air liberalization eng

8/2/2019 Air Liberalization Eng

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Mongolia: Impactfrom international

air serviceliberalization

Mongolia: Impactfrom international

air serviceliberalization

March 2011Ulaanbaatar, Mongolia


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EPCC

Cenral ower 1010aSukhbaaar squareUlaanbaaarMongolia

el: +976-11-321927Fax: +976-11-321926E-mail: [email protected]

Web: www.ecrc.mn

Cashmere & WoolMongolian Wool & Cashmere Association

MONGO

LIANTOURISMASS

OC

IAT

ION

Suppored by:


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Impact of international air service liberalization on Mongolia 3

Te Economic Policy and Compeiiveness Research Cener(EPCRC) is pleased o presen he ndings o he sudy on Mongolia:Impacs o inernaional air service liberalizaion. EPCRC wasesablished o promoe he concep o compeiiveness o he generalpublic and conribue o Mongolias economic growh by examining

he botlenecks ha hinder he counrys compeiiveness. Every year,he cener conducs in-deph sudies on one or wo crucial acorsaecing he economy, such as he eeciveness o governmenregulaion and he role o he privae secor.

For 2011, EPCRC seleced he air service indusry as i supporshe growh o ourism, rade, business ravel o and rom Mongolia,and wider economic growh. We parnered wih InerVISAS, aninernaional rm wih experise in air ranspor, wih he assisance

rom US Agency or Inernaional Developmen.Te aim o he sudy was o assess he curren saus o he Mongolianaviaion indusry, air rac levels and wider economy and examinehow air liberalizaion in Mongolia will impac:

Passenger rac volumes and air ares

Air cargo rac

Job creaion in he air ranspor indusry and he widereconomy

ourism

Economic growh

In addiion, his research also provides recommendaions onhe approach o liberalizaion and he poenial regulaory andinrasrucure implicaions. I is crucial ha governmen recognizeshe imporance o improving is policies o promoe privae secorcompeiiveness, in order o succeed amids inernaional compeiionin our globalized world.

FOR

EWORD


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Economic policy and competitiveness research center4

Tis repor presens he ndings and brie summary o he sudy only.Te ull repor is available a he research ceners websie:www.ecrc.mn in boh English and Mongolian.

We hope ha readers nd our sudy imely and o imporance o he

counrys social and economic growh.

Ogochuluu Ch.Direcor, EPCRC


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SUM

MARY

Mongolia presens a dynamic air service marke wih signicanpoenial or growh as is naional economy expands. Alhough heGovernmen o Mongolia has execued bilaeral air service agreements(bilaerals) wih over 30 oreign saes, here are only our major roues which regularly connec Ulaanbaaar o criical inernaional hubs

in Beijing, Moscow, Seoul and okyo. Mos o Mongolias bilaeralsconain ighly conrolled designaions or carriers, roues, airpors,capaciy, requency, and pricing.

Tere is considerable empirical evidence conrming ha heliberalizaion o air services provides benes or consumers includinglower ares and more air services. Furhermore, liberalizaion willconribue o he overall improvemen o he Mongolian economyin erms o a growing gross domesic produc (GDP) and increasingemploymen hroughou Mongolia.

Te purpose o hesudy was o examine he poenial impac o airservice liberalizaion in Mongolia and o provide some insighs as ohow Mongolia migh approach more liberalized air services.

Evidence o the impacts o liberalization

As documened in he sudy, here is considerable evidence haliberalizaion o inernaional air markes has provided subsanial benes or air passengers and he wider economy. For example,liberalizaion o he EU aviaion marke (one o he mos prominen

and large-scale examples o liberalizaion), lead o a 34% decline indiscoun ares and a doubling in he rae o growh in air rac inhe EU. Liberalizaion has also beneed emerging economies: heliberalized UK-India bilaeral resuled in a 108% increase in passengerrac, an 8-17% decline in are and he enry o new Indian carriers.Similarly, he liberalizaion o he Malaysia-Tailand bilaeral resuledin a 37% increase in rac volumes.

Furhermore, oher sudies have demonsraed a link beweenincreased air rac and growh in employmen and Gross Domesic

Produc (GDP). For example, a sudy esimaed ha each 10% increase


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in inernaional air services led o a 0.07% increase in GDP, whichcan ranslae ino millions (or even billions) o dollars o incremenalGDP.1

In summary, liberalizaion leads o increased air service levels andlower ares, which in urn simulaes addiional rac volumes andcan bring abou increased economic growh and employmen, asillusraed below:

Impact o liberalization in Mongolia

Full liberalizaion (i.e., open skies) will ulimaely have he greaesposiive economic impac on Mongolia and is orecas o produce heresuls discussed in he sudy. Bu here are poliical and economicrealiies ha will likely preven ull liberalizaion rom being adopedimmediaely. Tereore, immediae adopion o ull open skies mayno be pracicable. However, mainaining he saus quo or airservices would resul in he wihholding o signican economic

benes or he ciizens o Mongolia.

Te impacs o urher liberalizaion on he Mongolian inernaional

air marke were esimaed using a graviy model developed byInerVISAS which orecass rac beween any wo counries(or groups o counries) based on he wo counries economiccharacerisics, rade levels, geographic relaionship and hecharacerisics o he air service bilaeral beween he wo counries.By speciying changes o he erms o he bilaeral, he model can beused o esimae he rac impac resuling rom liberalizaion.

Te long erm esimaed impacs o ull inernaional bilaeralliberalizaion were:

Inernaional rac o/rom Mongolia increases by 112% wihin2-3 years o implemenaion.

rac o/rom Asia accouns or nearly wo hirds (65%) o heoal projeced increase in rac (China, Souh Korea and Oher

Asia). Many o hese Asian markes (noably China) are projeced

1 InerVISAS Consuling Inc., Measuring he Economic Rae o Reur n on Invesmenin Aviaion, December 2006 .

Economic

growth

Job

growth

Trafc

growth

New air ser-

vices / lower

fares

Liberalization


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o achieve high levels o economic growh in he nex decade.Increased air services and air rac o/rom hese counries willsuppor Mongolia urher leveraging is own growh hrough

beter ies wih oher emerging economies. A he same ime,liberalizaion will also simulae air service o large, esablished

markes such as Europe and Norh America. I is projeced ha liberalizaion will reduce passenger air ares

by an average o 42%. Assuming ull liberalizaion and based onhe rac increases projeced in he repor, he oal are savingsacross all Mongolian air passengers on inernaional ighs isesimaed o be US$ 121 Mil lion (MN 158.4 Billion).

Liberalizaion is also projeced o increase inernaional air cargovolumes by 62% and increase domesic air rac (hrough onwardconnecions) by 43% o 87%.

Economic benets to Mongolia

Liberalizaion is also projeced o generae signican economicbenes or Mongolia including:

A oal o 117,000 addiional inernaional v isiors per annum areprojeced as a resul o l iberalizaion, represening a 21% increaseover 2010 visior levels. Tese visiors are esimaed o spend aoal o US$94 Million (MN 123.1 Billion) in he Mongolianeconomy.

Air service liberalizaion is projeced o generae 21,540 ull-ime jobs in he aviaion, ourism and oher secors o he Mongoliaeconomy. Tis represens an increase o approximaely 2.1% inoal employmen in Mongolia.

