Mongolia is to get a new international airport next year. The $580 million project, overseen by the Japan International Cooperation Agency, is a large investment for a country of only 3.1 million people and a gross domestic product of just $12 billion.

Yet unless the government liberalizes the country's aviation market and stops coddling state-owned MIAT Mongolian Airlines from competitors such as Air Astana and Turkish Airlines, air traffic is likely to continue to stagnate and the new airport will become a white elephant.

Ulaanbaatar's existing airport handled fewer than 1 million passengers last year. The new airport, about 50km outside the capital, will have capacity to initially handle 3 million passengers a year and up to 12 million passengers once construction is fully complete.

Mongolia's aviation market has tremendous growth potential but under the government's current restrictive policies, it is unable to spread its wings. International traffic has been stagnant at approximately 800,000 passengers a year since 2012. Yet the authorities are refusing to allow Kazakhstan's Air Astana to launch flights to Ulaanbaatar or permit Turkish Airlines to increase capacity to enable nonstop services from Istanbul.

Turkish carriers are currently limited to offering a paltry 500 seats a week under the air services agreement between the two nations. Turkish Airlines wants to double its capacity to Mongolia by launching two weekly nonstop wide-body flights from Istanbul to Ulaanbaatar while maintaining three weekly one-stop flights via Bishkek, Kyrgyzstan.

Flag carrier MIAT has objected to Turkish Airlines' request. Nonstop Turkish flights from Ulaanbaatar to Istanbul would impact MIAT's European business, particularly from Germany, the largest Western European source market for Mongolia's tourism industry and also a popular destination for Mongolians.

MIAT also has raised repeated objections to Air Astana's plans. The Kazakh flag carrier announced plans in February 2016 to launch three weekly flights from Astana to Ulaanbaatar four months later and began selling tickets. However, Air Astana had to a cancel the launch just two weeks before the planned first flight after what it described as an "ungrounded revocation of permission" by the Civil Aviation Authority of Mongolia. Air Astana has since reapplied for permission, with an eye toward starting flights by the end of 2017, but seems unlikely to gain approval given MIAT's opposition.

European connections

Air Astana would rely heavily on transit traffic to Europe, given that demand for flights between Ulaanbaatar and Astana is itself relatively small. This means Air Astana would be competing with MIAT's services to Russia and Germany. Turkish Airlines, which has an extensive network in Germany and Europe overall, would also become a much stronger competitor in the Mongolia-Germany and Mongolia-Europe markets if it were able to launch nonstop flights to Ulaanbaatar.

MIAT offers one-stop flights to Berlin via Moscow and seasonal flights to Frankfurt. It covers the rest of Europe via Moscow using codeshare partner Aeroflot. As such, MIAT and Aeroflot now enjoy a near monopoly over the Mongolia-Europe market. The only other options for passengers heading between Europe and Mongolia are to use Turkish Airlines with two stopovers or to backtrack via Beijing or Seoul with Air China or Korean Air, respectively.
New showcase international airport will go to waste without competition

Mongolia is currently served by only five foreign airlines, which carried a total of 360,000 passengers via Ulaanbaatar last year. MIAT is a tiny flag carrier, carrying less than 400,000 passengers to seven destinations with a fleet of four aircraft.

Mongolia also has two privately owned regional airlines, Aero Mongolia and Hunnu, which operate domestically and to destinations in neighboring China and Russia using turboprop planes; MIAT has not operated domestic flights for more than a decade. The domestic market is small, with only 230,000 passengers travelling in 2016 though the country has 23 airports.

Nonstop flights from Astana and Istanbul would be beneficial economically and certainly boost tourism to Mongolia. The limited services at Ulaanbaatar and MIAT's near-monopoly result in higher air fares and long travel times to several important source markets. Partly as a consequence, European visitor numbers have been stagnant for the last 12 years.

Mongolia needs to realize that increased tourism would have an overall economic benefit far greater than the negative impact on the country from rising competition for MIAT. In addition to new nonstop routes, a more open market should also help attract higher demand from Seoul, the busiest international route from Ulaanbaatar.

Visitor numbers from South Korea and Japan have been flat over the last decade. Asiana Airlines, South Korea's second-largest carrier, has not been able to launch services to Mongolia due to restrictions in the air services agreement between the two countries. MIAT and Korean Air have a codeshare partnership on the Ulaanbaatar-Seoul route which has resulted in an undersupplied market with high average fares.

Ulaanbaatar could also potentially support service from a Gulf airline and several Asian low-cost carriers, including ones from China, Japan and Southeast Asia. Budget airlines would stimulate demand both in the outbound and inbound markets, potentially leading to an influx of visitors and making it more affordable for Mongolians to travel abroad. South Korea's Air Busan last year became the first low-cost carrier to serve Mongolia but its service is limited to two weekly flights to Ulaanbaatar from Busan. The much bigger Ulaanbaatar-Seoul route remains protected.

The new airport's Japanese financiers are understandably pushing for greater openness. Without a change in government mindset, the new airport will be underutilized and it could be difficult to pay off the debt incurred for its construction.

The government must also open up ground handling at the new airport to competition. MIAT has the only ground handling license at the existing airport and will at least initially be the only handler at the new airport. Ground handling is likely a revenue churner for the otherwise unprofitable MIAT, which has so far successfully argued against the authorization of another handler as it has outstanding loans on its equipment. This is another example of ill-advised protectionism, which is stunting growth in the wider market.

Mongolia's aviation sector has underperformed for far too long. With a new airport about to be completed, it is time for the government to liberalize the market.

Published Date:2017-06-19