Is ASEAN Open Skies a myth?

LESS than a year to its full implementation, the ASEAN Open Skies remains an uncertainty. First mooted some 20 years ago, it has been a long time coming. While there was some open discussion in its early days, all seems somewhat quiet of late. Is it likely to be postponed? Or is it after all a myth?

The issue really hinges on how ready the ten-nation association are collectively. Even deeper than that, how prepared are they to overcome the hurdles, real or perceived, that stand in the way of full implementation. Unlike the European Union, ASEAN is by definition an “association” and not a common government with binding law enforcement obligations. The bloc is made up of a disparate string of nations that are vastly different in their stages of economic development. How they weigh the opportunities that such a common policy could bring against possible losses at home would determine their readiness for participation. Some nations may still prefer the seeming protection of local businesses accorded by bilateral exchanges. This was already tacit when at the outset, the various nations agreed on “the importance of the development of Competitive Air Services Policy which may be a gradual step towards an Open Sky Policy in ASEAN.”

Yet the good news is that against the uncertainty, the skies are already becoming more liberal as a number of airlines have stepped up expansion plans across the region. The battle for dominance has begun.

ASEAN nations

Courtesy The Bangkok Post

Indonesia is the largest nation in the association, occupying a land mass made up of more than 13,000 islands that is almost 75% the total area of the other nine nations put together. It is also the most populous with 250 million people, followed by the Philippines (98,000,000) and Vietnam (90,000,000). While ASEAN has a combined population of over 600 million – which speaks a lot about its huge market potential – expectedly the focus is likely to be Indonesia. But Indonesia, hampered by slow infrastructural enhancement and the past poor safety records of its carriers, fears the loss of domestic markets to better endowed foreign competitors. In May 2010, Indonesia declared it was not ready to fully open its skies and would limit access to only five airports, namely Jakarta, Surabaya, Bali, Medan and Makassar. Other ports would be subject to bilateral agreements and foreign carriers would not be permitted to ply domestic routes.

So it is with the less developed nations of Myanmar, Laos, Kampuchea and Vietnam even as they seek more foreign investments and ways to boost their exports. Accessibility to the landlocked outback of these nations could open up opportunities for growth, as noted at a meeting of ASEAN transport ministers in 1996 that the association aimed “to promote interconnectivity and interoperability of national networks and access thereto taking particular account of the need to link islands, land locked, and peripheral regions with the national and global economies.” The question really is how ready they are to embrace this objective to see to its implementation.

At the other end of the spectrum is Singapore, which is the smallest of the nations but the most advanced economically and most ready to go full hog with the implementation of the ASEAN Open Skies policy. After all, Singapore has been a pioneer in advocating liberal skies on the global stage. A concern among its ASEAN neighbours may be that of how they perceive Singapore carriers as benefitting from an enlarged Asean hinterland. It works both ways. Foreign carriers, particularly short-haul operators with limited capacity and resources, will benefit from Changi Airport’s hub connections to tap into other markets in the region. Besides its strategic geographical position, Changi offers excellent infrastructure and has appeal aplenty for transits,

Middle-of-the-road Malaysia and Thailand seem less passionate about the push. Brunei Darussalam, which has the smallest population, appears quite comfortable the way it is for now. However, the Philippines with a similar geography as Indonesia could benefit from more liberal connections.

Which airlines will rule the ASEAN skies?

The region’s growth is likely to be led by budget carriers. With the focus on Indonesia, its home-based carriers are not sitting by idly. Flag carrier Garuda Indonesia is acquiring smaller 100-seat planes more suited to the shorter runways of secondary airports, which will be largely served by its budget subsidiary Citilink. Asked how Garuda was gearing up for the ASEAN Open Skies, Garuda president and chief executive Emirsyah Satar said: “The ASEAN Open Skies Agreement will open up the Indonesian market to carriers from other ASEAN member countries, but our position is very strong in Indonesia and we are prepared for the competition. Our network’s aggressive international expansion and continual developments and service improvements will also prepare us for competing in a more liberal environment.” (Interview: Emirysah Satar, president & chief executive, Garuda Indonesia, 4 September 2013) He projected that Citilink would carry 19 million passengers by 2015 and there were plans to add international routes to several destinations in Southeast Asia. Garuda is also developing a new hub in Bintan, which is a hop away from Changi Airport.

