Airline industry still under capacity amid entry of new players

This is due to capacity constraint imposed by the govt following the Covid-19 precautionary measures

by NUR HANANI AZMAN / pic by BLOOMBERG

DESPITE the entry of new airlines in the market, the airline industry in Malaysia is seen as handicapped or under capacity rather than overcapacity due to capacity constraint imposed by the government following the Covid-19 precautionary measures.

“Right now, even if you want to go to Sabah or Sarawak, you still need to go through requirements and the flight also has a capacity gap,” Pangolin Investment Management analyst and director Mohshin Aziz told The Malaysian Reserve (TMR).

On Jan 25, SKS Airways Sdn Bhd, Malaysia’s newest commercial airline announced short-haul routes to three popular island destinations — Pulau Pangkor, Pulau Redang and Pulau Tioman.

Mohshin did not see SKS Airways as a competitor to existing airlines because it serves routes that currently nobody flies or can fly to also because other airlines don’t have the suitable aircraft to land on those islands.

“SKS Airways serves a niche market, operating a small aircraft on a runway that is considered as Short Take-Off and Landing. I will say it is a holiday centric airline and it doesn’t impact Malaysia Airlines Bhd (MAB) at all and others.

“With regards to MYAirline Sdn Bhd, it’s difficult to say since we don’t know their plan in regard to the destinations, their base or even the type of aircraft they are buying, it is all unknown now and hard to give assessment,” he added.

MAB’s parent company, Malaysia Aviation Group (MAG), recently raised concern over the potential airline overcapacity following Malaysian Aviation Commission’s (Mavcom) preliminary approvals for SKS Airways and MYAirline.

Endau Analytics founder Shukor Yusof said MAG’s concerns about the viability of new entrants is valid.

“There is excess capacity in our market. This is a fact. Whether these new airlines will add value (to Malaysia and consumers), only time will tell.

Ultimately, both Mavcom and Civil Aviation Authority of Malaysia will be accountable as they gave the approvals.

“Airlines that don’t add value to our economy — or worse, in the case of Rayani Air Sdn Bhd, for example, which failed miserably after a brief start — tarnish Malaysia’s reputation as a strong, cost-effective destination for the aviation industry.

“Any new airline in the market will naturally compete against the incumbents. This is the reality. It’s a very tough business to succeed. Easy to start and easier still to fail. Malindo Airways Sdn Bhd has not been profitable since it began nine years ago. That’s something to consider, isn’t it,” he told TMR.

What will happen if there is overcapacity?

Mohshin said overcapacity is never good in any industry as it will lead to fare war — cheap flight for short time — however, over time, one or two of the competitors will die because fare war is unsustainable.

“Consumers will benefit for a short period when the fare war happens as the tickets will be low. But when the consolidation happens, eventually, they will be left with a situation where ticket prices will be very high for a long time.

“So that’s the reason the regulators are created in the very first place. Part of Mavcom’s objective is to make sure the entire industry operates in a high standard and sustainable manner,” he said.

On the outlook for the aviation industry this year, he believes that as soon as more countries decide to open the border, the demand will be very high.

“People are eager to travel but they are not allowed to. For now, the demand is strong but we cannot predict when the government will lift the border restriction,” he concluded.