An addiional US$ 189.9 Million (MN 253Billion) in GrossDomesic Produc (GDP) per annum. Tis equaes o an increaseo 2.5% in naional GDP.


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As Mongolia seeks o develop naional ransporaion sysems, herehave been discussions regarding he negoiaions o Open Skies Agreemens wih poenial airline parners. Tese discussions ocuson he impac o rapid economic developmen in he coming years,specically, how he liberalizaion o civil aviaion will promoe

increased business and ourism relaed ravel.Inernaional visiors currenly ravel o/rom Mongolia primarily by air. As Mongolia is a landlocked counry, air ravel is criical oMongolias rade, economy, and is abiliy o access overseas markes. Alhough he Governmen o Mongolia has execued bilaeral airservice agreements (bilaerals) wih over 30 oreign saes, here areonly our major roues which regularly connec Ulaanbaaar o criicalinernaional hubs: Beijing (BJS), Moscow (SVO), Seoul (ICN) andokyo (NR). Mos o Mongolias bilaerals are o he Bermuda I

ype, wih ighly conrolled designaions or carriers, roues, airpors,capaciy, requency, and pricing.

Tere is considerable empirical evidence conrming ha heliberalizaion o air services provides benes or consumers includinglower ares and more air services. Furhermore, liberalizaion willconribue o he overall improvemen o he Mongolian economyin erms o a growing gross domesic produc (GDP) and increasingemploymen hroughou Mongolia.

Te Governmen o Mongolia has recenly saed plans o conduc a

comprehensive review o naional civil aviaion policies. Specically,he Economic Policy and Compeiiveness Research Cener (EPCRC)aims o provide an assessmen o help rame public dialogue andpolicy choices on achieving measurable benes o liberalizaion o airservices o consumers and he overall economy in Mongolia.

INTR

ODUCTION


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1. TRFFIC IMPACTS OF

LIBERLIZATION

Te ollowing secions examine heimpac o liberalizaion on passenger

rac level, air cargo volumes and are(cos o service).

1.1. Impacts on passenger trafc

Based on he graviy model describedabove, he projeced increase ininernaional rac resuling romliberalizaion is summarized in Figure1 represens he long-erm impacmaniesing 2-3 years afer liberalizaionis enaced. Liberalizaion o Mongoliasair service bilaerals is esimaed oincrease inernaional rac o/romMongolia by 595,000 annual passengers,an increase o 112% relaive o 2010 raclevels o 528,975.

Figure 2 shows he rac increasessimulaed by liberalizaion, broken down

by marke. Te larges esimaed increase

is rac o/rom China, which is orecaso increase by 184,000 annual passengers,a 138% increase over 2010 levels. Inpar, his is driven by Mongolias srongrade relaionship wih China: 44% oMongolias oal rade is wih China.2

IMPACT OF

LIBERALIZATION ON AIRTRAFFIC IN MONGOLIA

rac o/rom Asia accouns or nearlywo hirds (65%) o he oal projecedincrease in rac (China, Souh Korea,and Oher Asia). Many o hese Asianmarkes (noably China) are projeced oachieve high levels o economic growhin he nex decade. For example, heIMF Economic Oulook Ocober 2010orecas average economic growh orDeveloping Asia o 8.5% per annum upo 2015, compared wih 2.6% per annumor he U.S. and 1.7% per annum or heEuro area.3 Increase air services andair rac o/rom hese counries willsuppor Mongolia urher leveraging

is own growh hrough beter ies wihoher emerging economies. A he sameime, liberalizaion will also simulae airservice o large, esablished markes suchas Europe and Norh America.

2 Source: Naional Sais ical Oce (htp://www.nso.mn). Figure based on 2008 impor and expor daa.3 htp://www.im .org/exernal/pubs/f/weo/2010/02/pd/ex.pd


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Figure 1: Passenger rac impac oliberalizaion

Figure 2: rac impac o liberalizaionby marke

1,200

1,000

800

600

400

200

0

529

525(+112%)

Current ra c ( 201 0) A fer L ib erali za ti on

InternationalPassengerrafc

(thousands)

1,124

Market

rafcIncrease

(Tousands)

Percentage

Increase

Shareootal

Increase

China 184 +138% 31%

Souh Korea 125 +86% 21%

Oher Asia 85 +162% 14%

Russia 31 +116% 5%

Europe/Middle Eas 86 +99% 14%

Norh America 77 +96% 14%

Oher 7 +41% 1%

oal 595 +112% 100%

1.2. Impacts on air cargo

Liberalizaion can have signicanimplicaions or air cargo. Many bilaeralagreemens have liberalized provisionsor all-cargo services, including sevenhreedom righs. All-cargo services are

someimes used as a means o es heconsequences o liberalizaion beoreexending he process o includepassenger services.

Te characerisics o air reigh diergrealy rom passenger rac:

Air reigh is very heerogeneous: ican include documens, machinery,oodsus, live animals and lierallyanyhing else ha people wish o ship.

Air reigh shipmens range grealy insize, rom single-page documens ohuge movemens requiring charer oseveral wide body all-cargo aircraf.

Air cargo can exhibi severedirecional imbalances. In general, airpassenger ows end o direcionally

balance nearly all passengers whoy rom a counry reurn back o hacounry (and mos on he same roue).By conras, air cargo can exhibisrong ows in one direcion (e.g.,expors rom one counry o anoher)

which are no necessarily machedin he opposie direcion (e.g., hereare limied impors rom he samecounry). Tis imbalance has majorimplicaions or capaciy managemenand pricing (e.g., reigh raes or heweak direcional ow can be verylow).

Te means o ranspor can dier:

some reigh is carried on dedicaedreigher aircraf while signican

volumes o reigh are also carriedin he bellyhold o passenger aircraf(ha remaining afer luggagerequiremens).4

4 Combi aircraf can a lso be used, which allow a mixed use o passenger and cargo capaciy, alhough use o hese aircraf is onhe decline due o saey and economic reasons.


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Figure 3: Impac o liberalizaion on aircargo

6,000

5,000

4,000

3,000

2,000

1,000

0

3,428

2,127(+62%)

Curren t ra c (2 00 9) A fer L ib eral iza ti on

InternationalAirCargorafc

(Metriconnes)

5,555

In very direc way, developmen o aircargo services o/rom Mongolia willplay a key supporing role in developingMongolias rade and is overall economicdevelopmen. Secion 2.4 discusses a

number o papers ha have esablished aircargos role in he developmen o radeand he economy. Air cargo is paricularlyimporan or Mongolia given ha hecounry is landlocked and currenly haslimied rail and road inrasrucure in hecounry.5

Esimaes o he cargo volumes o/romMongolia simulaed by liberalizaion

have been esimaed using he ollowinginormaion:

A calculaion o he bellyhold capaciyprovided on he addiional air servicessimulaed by liberalizaion opassenger services.6 I is assumed haair carriers will price his bellyholdcapaciy o achieve a 60% average loadacor.

Secion 2.3.1 summarized a paper byMicco and Serebrisky (2004), whichesimaed ha ull liberalizaion(qualiy o regulaion plus open skies)could reduce reigh raes by up o 22%.

