Air transport could have an important role in providing a direct connection between landlocked Mongolia and the rest of the world, expanding foreign trade and developing Mongolia’s economy. We have seen it in the last 20 years, since an independent nation makes its own decisions without asking another country for permission to execute.
Today Mongolia has several operating airlines from the private sector besides MIAT Mongolian Airlines, which is a state-owned company. Private aviation companies are currently conducting all domestic flights and they also offer international flights. However, the reality is that Mongolia’s air transport development has not simply reached a satisfactory level when you consider its potentials. The government exerts too much control on operations of aviation companies; the state determines their tariffs, sets air routes, limits the number of flights and grants advantages to state-owned companies. It also halts free competition by not allowing new players into the market and violates the interests of customers.
A year ago, the parliament announced the adoption of the State Policy on Civil Aviation through 2020 and stated that it would create free competition in Mongolia’s air transport industry. However, on the very same day, they gave the status of “national airline” to MIAT and promised to provide “policy support” to its operations. It is a clear example of how our government always says that its would do one thing and end up doing the exact opposite.
CUSTOMERS ARE WINNERS OF FREE MARKET COMPETITION
If air transport regulations are reduced and simplified, there will be more competition between aviation companies, resulting in cheaper tickets. In that case, customers will come out as winners. It can also be seen from the example of a few private aviation companies competing on unequal terms with MIAT, which is fed by the public budget.
Eznis Airways and Aero Mongolia have been competing with each other in the domestic flight routes, while MIAT’s domestic flights were cancelled as it resulted in deficits. As a result of the competition, Mongolians were given an opportunity to take flights as an alternative to driving to domestic destinations. Furthermore, when Hunnu Air entered the industry, ticket prices dropped significantly and customers increased considerably. In 2013, there was no price difference between airline tickets bought by foreigners and Mongolians.
Furthermore, the price of a round trip ticket from Ulaanbaatar to Khovd was reduced from 650,000 MNT to 400,000 MNT in the same year, while an Ulaanbaatar-Murun two-way ticket price dropped to 200 USD from 450 USD compared to the previous year. On top of this, airline customers increased by 30 percent in 2013.
It is hard to acquire a permit to establish an airline in Mongolia, and obtaining the right to conduct international flights is even tougher. The most profitable international flights are given exclusively to the national airline, which monopolizes the market. Things have been this way for many years and customers have managed to meet the requirements of such high prices. The Ulaanbaatar-Beijing flight accounted for 37 percent of total passengers in 2012, which decreased to 30 percent in 2013. The same thing was observed in the Ulaanbaatar-Moscow flight when the percentage contributed to total flights went down from 11 to 10 percent last year.
However, the Ulaanbaatar-Seoul passenger flow stayed the same in 2012 and 2013. These three international flights comprised 84 percent of the total passenger flow in 2012. The number dropped down to 77 percent in 2013.
Although MIAT is currently the only airline that conducts international flights on these three routes, they run deficits every year. Instead of competing with airlines from China, Russia and South Korea, MIAT chooses to make arrangements with them and share the seats. This arrangement is only beneficial to the two airlines and not the customers.
MIAT does not conduct any further flights from these three cities, they just hand over the passengers to other airlines. Half of the total passengers who are traveling from Ulaanbaatar to Seoul take such transit flights. If there had been free competition, the current Ulaanbaatar-Seoul ticket would have cost 30 percent less, and the Ulaanbaatar-Beijing tickets would have cost twice as less. MIAT currently has no competitiveness even on a domestic level. Nevertheless, MIAT’s senior management says that their competitiveness will improve on an international level instantly and their operations will expand if government provides monetary support from taxpayers’ pockets.
The government has been talking about preparing its national airline for the international market and increasing its value. However, our air transport service is slowing down the development and cannot even keep up with economic demands.
Neither new ideas nor innovations are created in an industry that lacks competition. Our experiences have already shown that state-owned companies, management of which is appointed by political parties, never operate as creatively as private companies do.
MIAT has recently announced that it will replace its flights to Berlin with ones to Frankfurt. It is not clear at the moment the kind of changes or advantages it will bring. The only clear thing is that MIAT will still be making up its deficits through the monopoly prices that they set in flights to Seoul and Beijing. To do this, MIAT alarms the government that it will go bankrupt if they had to compete for the two flight routes and that the government officials will have to bid farewell to their ride when that happens. These government officials will probably stay alarmed and provide financial support to MIAT and it will take another decade before there is competition.
Due to low labor productivity, all Mongolian state-owned companies run deficits. MIAT has four airplanes and 780 employees while Aero Mongolia has three aircrafts and 200 employees. Furthermore, Hunnu Air has five airplanes and the total number of their staff is 230. Eznis Airways recently had five airplanes, but they had to send three of them back because the government withdrew their permits. Eznis Airways is now operating with two planes and 220 employees.
NEW OPPORTUNITY
More air routes and more airlines generally mean cheaper prices and expanded markets. Such conditions is the artery for increasing trade and developing tourism. When compared to other industries, Mongolia’s aviators have a better chance of acquiring competitiveness internationally, the main requirement of which being free competition.
This industry needs to be developed with a vision to create every opportunity and condition that will help world-class passenger airlines and cargo carriers emerging from Mongolia. It is the airlines that lay the foundation for a country to become an international transport and tourism hub by setting standards and requirements of such services.
In Japan and Korea, it is widely said that Mongolia is a must-see place for young people from Asia. Furthermore, world famous magazines have recently announced that Mongolia will be a must-visit country in 2014. Unfortunately, Mongolia does not currently have air transport, hotel and tourism services to accommodate the demand.
The reason for lack of innovation and no new main routes is associated with MIAT’s monopoly. When will MIAT change this situation where it cannot fully sell seats in winter but increases the prices when summer comes?
I have recently taken a Hunnu Air flight from Ulaanbaatar to Bangkok. In the past, in order to make the same travel, one had to spend a day and a night; flying to Seoul for three hours, waiting for six hours to make a connection, and spending another four hours to get to Bangkok. But now it is only an overnight trip. It opens up vast opportunities to bring foreign products, such as frozen seafood, flowers and other products that one cannot transport for longer periods of time, much faster and cheaper. It also allows structural changes to be made in the competitiveness of many industries while unlocking the door to Asia’s highest growing economy with a population of 64 million. In addition, it makes it possible for Mongolians to visit a beach during winter vacations. On the other hand, more tourists from Southeast Asia can now be directed to Mongolia regardless of seasons.
The state policy on civil aviation states that by taking advantage of its geographical location, Mongolia will become a part of the global air transport services, a regional hub for international air passenger and cargo transport. However, it is unclear whether they are aware of the fact that this goal can only be achieved through reduction in regulations and creating free competition.