Airport industry poised for structural changes

This article first appeared in The Edge Malaysia Weekly, on July 30, 2018 - August 05, 2018.
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AMID the latest tit-for-tat between AirAsia Group Bhd and Malaysia Airports Holdings Bhd (MAHB) last week, the federal government sent an unmistakeable message — the airport industry is poised for major structural changes ahead.

One signal is Transport Minister Anthony Loke Siew Fook’s non-commitment on the question of MAHB’s structural monopoly.

Another was the federal government’s pursuit of new ways to fund airport expansions instead of tapping its development budget, such as joint ventures and private finance initiatives. The door seems open to possible proposals from private sector players.

Together, these signals raise the spectre of MAHB’s dominance eroding to some degree.

For example, the financing rethink may hypothetically see some terminals carved up partially or completely for another operator in exchange for funding expansions.

The obvious precedent is the Senai International Airport in Johor, which was carved out of MAHB’s stable back in 2003. It is now being operated by a MMC Corp Bhd unit.

At press time, the Ministry of Transport had not responded to The Edge’s query about its stance on MAHB’s structural monopoly.

On May 28, when asked about Pakatan Harapan’s pledge to tackle monopolies the airport context, Loke said, “We are looking into all options to improve efficiency.”

The latest war of words was ignited by AirAsia Group CEO Tan Sri Tony Fernandes’ proposal to refurbish Terminal 2 of the Kota Kinabalu International Airport as a dedicated low-cost carrier terminal (LCCT) to boost tourism arrivals.

Loke said the proposal, if submitted in writing would be studied but ruled out allowing any airline to operate an airport.

In claiming it was forced out of Terminal 2, AirAsia drew MAHB into a running dispute that culminated in an abrupt truce on July 27 as both parties met with Finance Minister Lim Guan Eng and Loke.

“More low-cost terminals coming. Malaysian airports now understanding what we can do,” tweeted Fernandes alongside a picture of himself, Lim and MAHB acting group CEO Raja Azmi Raja Nazuddin.

The exact outcome of that meeting remains unclear. But the tweet hinted at AirAsia finally getting its way to some degree.

The disagreement is not new. MAHB has argued for a single-terminal operation for seamless connectivity and connecting volume while AirAsia has asked for more LCCTs alongside regular airports.

One underlying issue here is the passenger service charge (PSC) .  On July 23, CIMB Research said AirAsia’s push for more LCCTs nationwide is “to keep its prices as competitive as possible and gain market share”.

Put simply, AirAsia prefers lower PSC as lower fares attracts more flyers, while higher rates would boost MAHB’s returns.

Recall that the Malaysian Aviation Commission (Mavcom) had raised PSC rates generally despite protests from AirAsia.

Mavcom is now working on a regulatory asset-based (RAB) framework to peg PSC rates to airport construction costs — no-frills LCCTs means much lower PSC rates.

“RAB [framework] is expected to raise overall PSC tariffs in Malaysia, as MAHB’s return on invested capital is still below its weighted average cost of capital currently,” CIMB Research writes.

Full-service airlines had complained before that uneven PSC unfairly distorts competition.  Having more LCCTs may tilt the balance further in AirAsia’s favour.

For passengers,  the push for alternative funding methods for airport expansions raises the risk of added flying costs.

The separation of the general taxpayer from having to pay for industry-specific services such as commercial flying commenced in  May this year when Mavcom began collecting a RM1 levy from each passenger to fund its operations. Among others, it said this ties its priorities to that of passengers.

Other practices globally include imposing a special levy on airport users to fund expansions, typically to some criticism.

In  Hong Kong, passengers have been paying a special levy since mid-2016 to fund a third runway. This year, Changi Airport began charging passengers an additional tax to fund a fifth terminal.

Last year, Mavcom told The Edge that a detailed study would be needed to gauge whether such a levy is appropriate locally.

Another possibility is passing on the costs to airlines as airport users. However, this risks the costs being passed on to passengers.

For MAHB, losing income from a profitable airport terminal would sting. Only four of its 39 airports are profitable and cross-subsidise the rest. It may also lose AirAsia’s business as the carrier had wanted an operator that is more accommodating to its requests.

If carving out Terminal 2 to a new operator succeeds in boosting tourism arrivals, “other state governments may also be tempted to push for something similar, spreading MAHB’s loss of AirAsia’s business to other cities,” CIMB Research wrote on July 23.

 But the devil is in the details, including what MAHB gets in return to offset the loss.

Despite the pressure, MAHB’s concession runs until 2069. Thus, it retains some leverage to offset losses in any carve-out.  

One is to ask for a review of the cross-subsidisation model, which may lead to a lighter burden to offset income loss. Another is the ongoing negotiation for MAHB’s operating agreement. Its revenue-sharing proportion with the federal government is currently the highest in Asean at 11%, Nomura Research said.

In comparison, Airports of Thailand pay up to 6.4% while Changi Airport pays up to 7.8%. Airports in Cambodia and Indonesia pay even smaller percentages.

Last year, MAHB’s revenue-sharing commitment bill was  RM381.78 million. If it has to give up a terminal or two, it could ask to keep more of its remaining revenue.  

 

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