Connections in the Sky
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As ASEAN inches towards the Asian Economic Community becoming reality in 2015, participating countries are frantically making their preparations in order to meet their obligations under the agreement, while companies here are positioning themselves to take advantage of the new opportunities this regional cooperation is expected to bring.
The core principles of the union are based on the three pillars of peace (security community), prosperity (economic community) and socio-cultural community (people). The goal is to promote the region as a stable, safe, business-friendly ecosystem of interconnected economies and populations working together for the benefit and prosperity of all members.
Once completed, the community will unite the economies of Southeast Asia as a single trading bloc with over 600 million people with a combined GDP of US$1.5 trillion, creating a third pillar of growth in Asia along with China and India.
Up, Up and Away
Regional leaders look to the Eurozone both as a model for regional cooperation and a warning about what not to do when forming an economic union of disparate countries and cultures. The woes of the Eurozone and the United States have served to make ASEAN leaders even more adamant that the region needs to look to its own back yard for economic security and growth. Thailand’s Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong said of the Asean Economic Community that “East Asia and South-East Asia have for too long been focused on export-led growth, and we forget that we have room for improvement in our own economies.” He’s right, of course, in 2011 only 25% of total trade conducted by the 10 ASEAN countries happened between members; compared to more than 75% for the E.U. and more than 80% for North America.
With the ASEAN Open Skies policy to reduce tariffs, open more routes and facilitate air travel, interregional travel and tourism is expected to see a boost. Airlines especially expect to reap the benefits of closer regional cooperation as people are encouraged to take advantage of new opportunities for trans-regional commerce and travel. Estimates are that some 120 million visitors will visit the region in 2015.
AirAsia's group chief executive officer Tony Fernandes said "the enormous potential in an underserved market of 3 billion people spread across ASEAN, Northeast Asia and South Asia offers huge opportunities and AirAsia, we are convinced, is ideally positioned to reap huge dividends by serving this market." AirAsia is considering adding 50 planes to its existing order of 75 planes to be delivered by 2016. AirAsia is a low-cost regional carrier operating out of Malaysia, Indonesia and Thailand and are represented in the iShares MCSI Malaysia ETF (NYSEMKT:EWM).
According to the company’s chairman, Malaysia Airlines has plans to nearly double the destinations it serves by 2015 to 25, including China, Japan and India. This is in addition to increasing the number of flights in existing routes. Citing the generally positive outlook for the region and growing enthusiasm for the coming union, Malaysian Airline chairman Md Nor Md Yusof says “the airline business is closely linked to the economic cycle and there is a consensus that the Asia Pacific region is the bright spot.” In Q1 2012 the airline cut several long haul routes and increased frequency to some its regional destinations.
Vietnam Airlines has introduced a program offering steep discounts for ticket purchases to selected regional destinations made at least 2 months in advance a la Ryanair. Not to be left out, Yangon Airways plans to add new domestic routes and extend its international coverage to Thailand, Cambodia and Malaysia. The airline currently operates two ATR-72 aircraft. Tourist traffic to Cambodia increased 19% in 2011 and has doubled since 2006. By far Vietnamese tourists are the most plentiful and it is via air that most of them arrive. Phnom Penh and Siem Reap served more than 1.4 million international visitors, 614,000 of them from Vietnam, in 2011.
Of Vietnam’s more than 5.4 million visitors in 2011 (up 17.8% over 2010), 54% of them came from ASEAN+3 countries, mostly from the ‘plus 3’ of China, Japan and South Korea. More than 83% came by air.
The High Cost of Flying High
High fuel costs, however, could prove to be a thorn in the side of airlines seeking to expand in the region, especially when so many other low-cost alternatives exist here. Singapore Air’s (SIA) 2011 profits tumbled nearly 70% on high fuel costs. They are also in the midst of selling off their old Boeing (NYSE: BA) 747-400 fleet for more fuel-efficient, higher capacity Airbus 380’s to service their intercontinental business. Fuel costs are so important that SIA’s 2012 Q1 results ended with a net loss due to the plunging prices on 747’s. According to a report from Ascend Worldwide, the price for a 10 year old 747-400 has dropped 10% in the past year alone to $6 million.
Carriers all over ASEAN+3 are dumping their 747’s, from Malaysia to Japan due to the increase in jet fuel prices for intercontinental travel. Silk Air, SIA’s regional subsidiary, saw their breakeven load rise 2.5% to just under 60% capacity in 2011. With the exception of the Airbus 380, the trend is towards smaller, more fuel efficient aircraft like Boeing’s 787s, which carry less than 300 people but do so with 20% less fuel usage.
The Guggenheim Airline ETF (NYSEMKT:FAA) dropped 55% from its peak in late 2010 to the bottom in 2011. It has since leveled off and looks to be unsure of where it will go. With the crash in Brent Crude below $100 and currently trading near $90 per barrel, this will provide some relief for airlines who have not been as proactive as some of the Asian carriers. British Airways comes to mind. The oil crash has a lot of analysts worried that the central banks have not responded to Europe fast enough and it is a harbinger of a deflationary wave they may not be adequately able to counter, think 2008.
The Rail Deal
New railways projects could give the airlines a run for their money, offering a cheaper and more practical alternative in a region where average incomes are still quite low. The Singapore-Kunming Rail Link (SKRL) is due to be completed by 2015, according to Malaysia’s Transport Minister. The proposed route will run from Singapore through Malaysia, Cambodia, Thailand, Vietnam, Myanmar and Laos, ending in Kunming, China. The SKRL is a major component of the ASEAN Connectivity Master Plan and will take a tremendous load off of the airline and shipping industry, especially once the port projects on the west side of the Malaccan Straits are finalized. But, these worries are a few years off. The port project at Dawei in Myanmar is currently not moving forward and alternate plans are still being considered.
Just a few years ago one could spend the entire day roaming the temples at Angkor Wat without seeing another tourist. Now the road leading to the site is often backed up for miles with tour buses full of Chinese and European visitors. Times are changing fast, and the benefits to ASEAN are potentially huge if they manage to execute well.
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