Courtesy Lion Group/Picture by Rudy Hari Purnomo

Compatriot Lion Air, which is Indonesia’s second largest airline, is also expanding its fleet and gearing up its regional subsidiary Wings Air to service smaller airports. Lion Air has long expressed its intention to hub through Changi although it has also announced plans to develop Batam as an alternative transit hub to the congested Soekarno-Hatta Airport in Jakarta for both domestic and international flights. Lion Air president Rusdi Kirana said: “The distance is actually shorter if you transit in Batam rather than flying south to Jakarta to transit. The shorter flying time makes flying more convenient for passengers and it means aircraft burn less fuel, leading to significant cost savings.” From Batam, which, like Bintan, is a stone’s throw away from Changi, Lion Air hopes to fly to destinations such as Guangzhou, Hong Kong, Bangkok, Jeddah, New Delhi and Mumbai.

It is to be seen how the plans of Garuda and Lion Air to develop Bintan and Batam respectively will impact on Changi, which is likely to see higher growth as Singapore becomes an attractive destination in itself and as a desirable feed port for international and regional traffic. In introducing a direct non-stop service from Jakarta to London in May this year, Mr Satar has hoped that Indonesian travellers would fly Garuda instead of routing their travel out of another airport such as Changi.

Other smaller carriers are expected to go for a bigger slice of the growing pie and new carriers launched to serve secondary airports.

Courtesy Airbus

Not to be left out of the race, AirAsia and Tigerair made early moves to establish their presence in the huge Indonesian market. Until a full open skies policy is in place, joint ventures are the expedient way to gaining a foothold. Indonesia AirAsia, which is 49% owned by AirAsia, operates beyond Indonesia to Singapore, Kuala Lumpur, Phuket and Ho Chi Minh City. AirAsia chief Tony Fernandes’ ambition is to dot the region with the AirAsia brand. The Malaysian budget carrier has also set up joint ventures in Thailand and the Philippines. This means AirAsia, which is headquartered in Kuala Lumpur, and its joint-venture airlines are serving destinations in all the ten Asean countries, as summed up by Mr Fernandes: “Think we are done in Asean.” But liberalization offers more than just opportunities within Asean; AirAsia is well positioned to connect its passengers beyond to destinations in Australia, Japan, Korea, China, India and the Middle East.

Responding to AirAsia’s thrust into Indonesia, Lion Air teamed up with Malaysia’s National Aerospace and Defence Industries to launch Malindo Airways for services from Kuala Lumpur across Asean and to China, India and Japan, a move that Mr Fernandes had rebuffed as no match for AirAsia’s strong brand and positioning as Asia’s largest budget carrier. So far Lion Air appears to be one with the biggest plans, which include an airline leasing company to be situated in Singapore, a new full-service airline Batik Air which was launched in May last year and which plans to fly to Singapore as its first international destination sometime this year, and a premium charter under the Space Jet brand.

Not so lucky is Tigerair, whose partnership with Mandala Airlines Indonesia is teetering on the brink, as was its partnership with SEAir in Tigerair Philippines which has since been sold to Cebu Pacific Air. Its attempt to spread its wings across the region had met with a string of failures added to a blemished record of poor service. Its ambiguous relationship with sibling airlines within the Singapore Airlines (SIA) stable has not improved its fortune; today Tigerair and Scoot are competitors on some routes. Scoot, which is 100% owned by SIA, looks likely to overtake Tigerair in the game. It has partnered Nok Air to operate a domestic service in Thailand. Nok has hoped that this will be its vehicle for expansion overseas. Regional carrier SilkAir continues to fly in the shadow of parent SIA, which may have to continue to shore up the fortunes of its offshoots with feeder traffic from and into its long haul services.

