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Timely arrival of an air rights framework

Saturday December 25, 2010

AIR rights are essentially the lifeline of an airline's business. Airlines want to fly routes that will not only see strong passenger numbers but are guaranteed to yield profits. But turning a route profitable comes with a price, which includes marketing and advertising costs.

Many airlines spend millions to create awareness about a destination before they reap the benefits of plying those routes. To a certain degree, protectionism may be sought by airlines over such routes to ensure the return on their investments are not eroded by new entrants in the market. However, to a passenger, competition means lower fares and more choices of air carriers.

Air rights, in its simplest form, allow an airline to fly across the air space of various countries to a selected destination. The handing out of air rights falls under the discretion of the Government and to some extent, it is dictated by how hard airlines lobby for desired routes. But without a clear mechanism of how air rights are given out to local airlines, talk of protectionism often arises when airlines fail to secure the routes they seek.

To address this issue, the Government has finally decided to establish an air rights allocation framework under the Economic Transformation Programme (ETP) in line with the overall aim to increase flight frequencies and air rights to 10 priority cities.

While there have been public disputes over the distribution of air rights, local airlines are united in a common goal the need for a more comprehensive aviation policy.

“Malaysia Airlines (MAS) is in favour of a policy which includes many other components such as air rights, maintenance, repair and overhaul (MRO), ground handling services as well as rules and regulations for foreign airlines operating in Malaysia,” says MAS executive vice-president for commercial strategy Dr Amin Khan.

He adds that such a policy will be a useful reference for both local and foreign airlines.

Historically when there was only the national carrier offering commercial air transport services, there was never a pressing need for a definitive written commercial air transport policy. But with the emergence of low-cost carrier AirAsia almost 10 years ago, the commercial air transport landscape in Malaysia has changed tremendously. There now needs to be a definitive aviation policy to provide clarity on the application process and allocation of air rights.

Former transport minister Datuk Seri Ong Tee Keat shot down the request by local airlines for such a policy as recent as May but that decision has been since reversed under the recent ETP.

A Maybank Investment Bank Bhd aviation analyst says the framework should focus on developing the local air space as a hub as opposed to merely focusing on the airlines' needs.

“The Government should focus on all aspects that help develop the air space into hubs for international flights, and the hubs that need to be considered include KLIA (KL International Airport), Penang, Johor Baru and Kota Kinabalu,” said the analyst.

Government's agenda

Under the ETP, the Government wants to increase flight frequencies and air rights to 10 priority cities namely Beijing, New Delhi, Melbourne, Mumbai, Osaka, Seoul, Shanghai, Sydney, Taipei and Tokyo. The reason for this is simple Malaysia is losing out to neighbouring countries Singapore and Thailand in tourism revenue from medium-haul markets.

The ETP highlights that Malaysia's portion of medium-haul arrivals stand at 15% compared to Singapore's 43% and Thailand's 36% owing to a lack of flight frequencies to the medium-haul markets.

In 2010, Malaysia had 579 medium-haul flights per week, compared to 928 per week for Thailand and 1,010 per week for Singapore.

With the double-digit flight frequency gap to most of these cities, the Government seeks to add more flight frequencies as it expects 43% of incremental arrivals in 2020 to come from medium-haul markets.

Aside from this, medium-haul markets are expected to see the biggest growth over the next decade, at some 8% against 3% growth for short-haul markets and 2% growth for long-haul markets.

The emphasis now on such markets is mainly because tourists from the medium-haul markets contribute 53% higher yields compared with tourists from short-haul markets.

The target for 2020 tourist arrivals will be met through focused capacity increases by the local airlines and airport operator Malaysia Airports Holdings Bhd attracting more airlines from these countries to either start operating or increasing existing flight frequencies to Malaysia.

The Transport Ministry will also focus its efforts to increase air rights to countries with restricted air rights, primarily Australia, India and Japan.

With the Government working to add more flight frequencies, the next dilemma is in the distribution of air rights to the local airlines.

As such, an air rights allocation framework is being formulated with inputs from local airlines and other relevant stakeholders. A transparent and liberalised air rights allocation framework will allow local airlines to plan and launch additional flights to priority cities in a more efficient manner once the additional air rights have been negotiated.

The airlines will be briefed on the new framework, which is dubbed critical for the further development of both Malaysia's tourism and the airline industry.

