Liberalisation of domestic airspace has led to competition between established airlines and newer ones looking to expand

Myanmar’s domestic airline space has become increasingly crowded in recent years as local conglomerates vie to establish their own airlines. At the same time, the industry’s service quality and safety record require improvements, even as rates for travellers remain high. International airlines are keen to engage with the growing market, and a number of airlines are adding cities in Myanmar to their flight schedules. While there have yet to be any major merger deals, this is likely to change as international buyers look increasingly to tap into the rising domestic airline market.

Growing Numbers

As of January 2014, there were 23 international airlines flying to and from Myanmar. The three largest were Thai: Thai Airways with an estimated 15,036 seats available per week (15%), Thai AirAsia with 11,160 seats per week (11%) and Bangkok Airways with 10,066 seats per week (10%). Alongside them are two international airlines based in Myanmar, Myanmar Airways International and Golden Myanmar, with 9660 seats (10%) and 5050 seats (5%) per week, respectively. Of the 23 total international airlines, almost half had been added in the previous 18 months as a result of the government’s reform programme and the subsequent surge in tourism, especially over the winter months. At the beginning of 2014 weekly international available seats surpassed 100,000, a 25% increase year-on-year, making Myanmar one of the industry’s fastest-growing markets in Asia, albeit from a low base. This growth was driven mainly by new connections from domestic cities to Bangkok, Thailand. In addition to the commercial hub Yangon, airports were opened to flights in the capital city Naypyidaw and the second-largest city Mandalay.

Fragmented Market

There are nine fully operating airlines in Myanmar, two with licences recently issued, and two more expected to join by the end of 2014. The nine local carriers controlled only 40 aircraft by November 2013, 13 of which were jets, and only two of these domestic airlines operate more than five aircraft each: Air KBZ and the state-run Myanma Airways. However, this fragmented market has prevented airlines from achieving economies of scale and keeps costs low, in turn leading to sub-par safety standards. This is a major concern for both tourists and potential international partners: there were four crashes in 2012, of which one was fatal.

The government liberalised domestic airspace as part of its reform programme from 2011 onwards, letting new companies apply for a licence as long as they met a set of minimum requirements, which has led to a large quantity of smaller domestic carriers to service a relatively small market. Within South-east Asia, only Indonesia has more domestic airlines than Myanmar, and catering to a market around 20 times the size of Myanmar’s. Analysts expect competition will intensify further and that airlines will consolidate or form international joint venture agreements in the coming years. Once the ASEAN “open skies” policy comes into effect in 2015, Myanmar is expected to see more offers to upgrade its airlines. “The open skies policy will result in more tourists entering Myanmar from our international airports,” U Htoo Thet Htwe, chairman of Air Bagan, told OBG. “This is likely to create greater demand for flights to other local airports, which in turn would generate income for local airlines in the country.”

Internationals

In many ways this process has already begun. In August 2013 Japan’s All Nippon Airways (ANA) signed a partnership agreement with Asian Wings, one of Myanmar’s smaller carriers, planning to invest $25m for a 49% stake in the local carrier. The deal was heralded as the first investment into a domestic airline but eventually fell through in July 2014.

ANA has cited overwhelming domestic competition and concerns over the viability of the plan given Asia Wings’ limited size, but the local carrier is confident it can find a new international partner in the future. Indeed, some international carriers are considering negotiating for a 49% equity stake in a local counterpart, the maximum proportion permitted by current legislation in Myanmar. For example, Vietjet, the first Vietnamese private airline established in 2007, has declared they are seeking a local partner as they push to increase their Asian fleet from eight to 20 in 2014. Indonesia’s Lion Air also aims to expand to Myanmar through its Thai partners, as the company’s chairman, Rusdi Kirana, looks to expand in the region.

AirAsia, the low-cost Malaysian airline, has secured more seat entitlements from its subsidiaries and joint ventures across Asia, including in September 2014 through a joint venture with AirAsia Zest, based in the Philippines. Zest was granted 1260 seats to Yangon after an air service agreement between the Philippines and Myanmar that allowed a total of 3780 seats, equating to AirAsia Zest securing a third of the total quota between the two countries. No joint venture deals have been closed so far, although some measure of consolidation may be inevitable in 2015.

MAI

Myanmar Airways International (MAI) is the country’s international flag carrier, and was the sole international operator until Golden Myanmar Airlines was set up in August 2012. Founded as the Union of Burma Airways in 1946, shortly before the country attained independence in 1948, the state-run airline went through many iterations before being renamed MAI in 1993 as part of a Singaporean joint venture. After a subsequent joint venture with Hong Kong’s Region Air Myanmar that ended in 2007, the company was acquired by the local KBZ Group in 2010. While MAI benefitted from the boom in tourism after 2011, the company is likely to face increasing capacity challenges in the future due to the recent entry of new carriers. Indeed, the airline’s market share dropped from 19% in 2012 to 12% in 2013, flying 312,000 passengers in that year, 17% fewer than in the previous year.

Many of MAI’s new routes have failed to prove economical: a Mandalay-Bangkok route lasted only a few months in 2013 and a Yangon-Siem Reap option was suspended in early 2014. The company is looking further north after the success of its Yangon-Guangzhou route, launched in late 2010. It is also likely to turn to Japan, where it charters flights to a number of cities, for its next phase of expansion, as well as seeking out new routes to New Delhi and Hong Kong.

Domestic Expansion

Myanmar’s airspace is set to heat up further as tourist numbers continue to climb. MAI is facing competition from other domestic airlines looking to expand internationally. In 2015 Myanma Airways (MA), now the sole state-run domestic flag carrier, will take a delivery of 10 Boeing 737s from GE Capital Aviation Services as part of a landmark $1bn deal to launch international routes. Moreover, MA plans to target Seoul and Tokyo, making it perhaps MAI’s most prominent competitor. MAI may respond by partnering with its sister company Air KBZ, a domestic carrier, connecting their international and domestic routes. As both companies have a shareholder in common, KBZ Group, this seems likely. MAI has also begun flying to Japan and is looking to expand its weekly flights.