An assumed air are elasiciy o -1.5 was used o esimae he consequenchange in reigh quaniy.7

Te projeced increase in air cargovolumes is provided in Figure 3.

Air cargo volumes are projeced oincrease rom 3,428 (meric) ons o5,555 ons, an increase o 2,127 ons or

62% relaive o 2009 volumes.8

5 Mongolias main rail corridor is he rans-Mongolian Rai lway running rom Russia hrough Ulaanbaaar ino China. In o-al, Mongolia has 1,908 kms o railway rack, o which he rans-Mongolian Railway accouns or 1,110 kms (Source: CIAWorld Facbook). In addiion, Mongolia has 3,015 kms o paved roads and 46,234 kms o unpaved roads (Source: CIA WorldFacbook).

6 Based on he capaciy available afer allowing or passengers luggage requiremens.7 Fare elasiciy measures consumers sensiiviy o are price changes or a paricular good or service. As he are increases, he

quaniy demanded (e.g., he volume o reigh ranspored) is expeced o decline and vice versa. Since he quaniy demandedgenerally decreases when he are increases, his raio is usually expeced o be negaive. Air reigh has been ound o beparicularly price sensiive (in his case, a 10% decline in price is expeced o resul in a 15% in reigh demand). For example,

see: D. Gillen, W.G. Morrison and Sewar, C. (2002), Air ravel Demand Elasic iies: Conceps, Issues and Measuremen,Ocober, 2002 .

8 Te increase in reigh volumes is shown relaive o 2009 levels as 2010 daa was no avai lable.


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1.3. Impacts on pricing

Te are reducions were esimaed on he basis ha much o he rac simulaionis due o are reducions. Tis assumpionis suppored by he research presened inhe sudy (Secion 2.3) which ound haliberalizaion generally resuls in signicanreducions in air ares. In esimaing heare reducion, i was assumed ha oncounry-pairs which already have direcservice prior o liberalizaion, all o he

Inormaion or daa on are elasiciiesspecic o he Mongolian marke were noavailable. Insead, he are elasiciies were

aken rom an IAA sudy which providesare elasiciies or dieren geographicmarkes.9 For example, IAA elasiciies

were available or Asia-Europe, or Asia-Norh America rac, and so on. Te mosapplicable elasiciy rom IAA repor wasseleced or each counry pair. ypically,hese elasiciies ranged rom -0.8 o -1.5.

Te esimaed impac on passenger aresis summarized in Figure 4. I is projeced

ha liberalizaion will reduce passenger airares by an average o 42%. Tis is in line

wih experiences elsewhere: a sudy on he

Country Pairs Already With Direct Service

% Fare Reducioni= (1 + % rac Increase

i) ^ Fare Elasiciy

i- 1

Country Pairs With No Prior Direct Service

% Fare Reducioni= (1 + 2/3 x % rac Increase

i) ^ Fare Elasiciy

i- 1

rac simulaion is atribuable o he arereducions; while on counry pairs ha didno currenly have direc service, wo hirdso he rac increase is atribuable o arereducions (hus, one hird is atribuableo improved service levels direc service,increased requency, ec.).

As such, he are reducion was calculaedas ollows:

9 Esimai ng Air ravel Elasiciies, An InerVISAS Consuling Inc. repor or IAA, December 2007.10 European Experience o Air ranspor Liberalisaion, Join Presenaion by he European Union and he European

Civil Avia ion Conerence o he 5h Worldwide Air ranspor Conerence (ICAO), 24-29h March 20 03.Pars o he EU marke had already been libera lized by indiv idual members saes prior o he EUs ull liberaliza ion. Forexample, he UK and he Neherlands had already signed an open sk ies agreemen. As a resul, he impac o EU libera liza-ion are lower han hose o Mongolia.

11 Te oal are savings are or Mongolian air passengers only and do no include he are savings or oreign visiors oMongolia. Foreign visiors are also expe ced o bene rom lower are levels.

liberalizaion o he EU aviaion markeound are reducions averaging 34%.10

Assuming ull liberalizaion and based

on he rac increases described earlier,he oal are savings across all Mongolianair passengers on inernaional ighs isesimaed o be US$ 121 Million (MN158.4 Bil lion). 11

As noed in he previous secion, previousresearch indicaes ha liberalizaion canresul in air reigh raes declining by upo 22%. I anicipaed ha reigh raes o/rom Mongolia will decline by a similar

proporion i open skies liberalizaion isunderaken.


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All nancial gures are in 2010 prices.

* Relative to 2010 trafc levels.

Figure 4: Passenger are impac and oal are savings rom liberalizaion

% Reduction inAverage Fare

otal Fare Savingsor Mongolians

(MN)

otal Fare Savingsor Mongolians

(US$)

LiberalizaionImpac 42% 158.4 Billion 121 Million

2. SECONDARY I MPACSON HE DOMESIC AIRSERVICES

Domesic rac oaled 136,828 passengersin 2010, wih Eznis Airways and Aero

Mongolia operaing he vas majoriy oMongolias domesic services.

While his sudy does no consider urherliberalizaion o he domesic marke,i is anicipaed ha liberalizaion oinernaional service will have an impacon domesic rac volumes. Some o heincremenal passengers will likely connec wih domesic services in order o sar orcomplee heir journey in areas o Mongoliaaway rom Ulaanbaaar.12 In paricular,here is expeced o be demand or serviceo/rom mining regions in he Souh andouris atracions around he counry.

Inormaion was no available on hecurren proporion o inernaionalpassengers connecing ono domesicservices. Anecdoal inormaion indicaesha mos ouriss o Mongolia use local

our operaors o make arrangemensor ravel wihin he counry, including

12 I is anicipaed ha virua lly all he addiional inernaional services will be sill uili ze ULN.

booking domesic ighs as par o he ourpackage. As hese passengers are in essence

sel-connecing (he domesic carriers dono have inerline agreemen wih any ohe inernaional carriers), i is very diculo rack heir connecions.

Insead, he impac on he domesicmarke has been assessed using scenarioanalysis. Based on experience in ohermarkes and exper judgmen, i isassumed ha beween 10% and 20% ohe incremenal inernaional passengers

would connec ono domesic services.Based on his assumpion, i was possibleo esimae he impac on he domesicmarke, as summarized in Figure 5. I10% o inernaional passengers connecon domesic services, his would producea 43% increase in domesic rac. I 20%,he growh in domesic rac is 87%. I isclear rom his analysis ha liberalizaiono he inernaional air services could havemajor impacs or he Mongolian domesicmarke.

Figure 5: Secondary impac on domesic passenger rac

Assumed % o ConnectingInternational Passengers

Additional DomesticPassenger rac

Growth in

Domestic Market*10% 59,000 +43%20% 119,000 +87%


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Te increase in air service and rac isorecas o simulae employmen andeconomic growh in a number o ways:

Aviation Sector: addiionaleconomic aciviy in he aviaion

secor is generaed by he servicing,managemen, and mainenance o headdiional air services.

Tourism Sector: air service aciliaeshe arrival o larger numbers o ourisso a counry; his includes business aswell as leisure ouriss. Te spending o

ECONOMIC

IMPACT OFLIBERALIZATIONhese ouriss can suppor a wide rangeo ourism relaed businesses: hoels,resaurans, heares, car renals, ec.

