Aviation Industry in Myanmar

While the initial rush of foreign investment into Myanmar tapered off in 2015, likely due to the November elections, 2016 is predicted to be a year of rapid growth.  The almost complete transition of power to Aung San Suu Kyi’s National League for Democracy (the “NLD”), formerly the opposition party, represents an impressive step towards increased stability and further opening up to the international community.  As a result, along with numerous other industries, the aviation industry in Myanmar is taking off.

Politics

On 15 March 2016, the NLD announced their Presidential candidate, U Htin Kyaw, a long time trusted associate of Aung San Suu Kyi.  Steeped in controversy, Article 59 (f) of the 2008 Constitution bars Aung San Suu Kyi from serving as President as her sons do not hold Myanmar passports.

On 17 March 2016, the Union Parliament voted in favor of U Htin Kyaw as Myanmar’s next President (albeit a proxy to Aung San Suu Kyi).  He is set to become Myanmar’s first truly democratically elected President (and from a civilian background) in more than five decades.  At the direction of Aung San Suu Kyi, the new government will take power with the formation of U Htin Kyaw’s Cabinet.  On 23 March 2016, the NLD announced that Aung San Suu Kyi will be the minister of multiple ministries, thus helping her maintain direct control over the new government.

Also on 17 March 2016, the Union Parliament approved U Myint Swe as Vice President.  The Constitution allows the military to select the Vice President, an important position in the Myanmar government system.  U Myint Swe is associated with the more conservative elements in the military and some may argue that he isn’t the best choice of candidate given his association with the military crackdown on monks protesting for democracy back in 2007.

It is too early to tell how well the new government and military will work together.  An early test will be the new government’s plans to reduce the number of ministries from 36 to 21.  Many would agree that it is logical to reduce their number and that reorganization would make the executive more efficient, however it could also be suggested that it appears to further consolidate the new government’s authority.  And while it appears that the Ministry of Transport (“MoT”) and the Ministry of Communications and Information Technology will be combined into a new Ministry of Transportation and Communications, it is yet to be seen how and if such a merger will affect the Department of Civil Aviation in Myanmar (“DCA”), which is now under the MoT.

The Laws

In general, the legal environment is in the early stages of reform and modernization, the former government under the military civilian government party had made significant progress in drafting laws encouraging foreign investment. Further laws promoting foreign investment are also expected to be approved by the new government.  These include laws relating to investments in the Myanmar aviation industry, such as the upcoming Airport Authority Law, the Rules Relating to International Interest in Mobile Equipment, and the Rules to the Law Relating to International Interests in Aircraft Equipment of 2014.

New laws in Myanmar co-exist with old British colonial laws, which have not been repealed and provide much of the fundamental legal framework still in place today, and which exist along with the laws and regulations issued by the various military governments over the last fifty years. This mixture of a common law heritage with laws more akin to an abridged civil law approach has been further complicated by the liberal application over the last few decades of “policies and practices”, which are not actually detailed in any law or regulation and are often unpublished.  The result is a legal landscape that requires patience and, most importantly, a deep understanding of the old laws and practices, and finally the recent laws aimed to promote foreign investment.  With careful legal and tax structuring and an appetite for risk, early mover foreign investors proceed with a “high risk/high reward” expectation.

The Myanmar Aircraft Act of 1934 (“Aircraft Act 1934”), Aircraft Rules of 1920, 1937 and 1946, and the Carriage by Air Act of 1934 regulate most aspects of the aviation industry in Myanmar.  Still, lots of gaps in the laws remain and most deals are accomplished with an element of direct negotiation with the DCA.

The Aircraft Act 1934 provides the legal framework regarding the manufacture, possession, use, operation, sale, import and export of aircraft and applies to citizens of Myanmar and any person who is listed as an owner of an aircraft registered in Myanmar.  The Aircraft Rules cover aerodromes, aircraft and public health-related matters, and contain practical details relating to aviation operations in Myanmar.  The Air Carriage Act represents the domestic implementation of the 1929 Convention for the Unification of Certain Rules Relating to International Carriage by Air.  In addition, notifications, orders, directives and circulars issued by the DCA regarding various aspects of the aviation industry must be followed by investors carrying out business in Myanmar.

