Glimmer of hope for aviators – BorneoPost Online | Borneo , Malaysia, Sarawak Daily News

Things are looking up for Malaysia’s aviation industry as the economy continue to improve after recent challenges seen in the global markets and the aviation industry over the last few years.

Aided by state governments’ push to improve air connectivity to and from local states within and beyond the country’s borders, Malaysia’s aviation industry could see clearer skies ahead.

Furthermore, as the global economy gradually stabilises, consumer sentiments are improving which would lead to passenger traffic across the world increasing, raising demand for air travel.

On a global scale, the International Air Transport Association (IATA) expected that the overall global airline industry to make a net profit in 2017 of US$29.8 billion, on a forecast total revenues of US$736 billion, that represents a 4.1 per cent net profit margin.

“This will be the third consecutive year (and the third year in the industry’s history) in which airlines will make a return on invested capital (7.9 per cent) which is above the weighted average cost of capital (6.9 per cent),” it said.

It also expected that one per cent of the world GDP to be spent on air transport in 2017, totaling US$776 billion.

For airlines in the Asia-Pacific region, IATA expected a net profit of US$6.3 billion in 2017 (down from US$7.3 billion in 2016) for a net margin of 2.9 per cent while capacity offered by the region’s carriers is forecast to grow by 7.6 per cent, ahead of a forecast growth in demand of seven per cent.

“The expansion of new model airlines and progressive liberalisation in the region is intensifying already strong competition. In addition profitability varies widely across the region,” it added.

The improvement in the aviation industry is also expected to be seen in Malaysia, as passenger traffic in the country has been forecast to exceed last year’s passenger traffic.

(SOURCE: MAVCOM Analysis, MAHB & Senai Airport

According to the Malaysian Aviation Commission (MAVCOM), this comes on the back of stronger demand for air travel as average fares declined in recent years, with fares for international routes seeing a sharper drop compared to domestic routes. In tandem, it noted that Malaysian carriers are expected to increase their capacity by 14.3 per cent during the year.

MAVCOM in its first industry report said Malaysian passenger traffic in 2017 is forecast to grow at 7.8 to 8.8 per cent resulting in total passenger traffic of 98.3 million to 99.2 million.

“This forecast takes into consideration the historical long-term trend of Malaysian passenger traffic, as well as the historical relationship between passenger traffic growth and Malaysian GDP growth.

“Furthermore, expectations for growth in passenger traffic in 2017 is underpinned by increased demand due to the growth of the Malaysian economy, which is in turn is driven by higher demand for exports (sustained by improvements in the global economy) and higher private domestic spending,” it said.

MAVCOM in its report also pointed out that for the first seven months of 2017, total Malaysian passenger traffic grew by 10.4 per cent as compared to the same period in 2016, underpinning the growth seen in the aviation sector overall.

Stabilising second half for air carriers

For the second half of 2017 (2H17), while the aviation sector is expected to continue to see tough competition, it would still continue its steady growth.

AmInvestment Bank Bhd’s research arm (AmInvestment) in its second half of 2017 (2H17) strategy report noted that the domestic aviation sector to see a tougher competition due to continuous capacity expansion among the domestic carriers.

AirAsia, Malindo Air and Malaysia Airlines all expanded capacity in 2016, with visitor arrivals in Malaysia expected to be boosted by the upcoming SEA Games and Asean Para Games in August and September 2017 respectively.

“The higher capacity offered should be positive for Malaysia Airports Holdings Bhd (MAHB) due to higher traffic at its airports, but this presents a risk to AirAsia Bhd (AirAsia) which could lead to lower yield. Additionally, Passenger Service Charge (PSC) rate for flights to Asean has been standardised at RM35, which could allow full-service carriers operating from KLIA Main to offer more competitive pricing for their tickets,” it opined.

All in, it expected passenger traffic in 2017 to continue to grow, reflecting the increase in seat capacity. It also expected AirAsia to record another commendable performance in FY17 due to a sustained strong demand in the region.

“As for MAHB, we expect the positive passenger traffic growth for Malaysia to be sustained throughout FY17 with all Malaysian-based carriers offering more seat capacity,” it added.

With that, BizHive Weekly takes a more in-depth look at aviators’ corporate developments to date:

AirAsia expands to meet demand

Tan Sri Tony Fernandes, AirAsia Group chief executive officer

AirAsia Bhd (AirAsia) is on a strong growth track with most analysts expecting that the low-cost carrier will record a commendable financial year 2017 (FY17).