Catalytic Impacts: includes he role oair ransporaion in aciliaing growh

and produciviy in he general economy by increased rade, business aciviyand greaer personal produciviy.

Te ollowing secions describe hepoenial economic impacs or Mongoliaas a resul o air service liberalizaion.

13 Source: Mongolian Naional ourism Cener, htps://mongoliaourism.gov.mn.14 Ibid.

15 Based on he air rac daa described in Chaper 3, i is roughly esimaed ha only 13% o visiors o Mongolia arrive by air.16 Te increase in visiors (21%) is considerably less han he growh in passenger rac (112%) due o he high proporion o

visiors arriving by land.

1. IMPACT ON TOUISM

In 2010, a oal o 557,414 inernaional visiors arrived in Mongolia.13 In 2010,hese visiors spen a oal o US$ 222.4Million (MN 292.3 Billion), an averageo US$ 399 (MN 524,300) per visior.14

Based on previous booking paterns, iis esimaed ha approximaely 39% ohe incremenal air rac simulaed byliberalizaion will be visiors o Mongolia

(he remainder will be Mongolianresidens). I is anicipaed ha visiors byair will spend considerably more han heoverall average rae o US$ 399, which isheavily skewed owards visior by land.15Visiors arriving by air end o say or longerand have greaer need or accommodaionand ground ransporaion. Tereore i

is assumed ha he incremenal visiors by air will have a spend rae double heaverage (US$ 798). Sensiiviy analysison his assumpion is provided in he nexsecion.

Based on hese assumpions,Figure6shows he incremenal visis simulaed by liberalizaion. A oal o 117,000inernaional visiors per annum are

projeced as a resul o liberalizaion.Tis represens a 21% increase over 2010visior levels (557,414).16 Tese visiors areesimaed o spend a oal o US$94 Million(MN 123.1 Billion) in he Mongolianeconomy. Te employmen impacs ohis addiional visior and ouris spend isdiscussed in he nex secion.


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1.1. Sensitivity tests

As daa on spending by visiors arrivingby air was no available, he spending raeo hese visiors was esimaed assumingha hey spen double he average o all

visiors. Tis was a reasoned esimaebased on ypical spend raes in oher pars

o he world.

However, as he spend rae was basedon an assumpion, sensiiviy es werecarried ou o examine he impac o hisassumpion. wo ess were conducedassuming dieren levels o visior spend:

Low: visiors are assumed o spenda he average rae o all visiors o

Mongolia (boh air and land visiors):US$399 per visior.

Figure6:Addiional visis simulaed by liberalizaion

Figure 7: Sensiiviy es on he visior spend raes


AdditionalVisits

otal Visitor Spend(MN)

otal Visitor Spend(US$)

IncremenalVisis

117,000 123.1 Billion 94 Million

AdditionalVisits

otal Visitor Spend(MN)

otal Visitor Spend(US$)

Primary Analysis(US$ 798 per visior)


Low Scenario(US$ 399 per visior)


High Scenario(US$ 1,1197 per visior)


High: visiors are assumed o spenda hree imes he curren average (3

x 399 = US$1,197). Tis 50% higherhan assumed spend rae used in heprimary analysis.

Te esimae spend under heseassumpions are provided in Figure 7,

along wih he resuls rom he primaryanalysis. Noe ha he number o visiorsis he same in all scenarios, only hespend rae changes. As can be seen, heoal spend is US$ 47 Million in he lowscenario and US$ 141 Million in he highscenario, a range o +/-50% relaive heprimary analysis.


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Tis secion provides esimaes o he em-ploymen generaed in hree areas:

Aviaion;

ourism;

Caalyic impacs.

2.1. Employment impacts in theaviation sector

Increases in air rac will requireaddiional resources o handle headdiional passengers and aircraf.Employmen in he aviaion secor isrelaed o he servicing, managemen andmainenance o addiional air services,

which includes aciviies a airlines,airpors, air navigaion and oher aviaion-relaed businesses. Furhermore, hisaddiional aviaion aciviy has spin-o

2. IMPACT ON EMPLOYMENT

impacs ino he wider economy knownas indirec or muliplier impacs. Forexample, hese include: ood wholesalers

ha supply ood or caering on ighs,rucking companies ha move goods oand rom he airpor, reneries processingoil or je uel, ec. Tese indirec impacsgenerae addiional employmen in arange o indusries.

Te resuling esimaes are provided inFigure 8. Liberalizaion is projeced ogenerae an addiional 2,010 (direc)

ull-ime equivalen (FE) jobs in heaviaion secor. Including he indirecjobs, he oal reaches 4,310 new ull-imeequivalen jobs. As wih he rac gures,hese are he long erm projecions some2-3 years afer liberalizaion.

Figure8:Addiional employmen generaed in and by he aviaion secor

DirectEmployment

(FEs)

IndirectEmployment

(FEs)

otalEmployment

(FEs)Liberalizaion Impac 2,010 2,300 4,310

2.2. Employment impacts in thetourism sector

Air service aciliaes he arrival o ouriss(boh business and leisure) o a counryor region. Te spending o hese ouriss

can suppor a wide range o ourismrelaed businesses: hoels, resaurans,heares, car renals, ec. In addiion, heourism indusry generaes signicanindirec impacs in businesses ha supplyand suppor ourism. For example, ood

wholesalers or hoels and resaurans, axirms, hoel laundering services, deliveryrucks, ec.17

Liberalizaion is projeced o resul in anaddiional 117,000 visiors o Mongoliaspending a oal o US$ 114 Million

in he naional economy. Based on hemehodology and parameers describedin Annex B, he esimaed incremenalemploymen relaed o he ourism secoris summarized inFigure 9. Te incremenalourism is projeced o generae 5,600 FE

jobs wihin he ourism secor isel, plus6,620 FE jobs in indirec employmenor a oal o 12,220 FE jobs.

17 By his deniion, air ranspor could be considered par o he indirec indusries beneing rom ourism. Te mulipli-ers used in his ana lysis exclude air rans por as par o he indirec impac o ourism, o avoid double couning.


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Figure 9:Addiional employmen generaed in and by he ourism secor

Figure 10:Addiional employmen gen-eraed by caalyic eecs

CatalyticEmployment

(FEs)Liberalizaion Impac 5,010

DirectEmployment

(FEs)

IndirectEmployment

(FEs)

otalEmployment

(FEs)Liberalizaion

Impac 2,010 2,300 4,310

2.3. Catalytic impacts

Air ransporaion has been linked oeconomic and produciviy growh. Airransporaion aciliaes employmen andeconomic developmen in he naional andregional economy hrough increased rade,atracing new businesses o he region

and encouraging invesmen. In paricular,caalyic eecs can include some or all ohe ollowing:

Trade efects air ransporliberalizaion opens new markes omany businesses as a resul o newdesinaions, beter igh connecionsand higher requencies oered. Tisleads o a broader demand or exising

producs. Investment efects a key acor many

companies ake ino accoun whenaking decisions abou locaion ooce, manuacuring or warehouses isproximiy o an inernaional airpor.

Productivity efects air ransporaionoers access o new markes whichin erm enables businesses o achieve

greaer economies o scale. Air accessalso enables companies o atrac andreain high qualiy employees.