Jetstar Asia, the only other airline based in Singapore that is not part of the SIA group, has proven to be a tough competitor. Parent Qantas has been actively promoting the Jetstar brand across Asia, having also set up joint ventures in Japan, Vietnam and Hong Kong.

Whether the Asean Open Skies is finally formalized or not, regional carriers have already started to prepare for the eventuality. The question as to whether it is a myth is no longer relevant. Clearly, the end-date is not as important as the progression towards it.

Singapore Airlines improves bottom-line, Tiger Airways reduces loss: Too early to celebrate

SINGAPORE AIRLINES (SIA) posts an operating profit of S$85 million (US$68 million) in the first quarter (Apr-Jun) of its 2012/13 financial year, against a loss of S$36 million last year.

This was the result of increased passenger carriage by 9.6 per cent – the traffic growth outpacing capacity growth of 4.3 per cent – although yields declined by three per cent. The passenger load factor was 3.9 percentage points higher at 9.6 per cent.

Things are looking up for the SIA, which was once billed as the world’s most profitable airline. So it seems. But the outlook continues to be one of uncertainty in light of the sluggish global economy, particularly in Europe and the United States, which affect SIA more than regional carriers. The Q1 result shows the need to continue managing capacity in the near future.

The relatively flat performance of subsidiaries SIA Engineering and SilkAir, as well as the loss incurred by SIA Cargo shows it is not quite the time to celebrate. SIA Engineering’s operating profit for Q1 was S$34 million, compared to $35 million in 2011. SilkAir’s operating profit dipped 14 per cent from S$21 million to S$18 million. SIA Cargo’s loss deepened from S$14 million to S$49 million.

As a Group, operating profit improved from S$11 million to S$72 million.

Meanwhile, budget carrier Tiger Airways in which SIA has a 32.84-per-cent stake reported a reduced loss of S$14 million for the same quarter, from S$21 million last year. The better result came on the back of improved loads and better aircraft utilisation. Tiger Singapore posted an operating profit of S$4 million while it is expected that Tiger Australia’s performance will continue to improve following the lift of the ban by Australian regulators over safety concerns. Tiger has also staked its fortunes in two joint ventures – one with Indonesia’s Mandala Airlines and the other with South East Asian Airlines (SEAAir) in the Philippines.

Certainly it looks promising. But it too may be too early to celebrate, considering how the regional budget competition continues to intensify with the entry of more players. We can expect Tiger’s immediate goal to be recapturing its lost market. SIA itself has launched a new budget carrier – Scoot – operating to Australia and China.

Tiger Airways slow to heal

IT had not been a good year for budget carrier Tiger Airways as it reported a fiscal year loss of S$104.3 million (US$81.3 million) for 2011/12 compared to a profit of S$39.9 million the previous year.

Added to the woes of high jet fuel costs that almost every airline is griping about, Tiger suffered from a period of flight suspension by the Australian authorities for safety infringement. Passengers carried in Q4 (Jan-Mar) was down 25 per cent, but if you look at Australia alone, it plunged 56 per cent.

If it is any indication of a recovery on the horizon, Q4 loss of S$16.4 million is a tad better than Q3 loss of S$17.4 million, both quarters reportedly levelling off the loss. Analysts are optimistic that things should look up for the beleaguered carrier, which is 32.8 per cent owned by Singapore Airlines (SIA),

Three factors may favour its recovery. First, services in Australia resume in July. Second, start-up joint operations with Indonesian carrier Mandala Airlines and the Philippines’ SEAir will also help utilize excess capacity. And, third, possible boost from feeder traffic when SIA’s second budget subsidiary Scoot commences operations to Sydney in July.

But is the picture all that rosy? Tiger will have to work hard to regain lost customers against main rivals Qantas Domestic and Virgin Australia. Mandala Airlines and SEAir have yet to be tested. And Scoot may not fill the seats of Tiger as expected if it carries mainly end-to-end traffic – the same that could be said of feeder traffic from parent SIA, which, incidentally, has entered into an arrangement with Virgin Australia to connect traffic on each other’s flights.

