The Afghan airspace that airlines want ✈️

The Taliban have taken over, but what about the one of their revenue sources?

This is edition 350 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

Afghanistan has fallen into the hands of the Taliban. As a result, its airspace is now off limits for international flights. And this may place additional strains on airlines. 

In Malaysia, its central bank has made some changes to how banks will determine loan interest rates. Will it actually impact consumers, though? 

Like most countries in the world, India is yet to roll out the Covid vaccination for children, and this will only spell trouble if and when the third wave hits. 

It seems that football clubs have found a new way to monetise their fans. Cryptocurrency. How does it work? 

A hole in the sky

On Monday, with the capture of the presidential palace, the Taliban’s occupation of Afghanistan was complete. As a massive humanitarian crisis unfolds in the land-locked country, one of its (and therefore, in effect, the Taliban’s) crucial revenue sources—the Afghan airspace—is now cut off. 

Afghanistan’s Civil Aviation Authority said its airspace is now uncontrolled, meaning it’s no longer supervised by air traffic control. That effectively shuts down Afghan’s airspace for any overflying. 

For a war-torn nation, its skies have been a crucial hub, especially for flights between Europe and Southeast Asia. Its civil aviation authority earns US$700 from every airline crossing the country’s airspace, according to the Afghanistan Times. And nearly 400 aircraft pass through Afghanistan’s airspace every day. Aviation is the country’s third-biggest revenue earner, and 60% of aviation revenue comes from its airspace. 

So, one could argue that even the Taliban won’t close off its airspace. 

But if past experience is anything to go by, when the Taliban was in power in the nineties, those lucrative fees from overflying didn’t materialise. 

In 1992, as IATA [International Air Transport Association] was making progress on overflights, mujahedeen guerrillas overthrew the government. By 1995, the airlines finally got access to Afghan routes. That success survived the Taliban, which seized power a year later. One of the reasons: The Taliban stood to collect as much as $12 million in overflight fees from the airlines.

That never happened. By the time there were enough flights to amass significant revenue, United Nations sanctions blocked the Taliban from receiving the money. The funds, earmarked for maintaining and improving air-traffic-control systems, were held in escrow before being turned over to the current government.

So, if a Taliban-ruled country has nothing to gain, would it open its skies? 

That kind of scenario worsens things for Covid-hit airlines. A closed Afghan airspace means their costs just went up from the additional travel time. 

When Pakistan’s airspace closed for nearly four months after the Balakot airstrikes on 26 February 2019, Indian airlines suffered a loss of Rs 548 crore (US$73.8 million) because of costly detours. 

Of course, this cost will pale in comparison to the human cost—Afghanistan’s people. 

Putting tape on a building’s crack?

The central bank of Malaysia (BNM) has made an interesting move—it revised the reference rate framework, which is used to determine the interest rate on a loan. The new changes will take effect on 1 August 2022. Under the new framework, a Standardised Base Rate (SBR) will replace the existing Base Rate (BR) for new retail floating-rate loans. 

What’s the difference? Currently, the interest rate on a loan is made up of two components—the reference rate (an interest rate benchmark) and a spread (bank’s margin, which is affected by the borrower’s credit standing and determined individually by the bank). 

Under the existing framework, both the BR and spread are determined by the bank itself. With each bank having a different BR, it makes it harder to compare loans across banks. When the new framework kicks in, banks will be using SBR instead of BR, which will adjust in tandem with the Overnight Policy Rate (OPR) set by BNM. A single reference rate, if you will. And this will be applicable only to housing and personal loans. 

Now, this will make the job of a borrower much easier. Because: 

  • when interest rates that are set by the BNM changes, the interest rates on the loans will be adjusted automatically
  • it’s easier to compare lending rates across banks without accounting for different BRs. It will also be easier to see which banks are charging lower spreads 

In short, things are much more transparent under the new reference rate framework. This could also potentially increase accessibility for personal financing, especially when banks decide to give out more attractive loan rates by lowering their spread in order to lure borrowers. 

But, and there’s always a but. 

If underlying issues such as unemployment and wage stagnation are not addressed, who will be there to take up loans since they might struggle to make repayments? 

As of June 2021, the unemployment rate in Malaysia has gone up to 4.8% from 4.5% in May. Studies have also shown that young workers with a tertiary education qualification are experiencing limited wage growth, even before Covid-19 began. In addition, the country’s economic recovery is highly dependent on the risk factors caused by the pandemic. 

It’s a sensible move by BNM for sure, breathing some fresh air into the lending business, but it may not have the kind of impact that it intended for. 