Tese caalyic impacs can have signicanimplicaions or employmen. For examplea sudy by Buton and aylor (2000) oundha as many as 44-73 jobs are generaed oreach addiional 10,000 E/D inernaional

18 Buton, K. and aylor, S. (200 0), Inernaional ai r ranspor aion and economic developmen,Journal o Air Transport

Management, Vol. 6, Issue 4, Ocober 20 00.Brueckner, J. (2002), Airl ine rac and Urban Economic Developmen.19 Te oal employed populaion a he end o 2010 was 1,089,600. Source: Monhly Bullein o Saisics, Naional Sais-

ical Oce o Mongolia, November 2010.

2.4. Total employment impactTe oal employmen simulaed byliberalizaion is provided in Figure 11. Air service liberalizaion is projeced ogenerae 21,540 FE jobs in he longerm. Tis represens an increase oapproximaely 2.1% in oal employmenin Mongolia.19

passengers while he sudy by Brueckner(2002) ound ha 22 jobs were generaed byeach addiional 10,000 E/D passengers.18

Te caalyic impacs in Mongolia have beenesimaed using parameers calibraed rominernaional daa rom previous examples

o expanded air service. Te parameershave been hen ailored o he Mongoliansiuaion, reecing local employmen,economic and business condiions.

Figure 10 shows he orecas employmensimulaed in he wider economy(excluding air ranspor and ourism) by hecaalyic impacs o increased air services.Liberalizaion is orecas o generae 5,010

FE jobs in caalyic impacs.


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Figure 11: oal incremenal employ-men simulaed by liberalizaion

Employment(FEs)

Aviaion Secor 4,310

ourism Secor 12,220Caalyic Impacs 5,010Total 21,540

3. IM PACT ON GOSS

DOMESTIC PODUCT

In addiion o employmen, anohermeasure o economic impac is he

conribuion o Gross Domesic Produc(GDP). GDP is a measure o he oalnaional oupu o an economy - he oalmoneary value o all goods and servicesproduced domesically. I includes incomeearned domesically by oreigners, budoes no include income earned bydomesic residens on oreign ground. Teesimaes o addiional GDP generaed by

liberalizaion provided below includes heemploymen income associaed wih he

jobs described in he previous secionsas well as he pros o he beneing

businesses and any relaed axes orsubsidies.

Te oal GDP generaed by increasedaciviy in he aviaion and ouris secors,as well as indirec and caalyic impacs,is presened inFigure 12. Air serviceliberalizaion is orecas o generae US$189.9 Million (MN 253 Billion) in GDPper annum. Tis equaes o an increase o

2.5% in naional GDP.20

Figure 12:Addiional gross domesic produc generaed by liberalizaion

Incremental GDP(MN)

Incremental GDP(US$ a PPP)

Liberalizaion Impac 253 189.9


20 Mongoli as GDP in 2010 is esimaed o be US$ 10.16 Billion (a PPP). Source: CI A World Facbook , htps://ww w.cia.gov/library/publicaions/he-world-acbook.


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21/34


RECOMMENDATIONS FOR

THE LIBERALIZATION OFMONGOLIA1. Issues and approaches orMongolia

Te sudy oulines he impac oliberalizaion o air services in emergingeconomies and demonsraes he posiiveimpacs o liberalizaion under almos allcircumsances. InerVISAS modelingand prior liberalizaion examplesdemonsrae ha opening he Mongolianmarke would produce a rapid increase inpassenger and cargo rac. However, hecurren governmen policy in Mongoliamus balance he need o simulaeaddiional rac, wih all he economic

benes ha such simulaion enails,wih a policy o improving he compeiiveposiion o MIA, he naional agcarrier, and is privae naional careersoprepare hem or more open compeiionin a liberalized marke. Tere is unmedemand or air services ino Mongolia,paricularly during he busy spring andsummer seasons, bu improving hecompeiive posiion o MIA and oher

naional carriers is also a criical acor.Liberalizaion o air markes hasproduced posiive resuls or ag carriersin he pas (e.g., Dubai, Singapore, andohers). However, many o hese examplesrepresen srong naional carriers wihsignican ees and asses o engage in,and endure, srong compeiion. Ohernaional ag carriers have ailed (or

suered signican losses) when aced wih opening o markes (e.g. Sabena,

Alialia, Olympic, Air Jamaica). I hesurvival and uure developmen oMIA remains a naional prioriy, heGovernmen o Mongolia mus adopa sepped, measured approach o boh

srenghening MIA as a viable eniy,while sill moving oward a liberalized airservice policy ha will provide economic

benes o he enire Mongolian economy.

Mongolia represens a relaively uniquesiuaion, because o a number o acors:

As a landlocked naion, Mongoliais paricularly dependen upon airransporaion, boh domesically and

inernaionally; Mongolia possesses a relaively small

naional populaion dispersed over alarge geographic area;

Dramaic economic growh hassimulaed demand or air services oand rom Mongolia

Seasonal air service demand (summer)

is paricularly high, wih dramaicdrop in demand during he auumnand winer seasons; and

Inernal desinaions, which are keyso growh, are remoe, and manydomesic airpors will require majorupgrades (ILS, paving runways, ec.)

MIA, he naional ag carrier, could bein a precarious posiion wih increased

compeiion, as i is no presenlysrucured o compee in an open


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environmen agains he major carriersrom Mongolias bilaeral markes(paricularly China, Korea, and Russia).Te carriers ying ino Mongolia have

vas ees, larger capaciy aircraf, and

signican economic resources (includingbroad air carrier neworks and alliances)rom which o draw. Alhough MIAhas announced plans or evenual eeexpansion, inending o double is eerom hree o six aircraf, his expansioncould be our o six years in he uure.

I is also criical ha he Governmeno Mongolia recognize he invesmens

made and commited by he privaelyowned naional carriers and suppora policy o encourage hem o expandheir services inernaionally. Whilesrenghening MIA, a srong policyo suppor privaely owned Mongoliancarriers mus be pu in place o allowhem o oer inernaional roue servicesand compee in a liberalized marke along

wih MIA. Eznis and Aero Mongolia,

he major privaely owned domesiccarriers, are poised or growh and haverecenly made major commimens osep up heir capabiliies wih a plan ourher invesmens ino heir operaions.Te poenial or growh o domesic air

services is high, paricularly o he wesand souh o he counry. Eznis is addingwo Avro RJ85 aircraf o is ee, while

Aero Mongolia is planning o add eihera B737 or A320 o is ee o Fokker

F50 aircraf. Boh airlines are buildingmainenance aciliies o increase heirin-house mainenance and engineeringcapabiliies in preparaion or heir eeexpansion. Wih his expansion o heirees, boh carriers will be ready o addaddiional inernaional roues and willlikely ully suppor liberalizaion.

Te governmen policy a his ime

appears o be somewha cauious, keepingexising bilaeral consrains in place,paricularly wih regard o Korea andChina. Given is signican poenialimpac, he governmen is apparenly

willing o consider liberalizaion, buonly on an incremenal basis, as MIAsrenghens hrough ee expansion,corporae resrucuring and building upo cash reserves.

Te ollowing secion proposes onepah oward liberalizaion ha could, iimplemened successully, address boho hese concerns.


