Malaysia and UK Agree Open Skies, but Will it Bring New Services?

The governments of the UK and Malaysia have agreed a deal to end restrictions on flights between the two countries. The former bilateral deal will be ripped up from October 27, 2013 when a new liberal arrangement will take effect enabling airlines from each country to operate any number of flights to and from any destinations within each country, as well as rights to fly onward to other international destinations and operate domestically within each country.

The revised accord was officially signed on June 21, 2013 but it is not clear what, if any, impact it will have on air services between the UK and Malaysia, at least in the short-term. Although there is significant passenger flows between Malaysia and the UK, Malaysia Airlines is currently the only carrier offering direct scheduled flights between the two countries with a twice daily link between Kuala Lumpur and London Heathrow. Its former partner, Air Asia X, had also offered a low-cost connection between the Malaysian capital and London, first to Stansted and then latterly to Gatwick, but it cancelled the route in March 2012 as increasing costs and taxation made the profitable operation of the route difficult.

“This is excellent news for consumers and the aviation industry alike. I very much hope that it will generate competition among airlines, allowing passengers to reap the benefits of greater choice and lower airfares.  It is one of the most liberal agreements of its type worldwide and I am pleased that the UK continues to set the standard in aviation liberalisation.”

Simon Burns
UK Aviation Minister

The fact that no UK network carrier has operated scheduled flights between the UK and Malaysia since BA pulled its flights in the early 2000s says a lot about the market. It has been suggested for many years that British Airways (BA) could consider using some of the former bmi British Midland International slots at London Heathrow to resume its services to Kuala Lumpur but yields on the route are relatively low and were not thought to be sustainable under the previous restrictive bilateral which provided little scope for onward connectivity. With Malaysia Airlines now a member of oneworld, BA does have a presence in this market, on a much less risky basis than with its own services.

However, the introduction of onward traffic rights from Malaysia to other points across Asia could provide the motive to enhanced air connectivity between Malaysia and the UK and likewise we could see Malaysia Airlines offer onward flights to North America from London, albeit this market is already heavily served by its alliance partners BA and American Airlines. The opportunity to combine Kuala Lumpur with another Asian destination could help persuade BA to return to Malaysia with its new Boeing 787s.

According to UK Aviation Minister, Simon Burns, the open skies arrangement is “excellent news for consumers and the aviation industry alike”. In a statement he said: “I very much hope that it will generate competition among airlines, allowing passengers to reap the benefits of greater choice and lower airfares,” but unfortunately this could be hard to achieve based upon historical traffic and schedule data.

Malaysia is a UK Trade & Industry 'High Growth Market' and UK commercial ties with Malaysia are very strong. UK exports to Malaysia in 2012 were valued at £2 billion. This reflects the wide range of opportunities for UK business and places Malaysia as the UK’s second largest export market in south east Asia, after Singapore. The UK is also one of the largest investors in Malaysia, investing over £20 billion in the past 30 years.

AirAsia X executives have confirmed to The HUB that the UK remains an interesting market for the airline and could form part of a significant return to the European market once more fuel efficient Airbus A350 airliners enter the carrier’s fleet. In the past AirAsia X’s flights to London and Paris were operated using four-engined A340-300s as the A330 models that form the backbone of its existing fleet did not have the range to serve the two European markets.

We also must not ignore Malindo Airways. The new Malaysia business from Indonesian low-cost carrier Lion Air has a number of Boeing 787s on order and although these are earmarked for regional routes, it would be feasible to use them on long-haul routes to the UK should the carrier have ambitions to grow outside of Asia and see a business case for serving the European market

Under the previous bilateral agreement there was scope for carriers to serve regional destinations. What this open skies agreement does offer is access to London Heathrow. If a carrier could secure slots at the UK international gateway, and that is a massive if, they would be permitted to introduce flights from any point in Malaysia.

In the table below we look at the evolution of bi-directional O&D passenger flows between the UK and Malaysia over the past five years. This analysis highlights the significant fillip the arrival of low-cost carrier AirAsia X played in the market when it provided direct flights between Kuala Lumpur and London between March 2009 and March 2012. According to last year’s data, Malaysia Airlines had a 48.9 per cent share of O&D traffic between the two countries followed by Emirates Airline (15.9 per cent), KLM (6.2 per cent), AirAsia X (6.1 per cent) and Singapore Airlines (5.1 per cent).

Interestingly, alongside the served Kuala Lumpur – London Heathrow route, which accounted for around 57.1 per cent of the O&D passenger flows between Malaysia and the UK in 2012, there were also notable numbers of passengers flying between Kuala Lumpur and London Gatwick (8.5 per cent), due to the AirAsia X link’s final months of operation, between Kuala Lumpur and Manchester (8.1 per cent) and between London Heathrow and Penang (4.9 per cent) and Kota Kinabalu (4.1 per cent).

These traffic flows could form the basis of new direct flights between regions of Malaysia and the UK and would enable Malaysia Airports Holdings, the country’s airport operating company, and Tourism Malaysia to push new direct links to the UK and provide better access to some of the country’s popular holiday resorts. This would particularly interest UK leisure carriers such as Thomas Cook Airlines Group and Thomson Airways, the latter being able to offer non-stop flights with its new Dreamliners. Next year’s Routes Asia forum, which takes place in Sarawak is sure to provide an insight into the potential of what can be achieved in the future (click here for more information).