All that, too, is subject to a bigger IF as the airline industry continues to languish in global economic uncertainties and faces an increasingly volatile fuel price.

Healing the wounded Tiger

THE Tiger Airways stock as listed on the Singapore Stock Exchange has recovered some lost ground as it moves up from a low of S$0.60 (US$0.48) per share to just below S$0.80 per share although it is still far from its peak of S$2.20 per share. Its initial public offering price was S$1.50 per share. It made a debut high of S$1.58 when listed on January 21, 2010.

Is the wounded Tiger finally healing?

Latest performance statistics shows that the budget airline carried 384,000 passengers in February, a fall of 19% from the same month last year. The load factor fell two percentage points to 81%. This was attributed to reduced capacity for its Australian operations because of the limitation placed upon Tiger by the Australian authorities following the carrier’s safety infringement last year, and to increased capacity by 13% for its Singapore operations.

If this is any indication of the trend, it shows a continual decline in the number of passengers carried. In January, the number fell 16% YoY to 466,000. And for the 12 months to Feb 29, Tiger carried 5.571 million passengers, declining by 6% compared to the previous year. The numbers for the last two months were below the average of 472,100 for the first 10 months, with February carriage lower by close to 19%.

With only one month left to add up the result for the full FY2011/12 ending Mar 31, we are unlikely to see a significant lift to the bottom-line. Tiger reported a net loss of $17.4 million in 3Q (Oct-Dec), which is traditionally a high-demand season, compared to a profit of S$22.5 million in 2011. Australia and Singapore operations posted losses of S$8.6 million and S$4.8 million respectively. There had been also some concerns about Tiger’s investment in its partnership with Philippines carrier SEAir for which Tiger had made a provision of S$7 million for doubtful receivables.

By all indications, it would be a report in red ink compared to a net profit of S$39.9 million the previous year. Yet the year ahead should look better for Tiger in terms of carriage since the Civil Aviation Safety Authority of Australia (CASA) is relaxing the restrictions imposed on the budget carrier, allowing it to operate a maximum of 64 sectors daily from October – an increase from the current 38 sectors daily, to be implemented gradually from July. Tiger operated 60 sectors daily prior to the suspension. This will mean improved fleet utilization to fill up excess capacity.

Tiger Airways Australia CEO Andrew David said: “We are continuing with our future Australian expansion as planned. The business goal was to have all 10 aircraft operating in Australia by second half of 2012.” Presently only seven of the 10 aircraft are being utilised. The airline plans to establish a second Australian base in Sydney from July, in addition to Melbourne. This will provide up to 38 services daily through Sydney Airport, including a new Sydney-Brisbane service which holds much promise in light of Air Australia’s exit.

Tiger Australia is expected to perform better than its Singapore counterpart as it focuses on rebuilding its lost business and taking advantage of new opportunities. Singapore operations are likely to see a cap on capacity to improve yield.

There is also the good news that the Indonesian regulator has reactivated the Air Operator’s Certificate (AOC) of PT Mandala Airlines, which will resume services in April 2012. Mandala’s AOC has been frozen since the suspension of its operations in January 2011. Tiger has acquired a 33% stake in the carrier, a belated success in its acquisition quest after experiencing setbacks elsewhere. This move will also help Tiger shift excess capacity to its new joint-venture as Tiger will lease three aircraft to Mandala initially, increasing to 10 by 2013 in compliance with Indonesian regulations that require new airlines to have a fleet of at least 10 aircraft within its first year of operations.

However, the picture may not be as rosy as it seems. Tiger faces tough competition in the region, particularly from AirAsia and Jetstar. It is also not spared the affliction of the escalating fuel price, which is apt to weigh more heavily on budget carriers than the bigger players. Stakeholder Singapore Airlines is said to be looking for a new man to helm the airline – such a move at the top that always comes with expectations of a fresh approach that in this case should help the wounded Tiger heal faster.