On 3 December 2012, Myanmar acceded to the Cape Town Convention on International Interests in Mobile Equipment  and the Protocol to the Convention on International Interest in Mobile Equipment on Matters Specific to Aircraft Equipment (together, the “Treaty”).  On 1 August 2014, in order to give effect to the provisions of the Treaty, the Law Relating to International Interests in Aircraft Equipment (“Aircraft Act 2014”) was enacted. However, the detailed implementing regulations have not yet been promulgated.

The key pillars for foreign investment in Myanmar are the Foreign Investment Law passed on 2 November 2012 (“FIL”) and Notification 49 of August 2014 issued by the Myanmar Investment Commission (“MIC”), the body also overseeing the FIL.  The FIL and the notification implement a substantial policy shift that encourages and opens more sectors to foreign investment, including the aviation industry.  Under the FIL, domestic and international air transport services can be conducted via a joint venture operation with a Myanmar private entity or government agency. There must be a corporate presence in Myanmar and it requires a permit from the MIC. The investors can operate transport services with owned or leased aircraft, which may be registered in Myanmar.

The Market

The opportunities for all types of carriers in the market are vast as it is currently the most underserved region in ASEAN and perhaps all of Asia.  Yangon, the financial hub of Myanmar, was a major trading center for Southeast Asia in the 1950s; however civil aviation entered a long decline after the military seized power in 1962.  In more recent years, the aviation authorities have recognized the need to rapidly redevelop the sector.  They aim to make Myanmar a major aviation hub in Asia and have developed a four point strategy to do so: liberalizing economic regulations, establish new air links to international destinations, promoting national airlines and improving infrastructure.

The Infrastructure

As part of this strategy, the aviation authorities have announced the privatization of airports and the upgrade of major international airports in the country.  In 2014, a US$150 million upgrade to Yangon International Airport was awarded to Pioneer Aerodrome Co., Ltd, a consortium led by an affiliate of Asia World Co., Ltd.  The first phase opened on 12 March 2016.  Yangon’s existing international terminal, which is also managed by Asia World, will be rebranded as Terminal 2.

In November 2014, MC Jalux Airport Service Co., Ltd, a Japanese company, also signed a concession agreement with the DCA to upgrade the Mandalay International Airport in the northern logistic hub at a cost of US$100 million.

In 2015, a consortium comprising of Changi Airport International, JGC Corporation and Yangon Holdings Limited won the bid to develop a new Yangon airport, the Hanthawaddy International Airport with construction set to begin in 2016, for completion in 2020.  The first phase is estimated to cost US$1.5 billion and will include a terminal complex that can handle 12 million passengers per year. Under the second phase, the capacity will increase to 30 million.  It has been reported that the project is strongly supported by the military however potentially not supported universally within the government as a whole.  Regardless, it is currently widely anticipated to become the main port for international arrivals and departures for the country.

The Airlines

There are a number of national carriers in Myanmar and many are placing volume orders for new aircraft, paving the way for new routes.  Myanmar National Airlines (“MNA”), for instance, is leasing ten new Boeing 737-800 planes – so far three have been delivered – and has ordered six ATR 72-600 passengers airplanes to be delivered by 2017. MNA flies to Singapore, Hong Kong and Bangkok, and will use its new aircraft for routes to Shanghai and Chengdu to start later in 2016.

Myanmar Airways International (“MAI”) uses Airbus 320 aircraft and is likely to add new planes later this year to its existing fleet of seven.  It is considering new routes to Bangkok and Penang, Malaysia.  FMI Air is also evaluating the addition of three new domestic destinations and is expected to have a fleet of five aircraft by 2017.

