13-Nov-2014 12:00 PM

FMI Air ready to test out new model for Myanmar aviation market with CRJ base at Nay Pyi Taw

Analysis

Myanmar start-up FMI Air is aiming to launch scheduled services by the end of 2014 using 50-seat CRJ200 regional jets based at the capital Nay Pyi Taw. FMI will become the first airline to establish a hub at Nay Pyi Taw, which has an underutilised modern international airport that opened in 2011.

FMI will enter an extremely crowded domestic market which is already served by eight airlines. But it sees an opportunity to differentiate by operating jets rather than turboprops, providing a higher level of service, partnering with foreign carriers and becoming the first domestic operator in Myanmar with IOSA certification.

FMI Air will initially operate on the Yangon-Nay Pyi Taw route, which it has served over the last two years using wet leased aircraft. But it plans quickly to establish a hub at Nay Pyi Taw with several domestic routes in the first phase and eventually regional international routes.

FMI has been working to establish an airline for over two years

FMI is a publicly listed Yangon-based conglomerate with joint ventures in several industries including agriculture, automotive, real estate, retail, tourism and transportation. The 22-year-old company initially expanded into the aviation sector in 2012 with a 50% investment in FMI Air after identifying a need to develop air travel within Myanmar as the country opens up and its economy expands.

FMI particularly saw a need for more air services at Nay Pyi Taw, a small sleepy city about 400km north of Yangon which became Myanmar's capital in 2006. Nay Pyi Taw has since seen an influx of development including the late 2011 opening of the country's third international airport after Yangon and Mandalay.

FMI Air has been offering services between Myanmar's commercial centre and old capital Yangon and the new capital Nay Pyi Taw since Sep-2012 using aircraft wet leased from other airlines. FMI is currently the market leader on the Yangon-Nay Pyi Taw route with three daily flights using ATR 72s operated by Myanmar domestic carrier Air KBZ.

FMI's intention has always been to transition its airline subsidiary to a scheduled operator. FMI secured a provisional air operator's (AOC) certificate from Myanmar's Department of Civil Aviation (DCA) in Jul-2013 and has since been working at meeting the several layers of regulatory requirements for launching scheduled operations.

FMI Air finally closes in on launch of scheduled operations

FMI has encountered multiple delays but is now closing in on securing final approvals. A key hurdle which was the primary driver of the delay in recent months was passed in early Nov-2014 when the airline was approved by Myanmar's Ministry Investment Commission (MIC).

FMI is now waiting on a final review of its manuals from Myanmar's DCA which will be followed by proving flights. It anticipates it will receive an AOC in Dec-2014, allowing for revenue flights to begin by the end of 2014.

The delays encountered over the last year are hardly surprising for a developing country, particularly as FMI will be using a type of aircraft which has not been operated before in Myanmar. The eight airlines currently serving Myanmar's domestic market operate primarily or entirely ATR 72 turboprops.

Start-ups in Myanmar - there have been several over the last three years - have always selected an aircraft type that is already operated by an existing carrier. This has simplified the AOC process as new carriers in Myanmar have generally been able to go through the certification process using manuals borrowed from existing operators.

Of the 44 aircraft currently operating in Myanmar's airline sector, 31 are ATR turboprops including 27 ATR 72s and four ATR 42s, according to the CAPA Fleet Database. Of the other 13 aircraft, six are A320 family aircraft, which are primarily used on international routes. The other seven aircraft include Embraer 190 and Fokker 100 jets as well as Raytheon Beechcraft and Cessna Caravan turboprops.

Myanmar in-service fleet by aircraft type (%): as of 12-Nov-2014

FMI sees the CRJ200 as a proof of concept aircraft

There are no Bombardier aircraft in the current mix. Currently the only regional jets operating in Myanmar are two E190s at government owned Myanma Airways and one Fokker 100 at Air Bagan. These are both large regional jets, seating about 100 passengers.

FMI has acquired four CRJ200s, which it sees as a key component of its business plan. FMI believes it can attract passengers that prefer regional jets over turboprops. FMI was also attracted to the low acquisition cost of used CRJ200s, pointing out it was able to acquire four aircraft for the price of one ATR 72.

Three of the CRJ200s FMI has acquired will be used on scheduled services while a fourth has been purchased without engines for parts. FMI also has acquired one Challenger 800, which is the business jet version of the CRJ200 and will be used for VIP charter flights.

Operating costs for the CRJ200 are significantly higher than turboprops. But this is at least partially offset by the lower acquisition costs and FMI is confident it can secure higher yields than competitors operating turboprops.

FMI sees the CRJ200 as a proof of concept aircraft rather than a long-term solution. The carrier plans to look at acquiring larger more efficient regional jets in a later phase including the E190, CRJ900 and CSeries. As such aircraft would represent a much bigger financial commitment the company wants to first test out its model with the CRJ200.

This is a sensible strategy given it is a new model for the Myanmar market and all of Southeast Asia.

