Strategic Directions for ASEAN Airlines in a Globalizing World

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Strategic Directions for ASEAN Airlines in a Globalizing World Strategic Directions for ASEAN Airlines in a Globalizing World Ownership Rules and Investment Issues REPSF Project No. 04/008 Authors: Mahani Zainal-Abidin, Wan Khatina Wan Mohd Nawawi, and Sazalina Kamaruddin Final Report Revised (November 2005) The views expressed in this report are those of the authors, and not necessarily those of the ASEAN Secretariat and/or the Australian Government Strategic Directions for ASEAN Airlines in a Globalizing World: Ownership CONTENTS CONTENTS...............................................................................................................................I LIST OF TABLES ....................................................................................................................II LIST OF TABLES ....................................................................................................................II LIST OF BOX...........................................................................................................................II 1. INTRODUCTION ................................................................................................................1 2. DEVELOPMENT, GROWTH AND PERFORMANCE OF ASEAN AIRLINES...................3 2.1. Historical Development ...........................................................................................3 2.1.1. Category of Airlines ........................................................................................4 2.1.2. Factors Determining Airlines Success............................................................4 2.1.3. Policies on Routes..........................................................................................5 2.2. Growth Outlook ........................................................................................................5 2.3. Performance SIA ......................................................................................................6 2.3.1. Airline performance ........................................................................................6 2.3.2. Airport performance......................................................................................10 3. OWNERSHIP RULES AND STRUCTURE ......................................................................11 3.1. Private sector financing of transport infrastructure ...........................................11 3.2. The role of government in the aviation sector: Ownership and regulations....11 3.3. Privatisation of airlines in ASEAN ........................................................................12 3.4. Relaxation of foreign ownership rules: international experience .....................13 3.5. Relaxation of foreign ownership rules: the ASEAN experience ........................14 3.6. Impact of 1997/1998 Asian financial crisis on the sector ...................................17 4. FUTURE TRENDS FOR THE AIRLINE INDUSTRY........................................................19 4.1. Liberalization and expansion of air services.......................................................19 4.2. Emergence of second international airlines........................................................19 4.3. Global: Strategic alliance ......................................................................................19 4.4. Community or regional ownership vs. country-specific ownership .................20 5. RELATIONSHIP BETWEEN AIRLINES GROWTH WITH OTHER SECTORS...............23 5.1. Increasing demand for air services due to higher economic activities ............23 5.2. Emergence of China as an important destination for ASEAN carriers .............23 5.3. Increasing consumer influence, affluence and sophistication..........................24 5.4. Airport Infrastructure and Facilities .....................................................................24 6. EXPERIENCE OF LIBERALIZATION OF AIRLINE OWNERSHIP STRUCTURE..........27 6.1. The EU: Setting new standards in M&A activities...............................................27 6.2. Australia and New Zealand: The Single Aviation Market (SAM) ........................27 7. FINDINGS OF THE STUDY .............................................................................................29 7.1. Options....................................................................................................................32 REFERENCES.......................................................................................................................36 REPSF Project 04/008: Final Report (Revised) i Strategic Directions for ASEAN Airlines in a Globalizing World: Ownership LIST OF TABLES Table 1: Size of Fleet, Routes and Workforce......................................................................5 Table 2: SIA’s Financial Performance ..................................................................................6 Table 3: SIA’s Passengers and Cargo Performance...........................................................7 Table 4: Thai Airways Financial Performance .....................................................................7 Table 5: Thai Airways Passengers Performance.................................................................8 Table 6: MAS Financial Performance ...................................................................................9 Table 7: AirAsia Financial Performance...............................................................................9 Table 8: Privatisation initiatives in ASEAN........................................................................12 Table 10: Aviation policy in the ASEAN countries............................................................15 Table 11: CAAS Group Financial Results ..........................................................................24 Table 12: MAHB Financial Results......................................................................................25 LIST OF BOX Box: A scenario for liberalization .......................................................................................34 ii REPSF Project 04/008: Final Report (Revised) Strategic Directions for ASEAN Airlines in a Globalizing World: Ownership 1. INTRODUCTION As a region with huge growth potential, ASEAN should work towards having a competitive, profitable and efficient airline industry that can support or even be the source of its growth. Other regions have begun the move towards a comprehensive Open Sky arrangement so that both the nations and people can benefit from a competitive airline industry through having more flexibility over route development and better pricing mechanism. To prepare for an Open Sky environment, airlines in ASEAN must first be competitive to meet the potentially keen competition that will come from both regional and external airlines. A critical factor that determines airlines’ viability and competitiveness is the ownership structure. State-owned airlines may face difficulty in accessing the market to finance its operations and expansion. In this regards, it would useful to understand the link between ownership and performance and to analyse the ownership rules and structure to prepare ASEAN airlines for a competitive environment of open sky. Yet, there is also a fear that the open sky could make the environment more uncertain – namely, how the airlines can remain viable under a less stable and highly competitive environment. The paper will begin with the analysis on the development of ASEAN airlines, including a brief discussion on the growth of selected ASEAN airlines and airports. Airports infrastructure and services are important to support the growth of airlines and airlines and airports ownership structure is often tied to one another. This can be an additional factor that influences the growth and performance of airlines. However, the issue of airport ownership structure is beyond the scope of this paper. Of particular significant is the link between the objectives of the establishment of the countries’ airlines and the structure of ownership (Section 2). Section 3 examines the pattern of ownership rules and structure in ASEAN. Section 4 highlights some key future trends of the global airlines industry. The growth of airlines is mostly determined by the other sectors such as tourism and trade, which is discussed Section 5. Section 6 examines efforts to liberalize the airline industry in other region. The concluding section (7) summaries the discussion on ownership structure and performance of the ASEAN airline industry and offers options for reform of ownership rules including through regional cooperation. REPSF Project 04/008: Final Report (Revised) 1 Strategic Directions for ASEAN Airlines in a Globalizing World: Ownership This page has intentionally been left blank 2 REPSF Project 04/008: Final Report (Revised) Strategic Directions for ASEAN Airlines in a Globalizing World: Ownership 2. DEVELOPMENT, GROWTH AND PERFORMANCE OF ASEAN AIRLINES 2.1. Historical Development The ASEAN region stretches across three time zones and it is a key part of Asia’s continental landmass and several archipelagos. The member countries are considered as developing world; however, some of them have joined the world’s top 20 most competitive economies. The region’s population is about 500 million, about 10% of the world’s population. ASEAN comprises of countries with diverse political and economic backgrounds. Even though most of them adopt the market-based system and policies in the management of the economy, the degree of private sector participation and in which the policies are designed based
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