Weekly international flights from Yangon between 2010 and 2015 increased 3.88 times.  There are 28 international airlines now flying into Yangon and several more have confirmed new routes, including Emirates Airlines, which will use Boeing 777-300ER aircraft for daily flights to Dubai from August 2016, and Hong Kong Express which will launch flights later this year.

As of March 2016, Japan’s ANA Holdings and the Shwe Thanlwin-owned Golden Sky World have formed a joint venture and have applied to set up a new international airline based in Myanmar.  The application is currently awaiting approval from the MIC.  The proposed airline is “tentatively” named Asian Blue and will only service international routes.

Aircraft Leasing

There are no specific regulatory requirements with respect to the leasing of aircraft. The most relevant law is the Myanmar Contract Act 1872.  The relevant lease and related agreements can be governed by foreign law.  The relevant lease must be registered in Myanmar and stamp duty fees must be paid, which are subject to the value amount of the lease.

Under the Cape Town Convention and the Aircraft Act 2014, an international security interest created and registered in accordance with the Treaty will be recognized and enforceable in Myanmar.  Under the Aircraft Act 2014, the Supervisory Authority to implement the provisions of the law shall be formed jointly by the government and the DCA to conduct the registration as provided for in the Treaty.  The provisions of the Aircraft Act 2014 shall prevail over any existing law which is not consistent with the provisions therein.

According to the Aircraft Act 2014, if there is an insolvency-related event with respect to an airline, the relevant insolvency administrator or the debtor must give possession of any aircraft to the creditor no later than 30 calendar days from the date in which the creditor would be entitled to possession of the aircraft.  The DCA is required to promptly co-operate with and assist a creditor exercising its rights under an Irrevocable De-Registration and Export Request Authorization (“IDERA”) and the DCA must provide the details for the IDERA and the form of a Certified Designee Confirmation Letter.

Although Myanmar had no practical experience regarding the enforcement of international interests in aircraft equipment, implementation of the Treaty and enacting the domestic legislation are positive steps in creating a strong framework for aircraft leasing and financing.

Thus, the aviation industry in Myanmar is ready for lift off.  These changes in policy, law and rapid infrastructure development, coupled with the industry’s eagerness to expand, is leading to a new golden age for the aviation industry in Myanmar.  All that is left is to see if the new government and the military are able to work together effectively as a team.  Most indications at this stage are for a bright future.

William D. Greenlee, Jr.

William D. Greenlee, Jr.

Partner; Managing Director, Myanmar at DFDL

Email: william.greenlee@dfdl.com
Tel: +95 1 540 995

William’s practice focuses on M&A, corporate and project finance and securities. He is involved in negotiating, structuring, documenting and managing large transactions, private equity and opportunity-fund companies and other international companies throughout Asia. With a focus on Southeast Asia, William’s clients include a range of industries including energy, mining, infrastructure, oil and gas, banking, telecommunications and tourism. William holds a B.A. degree from the University of Oregon in Asian Studies with a minor in East Asian Literature and Juris Doctor from the University of San Francisco, California. He is a member of the State Bar of California, State Bar of Nevada, State Bar of California International Law Section and the Inter-Pacific Bar Association. He is based in our Yangon office and is head of DFDL’s China Desk. He speaks English, Mandarin, Thai and Bahasa Indonesian.

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About William D. Greenlee, Jr.

Email: william.greenlee@dfdl.com
Tel: +95 1 540 995

William’s practice focuses on M&A, corporate and project finance and securities. He is involved in negotiating, structuring, documenting and managing large transactions, private equity and opportunity-fund companies and other international companies throughout Asia. With a focus on Southeast Asia, William’s clients include a range of industries including energy, mining, infrastructure, oil and gas, banking, telecommunications and tourism. William holds a B.A. degree from the University of Oregon in Asian Studies with a minor in East Asian Literature and Juris Doctor from the University of San Francisco, California. He is a member of the State Bar of California, State Bar of Nevada, State Bar of California International Law Section and the Inter-Pacific Bar Association. He is based in our Yangon office and is head of DFDL’s China Desk. He speaks English, Mandarin, Thai and Bahasa Indonesian.