CRJ200 and ERJ-145 become new aircraft types for Myanmar (and Southeast Asia)

There are currently no 50-seat regional jets in operation in Southeast Asia. The last time a 50-seat regional jet was operated in Southeast Asia was 2009, when Thailand's PB Air suspended operations. PB Air operated two ERJ-145s from 2002 to 2009.

CRJ200s and ERJ-145s proliferated in the North American and European regional markets in the late 1990s and first part of the last decade before fuel prices increased. While none of the hundreds of 50-seat regional jets exiting the fleets in Europe or North America have been moved to Southeast Asia until now, a portion of the fleet has been successfully remarketed in other emerging markets including Russia and South Asia.

While FMI has been working on registering the CRJ200 in Myanmar, Air Mandalay has been in the process of registering the first ERJ-145. Air Mandalay currently only operates ATR 42/72s but unveiled plans in Jul-2014 to add up to six ERJ-145s and six Mitsubishi MRJ90 regional jets. Air Mandalay plans to only use the ERJ-145 as an interim aircraft until the MRJ90s are delivered from 2018.

Air Mandalay has included some ERJ-145 flights in its domestic schedule from 17-Nov-2014. But there will likely be a delay in placing the aircraft in service as Air Mandalay continues to prepare for ERJ operations. FMI CRJ200s and Air Mandalay ERJ-145s could end up entering the market at almost the same time.

FMI sees an opportunity to offer a superior product in the crowded Myanmar market

Aircraft will not be the only differentiator for FMI. In fact aircraft type is not even seen as the most important differentiator by the airline's executive team. A more important component of the FMI Air strategy is to offer a different schedule and network from Myanmar's existing domestic carriers, which generally follow each other in operating the same routes at similar times with the same aircraft.

FMI CEO Bruce Nobles also believes FMI can provide a higher level of reliability and service than the existing carriers. FMI has not been able to provide this with the flights it has offered in the Yangon-Nay Pyi Taw market since Sep-2012 because it has had no control over the aircraft it has wet leased or the flight attendants provided.

FMI also will be using a different reservation system than all other airlines in Myanmar, providing a further point of differentiation. FMI has acquired a system from Radixx that allows airlines to install a server in country. FMI believes having a server near its office is important as the airline will be able to access the system when it loses an internet connection, which in Myanmar is frequent.

In parallel FMI sees opportunities to use different technology to bring automation to smaller domestic airports including airports that lack internet access entirely. Domestic air travel in Myanmar is like being stuck in a time warp as check in and bags are still processed manually.

FMI to focus initially on domestic services with international routes to follow later

FMI will initially use its CRJ200 fleet to take over its current Yangon-Nay Pyi Taw schedule. Several other domestic routes from Nay Pyi Taw are also planned during the initial build up period. This will likely include Mandalay, which is Myanmar's second largest city and a popular tourist destination, and several other tourist destinations such as Bagan.

In a later phase FMI will "look for interesting regional opportunities," Mr Nobles told CAPA TV on 14-Oct-2014 after speaking at CAPA's Asia Aviation Summit and LCC Congress. He added that small regional jets are ideal for opening new thin short-haul international routes from Nay Pyi Taw.

FMI Air CEO Bruce Nobles discusses FMI's business plan, how the start-up plans to differentiate itself from other domestic carriers and the opportunities for growth in Myanmar including from the capital Nay Pyi Taw

Currently Nay Pyi Taw has only two regular international routes - Bangkok and Kunming, both of which are only about two hours in duration. Other international routes have been operated on an ad hoc basis for special events.

Bangkok is currently served five times per week by Bangkok Airways, which generally uses ATR 72s on the route but during peak periods up-gauges the flight to A319s or A320s. Kunming is served with only two weekly flights from China Eastern with 737-700s. The 737 is generally too big for this market but China Eastern phased out its CRJ fleet earlier this year.

FMI is confident Nay Pyi Taw can support more international routes with the right aircraft type and right feed. This feed will come from the carrier's own domestic network as FMI develops Nay Pyi Taw as a domestic hub.

FMI sees hub potential for Nay Pyi Taw

Within Myanmar Nay Pyi Taw is generally only linked with Yangon. But FMI plans to operate several other domestic routes from Nay Pyi Taw. The new routes will rely primarily on leisure traffic or foreigners travelling around Myanmar. Yangon-Nay Pyi Taw is mainly a business market.

Mr Nobles points out most of the growth in Myanmar's domestic market since Myanmar opened up in 2011 has come from foreign visitors. So far this growth has been on traditional domestic routes linking Yangon with other destinations. But as most of Myanmar's tourist attractions are not in Yangon these passengers could be flown via other less congested hubs such as Nay Pyi Taw.

While Yangon airport is now operating at above capacity, the new airport at Nay Pyi Taw is hardly used. Nay Pyi Taw was designed to handle up to five million passengers per annum but in 2013 it handled less than 100,000, including about 76,000 domestic passengers and 21,000 international passengers, according to Myanmar DCA data. This made it the 10th largest airport in Myanmar.

Geographically Nay Pyi Taw is located in the middle of the country (which partly explains why it was selected as the capital), making it an ideal hub for domestic and international connections. For example Mr Nobles pointed out that tourists arriving from Japan and heading to the popular tourist town of Bagan now have to connect in Yangon although such a connection requires an overnight layover in Yangon and backtracking.