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2. Scenario or liberalization inMongolia

Ulimaely, ull liberalizaion (i.e., openskies) will have he greaes posiiveeconomic impac on Mongolia. Bu,as discussed above, here are poliicaland economic realiies ha will likelypreven ull liberalizaion rom beingadoped immediaely. Primarily,curren governmen policy is ocusedon srenghening MIA o be morecompeiive and o have an adequaeee o supply he required capaciy ina more compeiive marke. Tereore,

immediae adopion o ull liberalizaion(open skies) may no be eiher pracicalor desired. Noneheless, mainaininghe saus quo or air services resuls inhe wihholding o signican economicbenes or he ciizens o Mongolia.

Tere is a middle road beween he

presenly resriced markes and openskies, however. Capaciy, requency,and designaion changes shor o ullopen skies can be examined in selecedmarkes o ease curren botlenecks andpermi some growh o he marke wihposiive impac on Mongolian economyand Mongolian aviaion.In he long run,he governmen mus nd a mehod osrenghen MIA in preparaion or abroad opening o air service markes, whilereaping he benes o increased air rac

ino and ou o Mongolia.Te ollowing seps provide a poenialouline or meeing imporan governmenobjecives in he long-erm, whileurhering he growh o Mongolian airmarkes and naional economy in boh heshor-and medium-erm:

1. Establish target. Te rs sep would be o evaluae he benes o liberalizaion

(using his sudy and ohers) and hen o esablish a arge or a level o deregulaion/liberalizaion, aking ino accoun eecs o ourism, he naional economy, and heoverall aviaion indusry. Tus, he governmen would se a goal or limied or ull airservice liberalizaion and esablish an iniial arge dae o implemen he necessarypolicy changes o mee ha arge.

2. Establish conditions for liberalization. Te second sep would be o examine hepolicy and regulaory ramework ha governs inernaional air services o ensure hahere are no impedimens o he liberalizaion o air services and hen o esablishhe condiions necessary o achieve liberalizaion. An iniial review o he legal andregulaory ramework indicaes ha here are presenly no major legal impedimens

o liberalizaion. Once a policy is esablished o move oward liberalizaion, hegovernmen mus esablish he required condiions or ull deregulaion, includingensuring a level o readiness and expecaions rom all paries, including he Minisry,MCAA and he air carriers. Tis will require a cooperaive amosphere among heparies and a willingness o commi o (a his sage) a broad imeline owardsachieving he goal o air service liberalizaion.

3. Strengthening of MIAT.Alhough he specic circumsances o MIA are beyondhe scope o his sudy, i is readily apparen ha MIA mus be srenghened obecome a srong, economically viable inernaional air carrier. Because o MIAs size

in relaion o is compeiors in inernaional markes, here is jusiable repidaionregarding MIAs capabiliies a his ime o wihsand srong compeiion in some


24/34


markes. In his sep, he governmen would work o improve he abiliy o MIA ocompee in a more liberalized marke. Tis would include a comprehensive review opoenial markeing and sraegic alliances, developmen o updaed roue and eeopimizaion plans, compleing a compeiive service oering review and analysis operormance improvemen opions.

4. Strengthening of privately owned national carriers. While MIA is being preparedor an increasingly compeiive environmen, paricularly on Beijing andSeoul roues,he governmen mus encourage domesic privaely owned carriers o develop oherinernaional roues and augmen Mongolias capaciy o compee wih oreigncarriers. Tis can be done by allowing he privae carriers o serve desinaionsha are no o high prioriy or MIA. Also, during peak seasons or when here isa capaciy consrain on roues served by MIA, he privae carriers can be asked oprovide services on hose roues. In order o oser urher invesmen and expansiono heir capabiliies, he governmen mus consider reallocaions o exising unusedor underuilized designaions based on privae carriers willingness and echnicalcapabiliies o service hose roues.

5. Development of liberalization strategy. Tis sep involves he deerminaion oinerim seps or gradual liberalizaion, and he developmen o a clear negoiaionsraegy or discussions wih Mongolian air service bilaeral parners. In developinghis sraegy, he governmen mus ake a holisic approach, examining he impac oliberalizaion on he enire Mongolian economy and on is air carriers, including MIA,Eznis and Aero Mongolia. Exising bilaerals should be examined or opporuniies oexplore limied or gradual increases in capaciy and requency and, where, appropriae,carrier designaions. In addiion, Mongolia should examine opporuniies or new

bilaeral or mulilaeral relaionships ha could provide opporuniies or is carriersand or poenial posiive impac on Mongolian air services and he economy as awhole. Upon agreemen o a negoiaion sraegy, he governmen can make iniialinquiries wih is aviaion parners regarding recepiveness o limied changes inbilaerals as i explores a pah o more complee liberalizaion.

6. Implement limited liberalization. Once long-range arges and polices have beenesablished and a plan or he srenghening o MIA is developed, he governmenshould examine he possibiliy o negoiaing limied increases in requency andcapaciy in paricularly consrained markes such as Souh Korea and China. As

noed above and hroughou his repor, liberalizaion will produce a signicanposiive impac on he Mongolian economy, creaing addiional jobs in muliplesecors and increasing ravel opions or Mongolian ciizens and visiors rom abroad. Wih a viable plan in place or ensuring he viabiliy o he naional ag carrier,he governmen should examine limied liberalizaion seps ha could be aken oimmediaely provide a posiive impac on he Mongolian economy and o also permihe coninued dynamic growh o privae air carrier operaions by Aero Mongolia,Eznis, and ohers. Opions or increased requencies, capaciy or designaions have hepoenial or immediae and signican impac on Mongolian ourism, he naionaleconomy, and job creaion and can be underaken in a way ha is consisen wih

broad governmen policies and wihou harm o he naional ag carrier.


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7. Synchronization of market liberalization. Te governmen should consideradoping a synchronized, measured approach o opening some markes wihmilesones or implemenaion schedules ha coincide wih posiive developmens inreorganizing MIA and wih he growing capabiliies o oher Mongolian carriers.Tus, he agreemen o addiional capaciy or requencies among bilaeral parners

could be implemened o ensure airness on all sides, such as adding requencies whenMongolian carriers add o heir ees and are capable o providing lif similar o hao he airlines o Mongolias bilaeral parners.

8. Examination of domestic market.A he same ime he governmen begins o openhe air service marke o addiional passengers and cargo, a sudy should be underakeno review domesic lif capabiliies wih he goal o ensuring ha Mongolian ciizens inall geographic regions o he counry have reasonable access o air services. Essenialair service or oher subsidizaion plans ensure boh regular and emergency accesso air ranspor. As he number o inernaional passengers coming ino Mongoliaincreases, i will be criical o srenghen and ensure he growh o domesic servicesduring ransiion period o ull liberalizaion.

