Possible outcomes for KLIA with the Proposed Commitments for ASEAN Open Sky

The likely impact on KLIA will be different at different milestones in the proposed commitments. Before 2010, it is expected that KLIA will benefit from the anticipated increase in air traffic with the implementation of the agreement since only capital cities are involved. But when all international airports in Malaysia are opened up in 2010, there is a possibility that air traffic may by-pass KLIA to pick up passengers and cargo at the other international airports in the country to feed hubs in both Singapore and Bangkok. However, since KLIA is the largest and has the most facilities compared with the other international airports in Malaysia, it is unlikely that traffic diversion will be substantial.

A more likely outcome is the use of KLIA to feed the hubs in both Singapore and Bangkok, with Singapore being the greater threat due to its proximity and status as a hub airport and the highly competitive logistics industry available there. This will have an adverse impact on KLIA's aspirations to be a hub airport for both passengers and cargo. Consequently, five crucial measures are recommended below to prevent this from happening and to facilitate KLIA to achieve its hub status.

A. Joining a Strategic Global Alliance for MAS

Ohashi et al. (2005) found that connection time is the most important factor in choosing air cargo transshipment location and routing while landing fee is the second most important factor. They also found some marginal evidence that freight forwarders may try to avoid large and congested airports. Their study therefore suggests that the choice of an air cargo transshipment hub is more sensitive to time cost than monetary cost. Given the importance of connection time, improving the networks of airlines based at KLIA play a crucial role in enabling KLIA to be a hub.

In 2006, MAS was reported to have an intention to join Sky Team as part of its plans to rationalize its international destinations under the hub concept (Centre for Asia Pacific Aviation March 6, 2006). Subsequently, MAS launched its own MAS Overall Strategic Alliance Integration Concept (Project MOSIAC) together with its Business Turnaround Plan for the period 2006–2012. This is essentially a code share alliance with other airlines so as to expand MAS's network. Nevertheless, the airline industry is dominated by global alliances that have been formed since the early part of the nineties. As they are global in scope, these alliances are the most significant in terms of network expansion. Although it is possible to establish various partnerships with individual airlines across different global alliance groups, the number and extent of “side alliance deals” will decrease over time as the global reach of each alliance network improves (Oum 2001).

In 2000, Oum reported that five alliance groups accounted for 57% of the world's total revenue passengers kilometers (RPK), a widely used measure of airline industry output (Table 9 [ PDF 27KB | 1 page ]). Other indicators such as global passenger shares and operating revenue shares also show the substantial shares accruing to global alliance groups. This concentration of RPK, global passengers, and operating revenues in the hands of global alliance groups has grown over time when the 2000 data is compared with the 2007 data. By 2007, the share of RPK in the hands of the top three alliance groups (Star Alliance, Oneworld, and Skyteam) amounted to 59.1% while the share of global passengers and operating revenue controlled by them are 63.8% and 67.4%, respectively. This shows clearly that the market is getting more and more concentrated. Within ASEAN, both Thai Airlines and Singapore Airlines are members of the leading alliance group, the Star Alliance.

Global alliances can also contribute to productivity enhancement, competitive pricing and profitability of its partners as alliance partners generally increase traffic routing via their intercontinental alliance gateway airports after the strategic alliances (Oum 2001). Bowen (2000) also showed that an airline that is more successful in forming alliances will draw more traffic feed from around the world to its primary hub.

Given the trend shown in Table 8 and the generally positive impact of alliances on the performance of the airlines, it is imperative for MAS to join a global alliance to improve its market feed.

B. Accelerating the Construction of the New LCCT Terminal at KLIA

Air Asia is well placed to gain from the liberalization, as it is the biggest LCC in Southeast Asia, measured by fleet size. It has already established a strong ASEAN presence with bases in Thailand and Indonesia as well as one planned for Viet Nam. Since Thai Air Asia and Indonesia Air Asia are slotted to be the designated airlines of Thailand and Indonesia, Air Asia is in a vantage position to gain from Open Sky in ASEAN. Moreover, it is pressing ahead with an ambitious expansion program with the introduction of new destinations that include Hong Kong and southern India by the end of the year.

Despite this advantage, Air Asia is facing congestion in its current LCCT and the planned new LCCT needs to be accelerated to avoid retarding the airline from taking advantage of the Open Sky opportunities. Air Asia's CEO has in fact listed infrastructure support as the biggest challenge for managing the aviation industry in 2008 instead rather than the high oil price or the possibility of over capacity with the proliferation of LCCs.