The overall gross national income impact from this will be some RM3.3bil with 13,400 jobs created by 2020.

As at press time, the Transport Ministry has yet to respond to questions sent to the ministry on the status of the framework.

The way forward

Currently, MAS serves all these priority cities while AirAsia and long haul affiliate AirAsia X fly to most of these cities. But all three airlines have expressed interest to add capacity for these destinations.

Amin says that the airline has invested heavily on the 10 priority cities highlighted for more than 20 years.

“These routes are very important to us and the plan is to increase flight frequencies, subject to traffic rights, with the arrival of new aircraft,” he says.

On what would be the ideal flight frequencies to these cities for the national carrier, Amin says the airline benchmarks its flight frequencies in tandem with demand and will continue to do so.

“The allocation has been fair and transparent taking into consideration the economic, political and social benefits to the country and to ensure orderly growth of the aviation industry in tandem with traffic demand,” he says.

MAS currently flies seven times a week to Beijing, Shanghai, Taipei, Delhi, Mumbai, Tokyo, Seoul, Sydney, Melbourne and six times a week to Osaka.

Meanwhile, AirAsia and AirAsia X cover most of the priority cities with the exception of Osaka and Sydney.

Azran says he hopes to get approvals to fly to Sydney and Jeddah by the new year.

He adds that air rights should be given out as long as current bilateral air service agreements allow for it.

“As long as the bilateral rights are there, then we should be able to fly,” says Azran.

However, air rights signed some 30 years ago will present their own share of legacy issues to contend with because countries imposed stricter rules and regulations based on security factors.

“Air space was traditionally the mandate of the military air force so there were a lot more security considerations put in place and it was not designed to be passenger (aircraft) friendly. The accord agreements signed back then are binding by law and technical issues from the past need to be sorted out before air rights between countries can be further liberalised,” says the analyst.

The analyst adds that Malaysia can take a leaf from the United Arab Emirates' (UAE) book, which has seen the greatest benefit from signing various open skies with many countries.

“For this reason, Emirates (Airline) is now one of the best airlines in the world and its open skies policy with Malaysia allows it limitless flights here,” says the analyst.

The UAE, through its General Civil Aviation Authority, has a policy of open skies and its aviation market is one of the world's most open and competitive. Dubai has been dubbed as an aviation liberalisation pioneer, having adopted this policy as one of the cornerstones of its economy long before Emirates was established.

Emirates has secured over 60 open or highly liberal aviation agreements, following further recent liberalisation success in Latin America, Africa and Europe.

Meanwhile, Azran says AirAsia X's commitment to more capital expenditure next year depends on it securing approvals as there is no point in getting more airplanes without approvals, as each aircraft costs over US$100mil.

AirAsia X had previously said that the biggest market growth opportunity for Malaysia was from key trunk routes, and not the 34 peripheral cities that it has approvals for.

“With limited valuable aircraft capacity, Malaysia needs to smartly deploy it to the markets with the biggest unserved demand,” Azran says.

The analyst agrees, saying that airlines spend billions on aircraft purchases and millions on advertising for branding and positioning purposes.

The benefits of open skies

AN open skies agreement lists the conditions for de-regulating international air transport for passengers and cargo.

Some principles in the perimeter of the agreements include free access to capacity and routes, prices to be determined by the market (with the exception of a few cases) and all airlines based in the countries party to the agreement operate in equal and fair conditions.

One of the more prominent open skies agreements signed in recent times was between the European Union (EU) and the United States. The first stage of this agreement was signed in April 2007 after four years of negotiations and took effect in March 2008.

Under the agreement, any European or American airline is allowed to fly from any city within the EU to any city in the United States.

However, some parties have highlighted that the agreement was more in favour of US airlines as they were allowed to operate domestic routes within the EU while European airlines were not allowed to operate intraflights within the United States. Aside from that, European airlines could only own 25% of a US carrier while a US carrier could own 49.9% of an European airline. Prior to this agreement, traffic between Europe and the United States was predominantly regulated by bilateral agreements.

The second stage of the open skies aviation agreement between the EU and the United States was signed this year.

On the regional front, Asean countries are targeting fully open skies by 2015. Two key agreements approved last year for Asean countries were the Asean Multilateral Agreement on Air Services and the Asean Multilateral Agreement on the Full Liberalisation of Air Freight Services.

This article is a verbatim copy of the original article from The Star.

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