, Thailand, Singapore and Malaysia. In the first three quarters of 2013 MAI's traffic dropped 16% year-over-year on the Bangkok route, 28% on the Singapore route and 23% on the Kuala Lumpur route, according to Myanmar DCA data. All three markets saw significant growth, driven primarily by foreign carriers. As a result MAI's market share dropped from 17% to 13% on Yangon-Bangkok, from 33% to 20% on Yangon-Singapore and from 20% to 12% on Yangon-Kuala Lumpur.

MAI has been able to grow its traffic over the last year in the smaller Yangon-Guangzhou and Yangon-Gaya markets, where it has only one competitor (China Southern to Guangzhou and Air India to Gaya) that has not pursued significant capacity expansion. MAI does not have any competitor in the Myanmar-Cambodia market but this is a very small market that MAI has struggled in since resuming services in 2012.

Golden Myanmar's launch also has impacted MAI. Golden Myanmar now competes with MAI on the Bangkok and Singapore routes.

On the Bangkok route, Golden Myanmar transported 20,000 passengers in the first three quarters of 2013 while MAI's traffic dropped by 17,000 passengers. On the Singapore route, Golden Myanmar transported 25,000 passengers while MAI's traffic dropped 25,000 passengers. This seems to indicate that Golden Myanmar has mainly taken traffic from MAI rather than stimulate new demand. Both carriers cater mainly to the outbound Myanmar sector while foreign carriers cater to the larger inbound market. Golden Myanmar captured a 3% share of Myanmar's international market in the first three quarters of 2013, giving Myanmar carriers overall a 16% share compared to 21% a year earlier.

Myanmar airlines don't have the brands or muscle to compete in international market

Burmese carriers do not have recognised brands overseas, making it challenging to gain a significant presence in the fast-growing inbound market. With foreign carriers having pursued aggressive expansion there is little room for Burmese carriers. Thailand, Singapore, Malaysia and India are the main outbound markets for Myanmar but these are already well covered. There are limited network options for Myanmar's international carriers.

The Myanmar market is open to virtually all foreign carriers and the government is keen not to have any bilateral restrictions. This policy is beneficial for Myanmar's economic development and its emerging tourism industry. But its airlines will struggle to compete without any protection. They are small carriers without the muscle to compete.

Myanmar's carriers are also generally inefficient, with large head counts and low aircraft utilisation. For example MAI currently operates only 45 weekly return flights (42 international and three domestic) but has five A320 family aircraft operating, according to the CAPA Fleet Database. This equates to an average daily utilisation rate of less than five hours per day. (MAI's utilisation rate could be slightly higher during the peak season, when it operates some charters including one-stop services to Japan. But its utilisation rate is still very low and three of its A320s sit most of the day at the cramped apron in Yangon.)

Domestic market also has huge challenges

Myanmar's domestic fleet also has very low utilisation rates, driven partly by the inability to operate night flights on all but a couple of routes. Eventually the infrastructure will improve and airlines over time will be forced to become more efficient. Consolidation would help, leading to larger fleets and economies of scale. With almost all the carriers operating the same type of aircraft, integration could be quick and easy.

Over the long term there will be opportunities in the domestic aviation sector as Myanmar's economy grows rapidly and a larger portion of the country's 53 million population start to have the discretionary income to afford flying. For now Myanmar's middle class is very small and the income levels are not yet there to support a huge increase in passenger traffic, even if airlines can break down the existing barriers and lower fares.

Over the short to medium term there are huge challenges facing Myanmar's over-crowded airline sector. There will likely be more casualties than success stories.