With plans to expand its fleet further as well as plans to consolidate its Southeast Asian units, AirAsia is gearing up to very active and healthy years ahead.

Just recently, AirAsia signed an agreement with Airbus to order an additional 14 A320ceo aircraft to meet higher than expected near-term growth on the carrier’s regional network.

Last month, AirAsia Group chief executive officer Tan Sri Tony Fernandes announced the group’s plans to add an additional 23 planes to its fleet in the second half of 2017 (2H17).

Fernandes had also revealed that the group plans to expand to 500 aircrafts across the next decade.

“AirAsia Group is gearing up to expand to 500 aircraft by 2027, which entails adding 30 new aircraft every year for the next ten years.

“I’m confident that we can reach this target or even exceed it, especially as we set up our new associate airlines in Vietnam and China in the coming years.

“In this second half of 2017, we plan to add a further 23 planes to the group fleet, which will help solidify our strong position in intra-Asean routes and the domestic markets of Malaysia, Thailand and

Philippines, where we have been steadily adding market share.

“This year is the most number of aircraft we have added in four years, demonstrating our confidence in the competitive environment in Asia,” he said in a press statement.

On the long-haul expansion plan, in a report by Bernama, he said AirAsia X Bhd (AirAsia X) has to get some more planes and would announce some destinations once it is finalised, adding that London is not on the plan at the moment.

However, Fernandes hopes the Los Angeles route could commence next year as it the second route with most potential after Hawaii.

“We are really short of planes at the moment. So, we have to wait and see when we can get those planes,” he added.

In a recent report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) noted that for the rest of FY17, AirAsia has plans to expand its aircraft fleet by a net growth of 27 planes; an additional seven for Malaysia, six for Thailand, two for Indonesia, three for Philippines, six for India and three for Japan.

On AirAsia’s recent order placement for 14 A320ceo aircraft, Kenanga Research commented that its total outstanding aircraft order is now at circa 410.

“Apart from the increase in fleet size, AirAsia is also targeting a higher aircraft utilisation rate of 14.5 hours (previously 12 hours) which would be accretive towards average seat kilometres (ASK) growth – an increase of circa eight per cent based on our estimates.

“While we are expecting the boost to existing capacity, we believe AirAsia is able to maintain healthy load factors of more than 85 per cent backed by strong travel demand, coupled with their extensive route options with optimal frequencies,” the research team said.

However, it also expected some yield pressure from its increased capacities and competitions from other airlines.

“While yields might be pressured from the increase in capacity, we remain confident that they should be able to maintain its RASK, leveraging on the use of technology, which are data mining/dynamic pricing enabling them to mitigate the yield pressures through increased ancillary income from more targeted marketing/sales – which they have targeted RM55 per pax in FY17 and RM60 per pax by FY18 (compared with RM48 per pax in FY16,” it said.

Addressing the ongoing fuel price fluctuation, Kenanga Research believed that AirAsia’s fuel price problems are greatly minimised as 75 per cent of its FY17 fuel is hedged at US$59 per barrel which it has factored into its assumption; comparable to FY16’s average effective fuel costs of US$56 per barrel.

Aside from that, it also noted that AirAsia’s forex concerns are also mitigated by ticket sales, and partial US dollar-denominated borrowings.

Consolidating to strengthen operations

Earlier this year, AirAsia hinted of a consolidated entity which groups together some of AirAsia’s Southeast Asian units.

Deemed as ‘One AirAsia’, Bernama reported that the plan seeks to bring together the company’s Southeast Asian units in Malaysia, Thailand, the Philippines and Indonesia, and to go public in two years’ time.

“The first step is to create the group company, and AirAsia Group deputy chief eexecutive officer Rozman Omar is working hard on it. Is a lot of work to do ‘One AirAsia’ as a corporate structure. But ‘One AirAsia’ as a company within a company is working really well.

“We are reducing costs, combining a lot of services, standardising a lot of products,” he told reporters recently.

Fernandes said the corporate structure exercise would be a lot of works as the company has to persuade the Malaysian, Thai, Philippine and Indonesian governments to change the ownership rules, but it is beginning to happen.

He was also reported to have a target of two years until One AirAsia could be realised and to pave the way for the setting up of the holding company, AirAsia needs to list the Philippine and Indonesian units. Currently, only the Malaysian and Thai units are listed.

