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Wednesday, January 31, 2018

Cost of Air Travel - Dilemma between Social Responsibility against Corporate Stakeholders

In half a month from now, we will be celebrating Chinese New Year. While it is supposed to be a season for merry making and joy, for many Chinese Malaysians coming from Sibu and the surrounding towns, this is also a dreaded season of money outflow. The chief reason is to this is the price of flight tickets to and from Sibu.

This phenomena had been plaguing the people from Sibu and surrounding townships (Sarikei, Durin, Bintangor, Kapit, Song, Kanowit, Mukah, just to name a few) for at least 6 years, but had worsened in the last 4 years. And it occurs not only during Chinese New Year but also other festivals.

Flight tickets that would normally cost around RM250 for a to-and-from flight would ballooned all the way to RM2,200 during such seasons. What caused this, other than supply-and-demand issue? Sibu and the surrounding towns had been supplying migrant professional workers not only to Malaysian industries but at the global level for decades. And why it had worsened especially during the last 4 years? With global fuel price should be cheaper due to the massive drop in crude oil price, why wasn't this translated into savings? Compare this to flying to Kuching using a last minute ticket. I had bought last minute tickets to fly back to Kuching at only RM550, half the price to Sibu at festivals.

Air Asia ticket price. This is excluding preferred seats and credit card payment cost.

For comparison

Some might point to GST as the main cause of the increase. But this would be very ridiculous considering the price increase during the festive seasons is between almost 10 times the fare during normal days. So surely it is due to supply and demand then.

To understand this better, let's look back what had happened in the airline industry during the last 10 years.

During the last 10 years, Air Asia has grown leaps and bounds, mainly from sales of their cheap no-frills tickets to travellers in the region. This is made possible at the expense of Air Asia's main competitor, Malaysia Airlines. With both airlines competing at many major routes, MAS was made to bleed even drier.

In order to save MAS, a plan was hatched from within the government to have both airlines to reduce the competition between both airlines in August 2011. Both airlines get to share their passenger load and routes. Akin to the international code-sharing that we would usually see in international flights. I even remembered some MAS airline passengers expressed surprise that they had made booking to Air Asia flights from MAS websites back then, and had checked it to be true.

To seal the deal, both airlines get to swap shares. Concurrently, both airlines agreed not to compete with each other in the same route. As a result, MAS had dropped all their flights to Sibu and several other destinations. Everyone gets a pat on the back for massive savings then.

Unfortunately, while the plan had created massive savings to the airlines industry, the planners had not considered the legal ramifications of the plan. The plan came to the attention of Malaysian Competition Commission (MyCC), which deemed the arrangement as anti-competition. So in October 2013, the Commission declared that the arrangements were illegal and void as it had contravened Section 4(2)b of the Competition Act 2010 and penalised the airlines RM10 million.

As part of remediation plans, MAS was made to restore the flights back to several routes which they had cancelled off earlier. However, instead of reinstating all the flights from KL to Sibu, they only restored 2 direct flights. This was from an original of between 5 to 8 direct flights in the past, while Air Asia maintained the same number of flights.

The end result was flight tickets to Sibu became very expensive. This had resulted in many people resorting to fly to other destinations before either taking another connecting flight or by bus to Sibu. I too had to take such measure once in 2015, saving myself around RM500, only to be negated when Air Asia bumped me off the flight because I didn't check in earlier via website and I didn't book a seat. Oh bummer! That cost me another RM1,500 to fly the next day on a business seat with MAS as it was the only seat left in the sector and I need to be working the next day.

Political Ramifications
The exorbitant ticket prices during festivals is now going to have political ramifications. Many East Malaysians firmly believe that Air Asia owed much of their early success to East Malaysians flocking to their airlines when MAS was very expensive.

This issue had been latched on by Sarawak branch of Democratic Action Party last year, of which they managed to squeezed a solution out of Air Asia, getting Air Asia to declare additional flights to Sibu. And their latching onto this issue again this year. Concurrently, it seems none of Sarawak BN had caught on to the issue.

FB page of Sibu MP from DAP

Not to say that BN is inattentive. Kinabatangan MP Bung Mokhtar had taken the Transport Minister Dato Liow Tiong Lai to task on the expensive flight tickets in Dewan Rakyat. For all his fault and speech, at least Bung Mokhtar could show why people of Kinabatangan are endeared to him.

This year is a done deal. I don't see any way for this situation to be salvaged. However, the Federal Government via the Transport Minister should look into Air Asia cost structure to see if the charges levied are reasonable or otherwise. Or did Air Asia forced the demand to increase substantially by artificially forcing the market to accept an unrealistic supply.

Possible Solutions
Unfortunately, it would not be an easy solution. Let's have a look at possible solutions and how it would fare.

Price-Capping by Government
This is a possible solution. By getting Air Asia to be forced to cap the price, price can be brought down significantly. However, Air Asia is a private entity and as a private entity, they are a profit-orientated entity.
Price-capping will affect Air Asia's profitability and they might choose to further reduce the flights to the sector in favour of other more profitable routes.

Forcing this on Air Asia is also not possible. As a business entity, we must be cognisant that Air Asia has largely outgrown Malaysian market. While it may be inconceivable, Air Asia may force the government's hand by moving their operational headquarters to other countries. Well, they had actually done this by moving their operational HQ to Indonesia in 2012.

Subsidising The Price
Another method would be for the government to subsidise the ticket price. Ticket prices for rural flights in Sarawak are already subsidised to the tune of RM4 million per month by Sarawak government.
However, subsidising flight tickets during peak seasons only may result in the ticket price being pushed down artificially low that instead of being benefited by the residents of both states, it would be taken advantage by holiday operators.

And even with reduced flight ticket price due to subsidy, there will still be an issue of insufficient supply.

Forcing Air Asia to Increase Supplies
This can be made by getting Air Asia to increase their flights to Sibu. But you would need more planes to make this happen. Sibu will not be the only destination that would have increased demands during this period. There are many more destinations with similar demands. And Air Asia has only a finite number of planes to fly people around with.

Leasing additional planes will severely affect Air Asia cost structure and instead of lowering the cost, it might result in increased operational cost.

Increasing MAS and MALINDO Flights to the Sector
I believe a better approach to this problem would be to get MAS to Increase their flights to the sector. With the current 2 direct flights per day, this is still a far cry from the 5 to 8 direct flights that they once had. 

While MAS and Air Asia competes in different market segments, MAS in the premium segment while Air Asia is in the no frills low cost segments, MAS does offer some very competitive tickets. Some of their tickets could even compete with Air Asia, especially when a passenger considers the luggage options.

The Government could also consider to entice MALINDO to return to Sibu. They did support the sector at one point of time, circa 2013. But they seemed to have stopped supporting the sector. MALINDO had expanded in a rather ambitious way that it had to reduce some presence. Concurrently, there are rumours of internal disputes between the management with their pilots. I'm not able to confirm this though. So just consider this as a rumour. 

Political Solution Required
This is not just any business problem. This is a problem affecting the people, possibly due to the excesses of capitalism. Hence, this requires a political decision. With this year being the election year, this issue has now increased value and political ramifications.

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