Monday, December 26, 2011

Malaysia: More headwinds anticipated for aviation sector next year

Kuala Lumpur, Malaysia: It was undoubtedly an eventful year for the aviation sector in Malaysia which was dogged by controversies and surprises with the landmark share swap deal between rivals, AirAsia Bhd (AirAsia) and Malaysia Airline Systems Bhd (MAS), topping the list and 2012 is not going to be any less.

The deal saw AirAsia’s major shareholder, Tune Air Sdn Bhd, taking up 20.5 per cent share in MAS and Khazanah Nasional Bhd 10 per cent stake in AirAsia.

A management shake-up followed with AirAsia’s chief executive officer (CEO), Tan Sri Tony Fernandes, appointed non-executive director of MAS and Tengku Datuk Seri Azmil Zahruddin Raja Abdul Aziz resigned as MAS managing director.

Then AirAsia and MAS emerged as official partners of Queens Park Rangers Football Club (QPR) with AirAsia sponsoring its ‘away’ and ‘third shirt’ and MAS the ‘home’ shirts. Fernandes holds 66 per cent stake in QPR.

However, the details of how the share swap sealed in September would work for both airlines beyond the above, were sketchy amid debates, mixed reviews and calls for investigation.

The latest to join the fray is the Malaysia Competition Commission (MyCC) where the Competition Act 2010 will come into force Jan 1, 2012.

MyCC’s CEO, Shila Dorai Raj, said the commission had received complaints from consumers, urging it to look into the deal and whether it would reduce competition and result in expensive airfares.

Analysts, however, were positive on the collaboration, saying it would eliminate irrational competitive pricing, allow economies of scale, higher bargaining power and synergies.

They said it would give AirAsia a higher chance to fly routes which were previously exclusive to MAS and the national airline to achieve cost synergies in view of its high cost/available seat kilometre.

Some even noted that it could also result in MAS turning profitable as despite years of plans and revamp its financial woes continued in 2011 with common problems such as higher operating costs and spiralling fuel prices.

Earlier this month, yet another plan was announced by MAS’ new CEO, Ahmad Jauhari Yahya, which consisted of a series of action, including shrinking its network and a relentless focus on costs.

The plan, which was expected to allow MAS to return to the black by 2013, however, received a lukewarm response by analysts, saying such revamp and move were not new to the national carrier.

Among the routes MAS planned to suspend were Cape Town, Johannesburg, Buenos Aires and Dubai as well as four more routes via Sabah regional network.

AirAsia, on the converse, continued to expand its routes regionally, among the latest being Da Nang (Vietnam) and Surat Thani (Thailand).

It also opened a regional office in Jakarta, Indonesia to build relationship with Asean secretariat, which was also based there to work towards a one Asean sky and aviation authority like Europe’s joint venture aviation authority. It is also on track to list its Indonesian and Thailand affiliates.

AirAsia also hit a bumpy patch in its tiff with Malaysia Airports Holdings Bhd (MAHB) over the increase in airport tax at five airports nationwide. Both also locked horns over the upgrade of the low-cost air terminal, KLIA2.

AirAsia X was also not spared from the controversies either, with news reports that it planned to withdraw its services to Paris, London, Mumbai and Delhi.

Its chief, Azran Osman Rani, however, had denied the plan, saying the long-haul budget carrier had not made any decision yet.

The news reports said the implementation of the European Union’s (EU) Emissions Trading Scheme (ETS) come Jan 1, 2012, visa restriction and additional airport fees in India were part of the reasons for the withdrawal.

The ETS scheme called for airlines to pay up for carbon emissions it had not already accounted for.

An analyst said the industry was already struggling with volatile fuel cost and such ruling would only burden them further.

The International Air Transport Association (IATA), which represents nearly 240 airlines from 100 countries, were disappointed with the decision by the Court of Justice of the European Union to upheld EU’s plan to include international aviation in the ETS from 2012.

“Today’s (Dec 21) decision is a disappointment. It does not bring us any closer to a much-needed global approach to economic measures to account for aviation’s international emissions.

“Unilateral, extra-territorial and market-distorting initiatives such as the EU’s ETS are not the way forward,” said IATA’s director-general/chief executive officer, Tony Tyler.

IATA, in its recent report on the industry outlook, had painted a relatively bleak picture for 2012, citing the unresolved eurozone crisis as one of the factors, he said.

Tyler said airline profits could drop to US$3.5 billion from an earlier forecast of US$4.9 billion for a net margin of only 0.6 per cent from expected revenues of US$618 billion.

With various challenges and unresolved issues within and continued eurozone crisis that could continue to dampen global growth and air travel, airline companies need to brace themselves for more challenging headwinds. 

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