Recently, AirAsia also announced an internal reorganisation by undergoing a one-for-one exchange of shares with newly created AirAsia Group Bhd or NewCo.

Subsequently, all of AirAsia’s AOC associates — Thailand, Japan, Indonesia, Philippines, India — are expected to be grouped under NewCo along with its Malaysian AirAsia operations.

On this announcement, Kenanga Research noted that the new structure would be more ‘flat’ as compared to the existing structure whereby currently Malaysia AirAsia holds effective stakes of 20 to 49 per cent in Indonesia, Philippines, Thailand, Japan and India through their Investment Holding Co (AirAsia Investment Ltd).

It added, this move is in line with their plans to eventually have all existing AOC associates to be 100 per cent wholly-owned subsidiaries of the NewCo.

“That being said, we opine that there are various regulation hurdles in respective countries to overcome and the idea to have all AOC as 100 per cent subsidiaries under one group might not materialise in the near term,” it commented.

Furthermore, it pointed out that AirAsia announced the proposed listing of 57.25 per cent of AirAsia Indonesia (IAA) on the Indonesian Market (IDX) which is expected to be concluded by 4Q17.

The research team said it is positive on this move as it allows IAA to tap into the local equity market in Indonesia (IDX) to raise financing requirements to expedite growth in Indonesia.

All in, 2H17 is expected to be an exciting time for AirAsia as it revs up to meet its targets set earlier this year.

In its 2016 Annual Report, AirAsia said new routes will be introduced, including to countries in Indochina, on top of connecting its secondary hubs such as Kota Kinabalu and Johor to destinations that we already fl y to from Kuala Lumpur.

“As we press on with expansion, we will further expand our capacity and grow our fleet to over 200 aircraft by end 2017.

“With growth, however, comes added responsibility for safety. And this will continue to be given top priority.

“We will also continue to adhere to our time-tested and proven low-cost model and keep looking for more and better ways to keep our costs down. Digitalisation will be a positive boon in this regard; we look forward to seeing greater efficiencies across the board as we step up our digital processes. We will also seek ways to increase our aircraft utilisation, which features as a key consideration in our lean, cost-efficient model,” it said.

MAB gains back momentum

Following recent years of several re-strategising, reorganising and restructuring, Malaysia Airlines Bhd (MAB) is slowly but steadily rising up from its past doldrums.

In the second quarter of 2017 (2Q17), MAB managed to to record strong load factors and positive year-on-year (y-o-y) passenger revenue amidst the tough operating environment.

In a statement, it noted that passenger revenue saw an increase of eight per cent, on the back of 1.8 per cent higher capacity (ASK) compared to same period last year.

Load factor remained stable at 77.8 per cent, it said, which was a marginal decline from 79.4 per cent recorded in 1Q17.

It had also managed to increase international loads compared to 2Q16 by a significant 16.9 per cent, whilst only sacrificing a reduction of 4.5 per cent in average fare.

“However, we continue to see a challenging environment in the domestic sector due to overcapacity and relentless competition, which led to a small reduction in domestic loads to 73 per cent from 75.2 per cent in 2Q16.

“Moving forward we remain focused on improving services with a better steer on pricing.

“We have already seen progress on this front via a 2.6 per cent increase in domestic average fare,” said MAB Group chief executive officer Peter Bellew.

He added, MAB also continued to see positive y-o-y forward booking in both the business and economy class, despite the tight discipline on pricing to avoid irrational competition.

“We continue to focus on China, which has tremendous growth potential. The airline’s new routes, Fuzhou, Nanjing, and Wuhan, which were launched in the month of June, are already showing encouraging figures in their early months.

“We will continue to focus on improving the customer experience, develop a stronger and broader alliance network, and increase our focus on the world’s fastest growing aviation region, Asia,” he said.

Meanwhile, during a recent work-visit to US, Prime Minister Datuk Seri Najib Tun Razak announced that  Malaysia intended to increase the number of Boeing planes to be purchased by MAB.

Boeing and MAB signed a Memorandum of Understanding (MOU) for 16 airplanes during a ceremony at the St Regis Hotel in Washington DC.

The agreement includes eight 787-9 Dreamliners by converting eight of MAB’s existing order of the Boeing 737 MAX aircraft and eight additional purchase rights of the 737 MAX 8s as well as Boeing’s Global Fleet Care service to maintain the national carrier’s current and future Boeing airplanes

As of now, MAB confirmed an order of 25 Boeing 737 aircraft with everything else being optional.