The neglected clan

The National Disaster Management Authority (NDMA), one of the key agencies coordinating the Covid response for India, has called the potential third wave  “the ticking timeline”. An increase in Covid cases worldwide, especially with Indonesia being the new epicentre of the virus, has put Indian authorities on high alert.

The NDMA has released a report as a preparatory response, called ‘Covid-19 third wave preparedness – Children’s vulnerability and recovery’. It looked at the mitigating measures to prevent women and children from being the worst hit in case of a third wave.

Here’s what the report states: while data isn’t sufficient to back widespread fears that children will be hit more severely in the anticipated third wave, a major challenge is the lack of any approved vaccine for children in India yet.

Quoting statistics from the Ministry of Health and Family Welfare, the report points out that of all the children hospitalised due to Covid, 60-70% had comorbidities or low immunity. Comorbidities could include children with diabetes, high blood pressure, obesity, and so on. 

On 27 June, the government had told the Supreme Court that the Covid vaccination for children (12-18 years) may begin in July or August. This hasn’t materialised. 

As per Dr Randeep Guleria, director of the All India Institute of Medical Sciences (AIIMS), New Delhi, Bharat Biotech’s Covaxin vaccine could be available for children in India around September. That’s when data from phase two and three trials for the age group is expected. 

Pfizer, the only vaccine being administered to children worldwide, has not even been approved for adults in India, so expecting it to be available for children could be a long shot.

But the rate of vaccination is poor in India, with only a little over 100 million people fully vaccinated—7.6% of the population. Children have been entirely left out of the equation.  

This will have stark ripple effects. 

Dr Devi Shetty, who heads the expert committee of doctors set up by the Karnataka government to prepare for a possible third coronavirus wave, stated in the report that children, especially those below the age of 12, will be the worst affected. Most adults may already be infected or immunised (even partially). 

With schools reopening in many parts of the country, it’s important to ensure that staff and teachers are fully vaccinated on priority. And, of course, building the paediatric medical capacities urgently in preparation for the threat of a looming third wave.

Football is about to have a crypto problem

Paris Saint Germain (PSG), Manchester City, and Arsenal are among the football clubs to dabble in the heady world of cryptocurrency. 

Forget crypto tokens like Bitcoin, Ethereum or even Doge, the trio are among the clubs to get into fan tokens. And they’re in vogue for this new playing season. PSG paid an undisclosed amount of its fan token to Lionel Messi as part of the superstar’s recent move to the club, while Arsenal’s fan token sold out in hours last week.

Fan tokens are crypto tokens tailored to a club that are ostensibly designed to give fans a say in low-level decision making. That typically means deciding the music at the home stadium to celebrate a goal, the design of the team bus or the curtains used for media interviews. In marketing speak, the tokens help fans engage with the clubs they love.

The monetary side is not clear for clubs as none have been transparent, but fan tokens are a potentially lucrative new monetisation avenue.

The value of PSG’s fan token tripled in the run-up to Messi’s signing. Trading of the token reportedly exceeded US$1.2 billion in the days before he joined—with some US$36 million spent on new token purchases. At the time of writing, the price is down some 33% from that high.

PSG’s fan token hit an all-time high when the club announced the signing of Leo Messi on August 11 [Image via CoinMarketCap]

That represents a potential financial windfall for PSG and Socios, the blockchain company that partnered with the club and many others to create fan tokens. PSG is given an allocation of tokens to hold and sell if it wants, while Socios owns tokens and uses its own token as the intermediary to allow fans to buy their club tokens.

In an industry in which money often trumps ethics—Norwich recently cancelled a sponsorship deal with a controversial gambling firm; Arsenal was duped by a fake sponsor in 2018—there’s concern that fans may be on the sharp end of yet another way for clubs to monetise their popularity. But now, throw in the volatility of buying and owning cryptocurrencies. 

Fans of top clubs already pay through the nose for replica kits, access to streaming services or tickets for live games. Now, clubs are asking them to pony up to buy digital tokens that let them vote on trivial matters just so their club might pocket a little more money in the process.

Socios claims that “every fan has the right to make their voice heard,” but with billionaire ownership and boardroom battles in modern sport, cryptocurrencies don’t seem to be the medium to fulfil what is a well-intentioned goal.

That’s it for today.

Don’t forget to write in with your thoughts and observations on the reshaping of businesses, societies, and economies. We will be back tomorrow.

Stay safe,
Kay
kakay@the-ken.com

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