C. Reviewing the Policy to Establish a Regional Cargo Hub at Senai

While it has been reported that that as much as 25–30% of airfreight throughput is channeled through Singapore (Malaysia 2006b), this does not imply that it is necessary to set up a separate air freight airport at Senai to stop the leakage. First, it is not necessarily the distance to KLIA that is the cause of the leakage. INTEL, which is producing in the north of Malaysia, reported that some of their chips are exported through Singapore due to the flexibility of flight connectivity (Tham et al. 2007).

Second, the electronics hubs in Malaysia are in Penang in the north and the Klang Valley in the central part of Malaysia and not in the southern state of Johor where Senai is located. Given the importance of time in the delivery cycle of these goods, E&E goods are exported mainly through the Penang airport and KLIA.

Third, there is unutilized capacity as well as room to expand the capacity at KLIA. In 2007, the number of passengers per annum at the main terminal was 19 million while the LCCT contributed another 7.7 million (Interview MOT 23 May 2008). Since the capacity of the main terminal is 25 million ppa, there is still excess capacity at the main terminal. Similarly, there is excess capacity in cargo as KLIA handled a total of 672,888 tons of cargo in 2006, which is well below its capacity of 1.2 million tons a year.

Fourth, although the air transport industry serves two heterogeneous markets, namely freighters and passengers, it uses the same technology for both. Moreover, most airlines carry both passengers and cargo. It is therefore better to focus on the development of KLIA as the regional hub for both passengers and cargo as airlines serve these two types of customers. Dedicated air freighter airlines can also utilize the facilities that have been developed to serve both passengers and cargo transactions.

Lastly, maintaining Senai as a good secondary airport due to its proximity to Singapore may be a better strategy than changing its status, as this would complement Changi's development.

D. Developing a Distinctive Product Appeal for Tourism

Within ASEAN, Thailand is the acknowledged leader for long-haul tourists from Europe and North America. Both Singapore and Thailand have been able to tap into the tourist market through different strategies. Thailand, for example, offers diverse tourist attractions while Singapore, despite lacking many natural tourism products, has managed to sell itself as the gateway to nearby tourist destinations of the region as well as through its theme parks (Bowen 2000).

Malaysia has not been able to tap extensively into the long-haul visitors market from outside ASEAN, despite sharing many similar tourism features with Thailand such as sun and surf tourism, eco-tourism, heritage tourism as well as medical and health and well-being tourism. The industry is still very much in its infancy since its contribution to GDP growth is only approximately 7.2%, implying that there is much scope for further growth. For example, although Malaysia was ranked below Singapore but above Thailand in the Travel and Tourism Competitiveness index for 2008,¹² 74.5% of its tourist arrivals in 2007 are from ASEAN countries, with Singapore contributing as much as 67% of the ASEAN arrivals (Ministry of Tourism undated). As noted by the World Travel and Tourism Council (2001), the main problem with Malaysia's tourism lies in its image and the development of a distinctive product appeal that will enable it to distinguish itself from its competitors within Southeast Asia. Even its current tag line, “Malaysia—Truly Asia” differentiates itself too little from its competitors in the region, namely Singapore's “New Asia” and Indonesia's “Endless Beauty of Diversity.”

E. Realizing the ASEAN Community

As noted by Chin (1997), unlike London–Paris–Amsterdam, which are gateways to a large hinterland and great concentration of population and activities, Southeast Asia is both fragmented and insular. At the same time, the rapid development of major international airports such as Suvarnabhumi, Changi and KLIA within relatively short distances, through heavy investment in infrastructure, has raised concerns as to whether supply will outstrip demand, leading to underutilization of some of these airports.

While the liberalization of the transport sector will undoubtedly help to facilitate the movement of goods and services within ASEAN, an increase in demand will be greatly assisted by the early realization of the ASEAN Community. This includes not just the initiatives taken to liberalize the transportation sector, including air transport but also the whole gamut of policies and initiatives that have been postulated for the realization of the ASEAN Community. Although ASEAN has made great efforts to liberalize trade under the ASEAN Free Trade Agreement (AFTA) as witnessed by the reduction in tariffs among member countries, progress on liberalization of the services sector is still slow. Despite five rounds of negotiations to liberalize the services sector since 1995, substantial barriers continue to limit the regional integration of this sector within ASEAN. Clearly, greater political will is needed for the realization of the ASEAN community. At the same time, the arrival of an ASEAN community will allow the region to tap into its extra-regional ties, leading to the possibility of the East Asian community, with ASEAN as the driver.

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