In a statement last week, MAB said, “The options, as well as a variety of other arrangements including the recent MoU with Boeing, will allow us to have some flexibility in deciding which aircraft suits our operational environment best.

“MAB will continue to carefully evaluate all options available to us to ensure our purchases make both business and operational sense.

“This is necessary and in line with ongoing prudent fleet management and cost containment efforts across the group.”

MAB currently has 54 aircraft in its fleet of 737-800. However, it pointed out that 48 of these aircraft are currently operating, as six of these aircraft are being handed back to lessors in December 2017 and are currently going through a lease return maintenance programme.

“In 2018, we will operate 44 737-800 aircraft daily, with three in maintenance and one available spare. The 48 operating aircraft in the 737-800 fleet start reaching end of lease from early 2019,” it said.

“In June 2017, we entered into a new agreement with Boeing to allow us to choose their new larger 737-MAX10 aircraft for 10 out of the previous firm order of 25 737-MAX8.

“With this agreement, Malaysia Airlines can decide to take either the MAX8 or MAX10.  The MAX10 aircraft are expected to commence delivery in early 2021,” it added.

“The recent MOU to potentially add eight of the widebody Boeing 787-9 Dreamliner aircraft to our fleet from 3Q19 is to add capacity to the airline’s widebody fleet and provide a high level of quality on its most lucrative routes,” it said.

Of note, the 787-9 has one of the longest ranges of any commercial aircraft and can operate non-stop from Kuala Lumpur to any point in Europe as well as key cities on the west coast of the US.

“The same aircraft can similarly operate high quality services to Tokyo or flights of up to 17 hours, offering great flexibility for the airline to manage a variety of market opportunities over the next 20 years,” MAB said.

The list price for the eight Boeing 787-9 Dreamliner aircraft is some US$2.5 billion, of which MAB explained, would undergo extensive negotiation to ensure the best value on confirmation of order.

“If the order is confirmed, the initial 787-9 Dreamliner deliveries are planned for operating Asian services.  The growth of the Malaysian economy and the increasing globalisation will allow these aircraft to commence new long haul services from 2020 onwards if sufficient profitable demand exists.

“The airline is also considering options with either used Airbus A330-200/300 or new Airbus A330neo aircraft for expansion and replacement of existing aircraft,” it said.

On that note, analysts have viewed MAB’s investment as part and parcel of the group’s normal business exercise.

Affin Hwang Investment Bank vice-president and head of retail research Datuk Dr Nazri Khan Adam Khan told Bernama that the 787-9 Dreamliners is considered as future expansion.

“Without the new aircraft, MAB could not add new routes, especially in the European market as the current Boeing 777s are already old and cannot be used anymore,” he said.

RHB Research Institute Sdn Bhd chief Asean economist Peck Boon Soon said the deal as a normal business exercise for MAB if the airline were to have adequate financial muscle to keep upgrading its airplanes.

Malaysia sees strong passenger traffic, MAHB set to record good FY17

On the ground, airport operators such as Malaysia Airports Holdings Bhd (MAHB) are also expected to stellar year as passenger traffic as well as the newly implemented passenger service charge (PSC) rates are expected to boost its revenue this financial year.

In the first half of the financial year 2017 (1HFY17), MIDF Amanah Investment Bank Bhd (MIDF Research) noted that MAHB’s group revenue advanced 8.8 per cent y-o-y, led by the Malaysian operations (11.3 per cent y-o-y) while Turkey was flat (0.1 per cent y-o-y).

“PSC revenue was the key contributor to revenue growth at the Malaysian operations, rising 17.9 per cent y-o-y, underpinned by passenger traffic growth of 11.2 per cent y-o-y and higher proportion of international traffic at 50.3 per cent of total pax (48.8 per cent in 6MFY16).

“Retail and rental/royalty segments did well too, registering 15.9 per cent y-o-y and 12.2 per cent y-o-y growth respectively for the Malaysian operations.

“Retail sales per pax increased 11.1 per cent y-o-y while Eraman saw a 14 per cent y-o-y rise revenue, supported as well by better international traffic,” it said.

It also noted that rental and royalty revenue rose despite lower occupancy rate at klia2 – hovering around the mid-70 per cent range – as a result of better rental rates and sales volume.

“Slightly higher maintenance expenses are projected in 2HFY17 as the defect liability period draws to a close for klia2. Meanwhile, as anticipated, staff costs saw an uptick of 3.7 per cent y-o-y in 1HFY17 arising from a three-yearly group wide salary adjustment.