FMI aims to feed foreign airlines serving Myanmar

FMI is confident over time more international carriers will start serving Nay Pyi Taw and that a domestic hub will help attract foreign carriers as the local market is not yet big enough to support such flights on a year-round basis. FMI is developing its product and standards in order to attract such foreign carriers.

Foreign carriers that are only interested in serving Yangon can still partner with FMI on its core Yangon-Nay Pyi Taw route. Offline access to the Myanmar capital will become increasingly important for international carriers as the country continues to come out of its shell.

FMI expects to be the first domestic carrier with IOSA certification, which major foreign airlines often require of their codeshare partners. Myanmar Airways International (MAI) is now the only IOSA certified airline in Myanmar but it only serves the international market with the exception of a limited number of seasonal flights between Yangon and Mandalay. MAI currently codeshares with Asiana, Korean Air and Malaysia Airlines.

There are now over 20 international carriers serving Myanmar. But none have partnerships with domestic carriers, leaving tourists to buy domestic flights separately. Foreign carriers have more than doubled capacity in Myanmar since the market opened up in 2011 and now account for about 85% of Myanmar's international market. FMI should be able to build up a sustainable and profitable niche if it can succeed at feeding only a small fraction of this market.

Mr Nobles points out that foreign visitors have accounted for virtually all of the domestic growth since Myanmar opened up in early 2011 because development of Myanmar's middle class has not yet reached a point where there has been a large increase in travel propensity rates for the local population. The Myanmar domestic market consisted of 3.8 million passengers in 2013 compared to about 2.4 million passengers in 2010.

Myanmar annual domestic passenger traffic and year-over-year growth: 2010 to 2013

FMI to avoid Myanmar's most competitive routes

FMI will be insulated from the intense competition in the Myanmar domestic market as it is focusing on Nay Pyi Taw, which is not currently served by most of Myanmar's carriers. Several domestic carriers have served Nay Pyi Taw at various points but have not been able to maintain services on a regular year-round basis. Some of these carriers have only typically served Nay Pyi Taw when a major event or conference is being held in the capital.

Based on current schedules published on the websites of Myanmar's eight existing domestic carriers, only government-owned Myanma Airways is operating scheduled services to Nay Pyi Taw. None of Myanmar's seven privately owned domestic carriers currently operates regular services to Nay Pyi Taw - Air Bagan, Air Mandalay, Asian Wings, Air KBZ, Yangon Airways, Golden Myanmar and Mann Yadanarpon.

Yangon-Nay Pyi Taw will continue to be FMI's core route, which has been profitable with average load factors of approximately 65% to 70%. While this is below international norms, Yangon-Nay Pyi Taw is a high yielding market and average load factors in the overall Myanmar domestic market are typically only 60% to 65%. FMI loads are thus slightly higher than average while its yields are significantly higher than average.

FMI plans to base one of its aircraft at Yangon, enabling it to continue offering a morning departure to Nay Pyi Taw which is popular with business passengers. But FMI does not plan to follow Myanmar's other domestic carriers in operating any of the main trunk routes from Yangon. There are a handful of domestic routes from Yangon which are now served by all eight existing carriers - typically with similar schedules and the same type of aircraft (ATR 72).

Inevitably more carriers will start serving Nay Pyi Taw regularly as the market grows and matures. But FMI expects it will be able to remain the market leader and says it will not operate any route unless it is the largest or second largest carrier.

"We know there will be competition. That doesn't worry us," Mr Nobles told CAPA TV. "We think we can provide a superior product which will be important to [developing] our market share."

Consolidation in Myanmar is inevitable

The Myanmar domestic market clearly has too many carriers. Not a single Myanmar carrier transported more than one million passengers in 2013. Only two of the carriers currently operate more than five aircraft and all the airlines are believed to be unprofitable.

Myanmar fleet by carrier (based on aircraft currently in service): as of 12-Nov-2014

The playing field has doubled in recent years as four airlines have entered the market since 2011: Asian Wings (2011), Air KBZ (2011), Golden Myanmar (2013) and Yann Mangadalon (2014). But the total size of the market has only increased by 50% during this span.

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In addition to FMI, Apex Airlines is also in the final stages of securing an AOC, resulting in a total of 10 domestic carriers. Apex is following a typical Myanmar domestic carrier strategy and has acquired two ATR 72-600s. But it could become one of FMI's largest competitors as it also plans to be based in Nay Pyi Taw.

FMI seems to be betting that consolidation will finally come to the Myanmar market, resulting in a more rational number of competitors. FMI also is banking on domestic passenger growth, which was a relatively modest 8% in 2013, accelerating as Myanmar's economy continues to grow. Eventually a middle class will start to emerge and grow, driving up travel propensity rates closer to the levels of other emerging markets.

FMI deserves credit for trying to break the mould, coming to market with a different model. The start-up could shake up the Myanmar market and spur new strategies at other airlines in Myanmar and elsewhere in Southeast Asia.