9. Address aviation fuel price issues. One acor ha keeps airares a an expensive levelis he cos o aviaion uel in Mongolia. While here may be reasons or high uel pricesin Mongolia (shipmen expenses, lack o renemen nearby renemen capabiliies,ec.), Mongolia has a repuaion or having one o he highes coss or aviaion uelin he world. I Mongolian carriers are o be compeiive wih oher carriers in heregion, hey need access o reasonably priced aviaion uel, a leas a a price levelsimilar o ha enjoyed by heir compeiors. As par o a comprehensive sraegy odevelop air services hroughou Mongolia, he issue o aviaion uel pricing mus be

addressed. While uel coss may evenual ly decrease over ime as he uel disribuioninrasrucure in Mongolia maures, access o marke-priced aviaion uel is criical ohe compeiiveness o Mongolian carriers and o increasing he access o air servicesor all Mongolian ciizens ha lower airares will provide. I is recommended ha hegovernmen underake sudy o uel coss and procuremen sysems o develop henecessary policies and acics o reduce hese coss o air carriers.

10. Adherence to the liberalization plan. Te criical acor in he success o any plan oliberalize Mongolias air services will be he adherence o he milesones, schedulesand programs adoped under such a plan. While he basic elemens o a program o

move oward liberalizaion are highlighed here, he governmen will need o ensureha programs and plans remain on an agreed schedule so ha Mongolia can begino reap he benes o liberalizaion, even on a limied basis, as quickly as possible.Tis will require iniial agreemen rom all paries involved, including he aeced aircarriers, and consisen and coninual oversigh o he process.


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27/34


OVERVIEW OF THE

MONGOLIAN AVIATIONMARKET

1. Passenger trafc

In 2010, oal annual air passenger racin Mongolia reached 665,803 passengers,as shown in Figure 13. Inernaional

passenger rac in Mongolia oaled529,000 passengers (accouning or 79%o oal passenger rac), while domesicrac oaled 137,000 passengers(accouning or 21% o oal passengerrac).

Beween 2001 and 2007, inernaionalpassenger rac has exhibied srong

growh, averaging 17% per annum. In2008 and 2009, inernaional racdeclined due, in par, o he global

economic recession. rac volumesrecovered srongly in 2010 (up 18% rom2009).

Domesic passenger rac has beenucuaing over he las decade, reachingis peak in 2004 wih 163,000 domesicpassengers. Domesic rac grew by 55%in 2010 relaive o 2009.

Figure 13: Domesic and inernaional passenger volumes (2001-2010)

700

600

500

400

300

100

200

0

185 206208

294

346 418 478489

450

450

606

538

666

457479

555

609

347331

312

127

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

125 139 163 133 137 131 118 88 137

Source: Statistical Bulletin o the Mongolian Civil Aviation Authority.

AirPassengers(thousands)

International Passengers

Domestic Passengers


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2. Air cargo trafc

Figure 14 illusraes he hisorical levelso air cargo rac in Mongolia, spli inoinernaional and domesic reigh andmail. Air cargo increased by an averagerae o 12% per annum beween 2001 and2008. rac declined 14% in 2009, wihhe global recession he likely major cause.

Inernaional reigh is he largescomponen o air cargo, accouning or2,936 ons (77%) in 2009. Includinginernaional mail, inernaional air cargoaccouned or 3,342 ons (88%) o oal aircargo.

Figure 14:Air reigh carried (2001-2009)

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

02001 2002 2003 2004 2005 2006 2007 2008 2009

1,567

143106

58

5745

10

7

85

42

34

286

286

439

439

406

370

283

291

348

348

291

283370

2,144

2,963 3,0292,926

3,430

3,861

4,378

3,782

1,959

1,696 2,166 2,418 2,334 2,727 3,204 3,458 2,936

143195

195

406


3. Major airlines and routes

Mongolia has 23 airpors bu only 14have paved runways. Chinggis KhaanInernaional Airpor (ULN) is he largesairpor in he counry handling viruallyall he counrys inernaional rac andacing as a hub or MIA Mongolian Airlines (MIA), Aero Mongolia, andEznis Airways.21 ULN is locaed abou18 kilomeers souhwes o he capialUlaanbaaar, and also accouns or he large

majoriy o he counrys domesic services(ULN acs as a hub or mos domesicservices o oher poins in Mongolia; hereare a small number o services ha connecoher airpors direcly, bypassing ULN).

Figure 15 shows he airline marke sharesin he domesic marke in 2010. Treemajor Mongolian carriers operae in hedomesic marke:

21 Te oher airpor wih scheduled inernaional serv ice is lgii Airpor wih service o Kazak hsan.

Domestic Mail Domestic Freight International Mail International Freight

AirCargo(Metriconnes)


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MIA Mongolian Airlines is Mongoliasnaional airline, headquarered inUlaanbaaar. MIA Mongolian Airlines, ounded in 1954, holds acode-share agreemen wih Korean Air

and Aeroo and operaes domesicand inernaional ighs rom and oULN. Inernaional ighs are operaedo Moscow, Berlin, Beijing, Seoul,and okyo rom ULN.22 MIA nowaccouns or very litle o he domesicmarke operaions, and has carried anincreasingly small share o domesicpassengers (in 2008, he carrier handledover 13,000 domesic passengers).

Eznis Airways, ounded in 2006, oersscheduled and charer ighs and is helarges domesic airline in Mongolia. Insummer 2009, he airline also saredoering inernaional ighs o Hailarin China. A year laer in summer 2010,Eznis Airways sared inernaionalservices o Ulan-Ude in Russia.23

Aero Mongolia was ounded in 2002. Te

airline oers domesic and inernaionalservices o 12 domesic desinaions andour inernaional desinaions (Alaiand Irkusk in Russia, and Urumqi andHohho in China).24

22 MI A-Mongolian Airl ines websie. A small number o seasonal services o Hong Kong, Osaka ( Japan) and Irkusk

(Russia) are also operaed.23 Eznis Airways websie.24 Aero Mongolia websie.

Figure 15: Domesic marke airlineshares in Mongolia (2010)

Source: Statistical Bulletin o the Mongolian CivilAviation Authority.

Major domesic desinaions served romULN include Oyuolgoi, Dalanzadgad,

Khovd, avanolgoi, Ovoo, Ulgii, Murunand Ulaangom.

Figure 16 shows he airline marke sharesin he inernaional marke. Naionalcarrier MIA accouns or 50% o allrac. Mongolias oher carriers, Eznis Airways and Aero Mongolia, accounor abou 2% o inernaional rac. Teremaining inernaional rac is carriedby oreign carriers such as Korean Air, AirChina, Aeroo, SCA (Kazakhsan).

Airline

2010 DomesticPassengers

Passengers

Market

ShareEznis Airways 77,274 56%Aero Mongolia 59,273 43%MIA 281 1%otal 136,828 100%

Figure 16: Inernaional marke airline shares in Mongolia (2010)


Airline2010 International Passengers

Passengers Market Share

MIA 266,040 50%

Korean Air 112,073 21%Air China 82,373 16%Aeroo 49,539 9%Aero Mongolia 8,802 2%Eznis Airways 5,672 1%Oher 4,476 1%otal 528,975 100%


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Figure 17 shows passenger rac oninernaional roues o/rom Mongoliain 2010. Seoul (Souh Korea) is largesinernaional roue, operaed by MIA andKorea Air, accouning or nearly 210,000

Figure 17: rac on inernaional roues o/rom Mongolia (2010)

passengers or 40% o all inernaionalrac. Beijing is he second larges roue,ollowed by Moscow and Naria. Teseop our roues accouned or 92% o allinernaional rac in 2010.