“The increments are retrospective in nature, adding a one-off RM7 million to RM8 million in of staff related expenses in 2QFY17.

“Positively, there was a 3.6 per cent y-o-y improvement in utility expenses,” it added.

Overall, MIDF Research believed that FY17 is shaping up to be a good year for the airport operator.

It opined, “Notwithstanding the cost pressures, we see further room for improvement for MAHB in 2HFY17. We continue to be bullish on MAHB’s ability to grow its topline, benefitting from continuous capacity expansion by both local and foreign carriers.

“In addition, we foresee inbound/outbound travel demand to remain buoyant from the easing of entry visa requirements and fare discounting.”

Meanwhile, Kenanga Research believed that the new PSC rates are expected to boost MAHB’s revenue by crica10 per cent and provide improved earnings visibility for their Malaysian operations.

“We look forward to the next hike in PSC in FY18 whereby KLIA Main and KLIA2 will have the same PSC rates,” it said, noting that for FY17, the only difference in PSC rates for KLIA Main and klia2 is their International PSCs whereby KLIA is at RM73 while KLIA2 is at RM50.

Aviation sector: Connecting people and economies

Local governments play a vital role in the expansion and performance of an airline in a country or state. The industry also plays a vital role in a country or a state’s economic development.

In its latest 2017 mid-year economic performance of the airline industry, IATA highlighted the importance a strong partnership between local governments and the aviation industry.

“This wider economic benefit is being generated by increasing connections between cities – enabling the flow of goods, people, capital, technology and ideas – and falling air transport costs,” it said.

It expected that the number of unique city-pair connections could reach more than 19,000 this year, almost double the connectivity by air twenty years ago.

“The price of air transport for users continues to fall, after adjusting for inflation. Compared to twenty years ago real transport costs have more than halved,” it added.

“Governments have also gained substantially from the good performance of the airline industry. Airlines and their customers are forecast to generate US$124 billion in tax revenues next year.

“That’s the equivalent of 45 per cent of the industry’s gross value added (GVA), paid to governments in payroll, social security, corporate and product taxes. In addition the industry continues to create high value added jobs,” it said, noting that that charges for services are excluded.

Similarly, MAVCOM highlighted, “Improved connectivity may promote tourism by making more destinations easily accessible and may also support mobility between countries, allowing businesses to access a wider pool of labour.”

It noted, in terms of the number of destinations served by Malaysian airports, Malaysia’s connectivity has improved from being connected to 107 destinations in 2010 to 116 destinations in 2016.

“These numbers – an increase of 8.4 per cent – represent the total destinations that can be reached via both direct and indirect flights from Malaysia,” it added in its ‘Waypoint’ report.

In Sarawak, the state government is pushing to increase air connectivity and frequencies of direct flights to and fro Sarawak to other states as well as major cities in foreign countries such China.

The state government recently said that the Ministry of Tourism, Arts and Culture would continue to focus on direct routes to China, Taiwan, Singapore, Korea and Japan.

The Ministry had also pointed out that so far, AirAsia has increased its direct flights to Sarawak over the last few months.

With direct flights to Pontianak-Kuching, there are also plans to establish direct flights to China via Vietnam.

Meanwhile, AirAsia reiterated its commitment in developing Sarawak’s air connectivity. During the launch of the Kuching-Langkawi route last month, AirAsia head of Commercial Spencer Lee said, “ “We are committed to continue growing this hub as Sarawak has a lot to offer beyond a tourism destination.

“Increasing connectivity into Sarawak is important for us as it is also one of the top preferred investment destinations in Malaysia with Sarawak Corridor of Renewable Energy (SCORE) attracting investors to set up manufacturing plants on ICT, agriculture, industrial and many more.”

“Last year, we have flown about 3.2 million guests in and out of our Kuching hub and we believe the introduction of the two new routes to and from Kuching namely Pontianak recently and Langkawi today, echoes our commitment in Sarawak.

“We would also like to thank the state government for their continuous support and guidance and we look forward to strengthen this hub with further connectivity in the future.”

Lee believed the time was right for the airline to have the Kuching- Langkawi route, as well as having a strengthened partnership with the state government and STB.

“We are very focused on improving this route and keeping it, but we alone cannot provide the air connectivity.

“So we need a close partnership from the tourism sector including hotels to assist us,” Lee said, while expressing confidence that the route would grow.

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