Route(and Airlines Operaing Roue)

2010 International PassengersPassengers Market Share

Seoul (MIA, Korea Air) 209,901 40%Beijing (MIA, Air China) 193,261 37%Moscow (MIA, Aeroo) 56,841 11%Naria (MIA) 26,167 5%Berlin (MIA) 16,028 3%Oher China (Eznis, ianJin Airlines) 14,443 3%

Oher Japan (MIA) 3,019 1%Oher Russia (Eznis, Ural Airlines) 1,230 0%Oher 8,085 2%otal 528,975 100%

4. Origin and destination markets

Te passenger rac gures inFigure 17

show he volumes o rac on direc servicesoperaed o/rom Mongolia. Tis doesno necessarily represen he nal origin/desinaion o he passengers. For example,some passengers ying o Moscow may bemaking onward connecions o Europe.Similarly, some passengers rom Seoulmay have conneced here and acuallyoriginaed heir rip in Norh America.Figure 18presens he rac gures in

erms o he nal origin/desinaion (O/D)counry o he passengers. Te gures arebased on ravel booking daa.

On an O/D basis, he larges markesremain hose wih direc service: SouhKorea, China, Japan, Russia, and Germany.Te O/D passenger volumes or mos ohese counries were lower han he roue

volumes, indicaing a signican degree oconnecing rac. For example, roue raco/rom Moscow oaled nearly 57,000,

while he number o passengers saring

or ending heir journey was only 26,000.

Tis suggess ha approximaely 31,000o he passengers o/rom Moscow wereconnecing (e.g., some o passengers mayhave been ravelling o/rom Europe). Oneexcepion o his is Japan: O/D volumesexceeded roue volumes, suggesing somepassengers o/rom Japan were connecingelsewhere (mos likely Seoul). In oal, iis esimaed ha approximaely one hirdo passengers o/rom Mongolia were

ravelling via a connecing poin.A noable unserved marke is he U.S., whichwas he ourh larges O/D marke despiehe lack o direc service. Oher signicanunserved markes were in Europe and

Asia. Te analysis o he booking daa alsorevealed he direcionaliy o ravel. Exaclywo hirds o passengers were Mongolianresidens ravelling o and rom ohercounries while one hird were oreign

visiors o Mongolia.


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Figure 18: op 10 origin/desinaion markes or Mongolia (2009)

CountryPassengers

(Tousands)% o otal

PassengersSouh Korea 145 27%China 133 25%

Japan 48 9%

U.S. 43 8%Russia 26 5%Germany 22 4%France 14 3%Ialy 9 2%Czech Republic 9 2%UK 8 1%Oher 72 14%otal 529 100%

Source: Travelport Bookings Data andMongolian Civil Aviation Authority.

Note: Trafc gures are based on the nalorigin or destination o the air passenger,not their immediate connecting point.Figures may not sum up to the totals dueto rounding.

5. International air service agree-

ments signed by Mongolia

Te Governmen o Mongolia has execued bilaeral air service agreemens wihover 30 oreign saes.Figure 19provides

summary inormaion on nine o hosebilaerals.

Figure 19: Key Characerisics o he air service agreemens in Mongolia

Country AuthorizedPoints Capacity PricingAirline

DesignationFifh

FreedomFinland Any Predeerminaion Single Disapproval Dual/Muliple No

Germany Unknown Predeerminaion Counry o Origin Dual/Muliple No

Hong Kong Named Predeerminaion Single Disapproval Dual/Muliple No

India Unknown Predeerminaion Single Disapproval Dual/Muliple No

Japan Unknown Predeerminaion Single Disapproval Dual/Muliple No

Russia Unknown Predeerminaion Single Disapproval Dual/Muliple No

Singapore Any Predeerminaion Double Disapproval Dual/Muliple Yes

Sweden Unknown Predeerminaion Counry o Origin Dual/Muliple No

UK Any Bermuda Double Disapproval Dual/Muliple No

Source: ICAO World Air Services Agreement Database.


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Figure 20: Capaciy limis under bilaeral air service agreemens or op 3 O/D mar-kes in Mongolia

Since 2008, Mongolia is also a signaory ohe MALIA agreemen wih Brunei, NewZealand, Singapore, Samoa, Cook Islands,onga and he Unied Saes bu or cargooperaions only. In 2009, Mongolia has

Source: Bayarsaikhan S.: Case o International Air Transport Market

25 Source: Bayarsaikhan S., Case o Inernaional Air ranspor Marke

26 A horizonal agreemen is an agreemen negoiaed by he Commission on behal o he Member Saes, in order obring all exising bilaera l air services agreemens beween Member Saes and a given hird counry in line wih Com-muniy law.

CountryCapacity Allowed(Flighs per Week)

Seat Limit

Korea 6 (special permissions or addiional ighs during summer) None (since 2003)China 28 (14 or Beijing) NoneJapan 5 (3 or okyo, 2 or Osaka) None

also signed a horizonal agreemen wihhe EU which, while no open skies, allowscarriers greaer reedom o operae beweenpoins in Mongolia and he EU.26

6. Tourism

ourism is a relaively new economic secorwih poenial o grow subsanially. Figure

21 shows he oal number o visiors oMongolia since 2000. Over he las 10 years,inernaional visior rac o Mongoliahas increased by an average o 13.4% per

annum, reaching 557,414 in 2010. Tesegures are or visior arrivals by all modes

(i.e., ground and air). Based on he O/Drac daa described in Secion 3.4, i isesimaed ha 17% o visiors arrive by air.

In general, he bilaerals o which Mongoliais a signaory are airly resricive in naure, wih conrols on capaciy, pricing, airlinedesignaion and fh reedom operaions. Ishould be noed ha governmens ypically

require reciprociy when negoiaing heerms o a bilaeral. Tereore, i is possibleha resricions wihin bilaerals areno due o he policies o he Mongoliangovernmen bu due o he policies o heopposie counry.

Figure 20 provides addiional inormaionon he specic capaciy limis on he

air service agreemens wih hree majormarkes: China, Souh Korea, and Japan.Te number o allowed ighs per weekis resriced or all hree markes. TeKorean marke has a igh requency limi

o six ighs per week. Since Souh Koreais Mongolias op O/D marke in erms opassenger numbers, hese requencies areairly resricive and regularly violaed bygiving special permission or addiionalighs during he summer peak season.25


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Source: Mongolian National Tour-ism Center 2010 and MongoliaBulletin o Statistics , Dec 2010

Source: Mongolia Bulletin o Statistics, Dec 2010

Figure 21: Inbound visiors o Mongolia (2000-2010)

100

200

300

400

500

600

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

158

192

235

205

305

345

390

456

469

465

557

otalVisitors(Tou

sands)

Figure 22 provides a breakdown o visiors o Mongolia by source counry.China accouned or over hal (52%) o all visiors in 2010, while Russia accounedor 23%. Tese wo neighboring counries

accouned or hree quarers o all visiorsin 2010. Souh Korea is he hird largessource marke (8%), ollowed by Japan(3%) and he Unied Saes (2%).

Figure 22: Proporion o inbound visiors by counry (2010)

China-52%

Japan-3%

Souh Korea-8%

Russia-23%

USA-2%

Oher-10%

Germany-1%France-1%


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air liberalization eng

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