This article first appeared in The Edge Financial Daily on July 25, 2018

KUALA LUMPUR: For years, the Rural Air Services (RAS) operation to connect rural areas in Sabah and Sarawak has been subsidised by the federal government solely on the operator’s financial performance.

That will change next year as the Malaysian Aviation Commission (Mavcom) is rejigging the compensation model to factor in the quality of service provided as well.

The service quality indicators will include on-time performance and cancellation rates, said Mavcom chief operating officer (COO) Azmir Zain.

“Hopefully, that will incentivise MASwings Sdn Bhd to not only perform financially, but also operationally. It will also benefit those using RAS,” he told The Edge Financial Daily in an interview.

MASwings, a subsidiary of Malaysian Aviation Group Bhd, has been operating the RAS since October 2007. Last year, its concession to run the service was extended to 2024.

The RAS serves 49 routes spanning 10 airports and 14 airfields in Sabah and Sarawak. For seven years up to 2024, the annual subsidy bill is expected to hit RM190 million prior to the change in the compensation model.

However, the commission declined to say whether the revised compensation model may lead to a higher subsidy bill for the federal government except that the mechanism is still a work in progress.

“The size of the subsidy bill from the government is driven by the fluctuation in oil price and exchange rate, rather than change in the subsidy mechanism itself,” it said.

On how the current subsidy formula works, Azmir said this is best answered by the ministry of transport (MoT).

By January 2019, Mavcom will fully assume oversight and management over the RAS, including the disbursement of subsidies.

However, the MoT will remain the policymaker for the service which includes determining which routes would be served.

Last November, the federal government said that six RAS routes would be dropped. It cited a Mavcom survey that the six routes are also served by commercial airlines with load factors as high as 86%.

The six routes, namely Kota Kinabalu-Sandakan, Kota Kinabalu-Tawau, Kota Kinabalu-Miri, Kuching-Miri, Kuching-Bintulu and Kuching-Sibu, will not be subsidised from 2019 onwards.

Azmir said the subsidies saved could be reallocated to connect new places to the network, although the number of possible new routes remains under discussion with the government.

“We have observed that there are certain rural areas, in particular within Sarawak, which will also benefit from air transport connectivity and we could potentially introduce RAS to those areas as well,” he added.

Also on the commission’s agenda is another round of amendments to the Malaysian Aviation Consumer Protection Code, he added, slated for later this year.

In February, Mavcom issued a consultation paper to seek public feedback on proposed new provisions for the code.

Among others, the amendments seek to compel airlines to include all previously hidden charges in the total fares upfront; to prohibit airlines from charging a fee when processing passenger service charge refunds; and to prohibit any additional charges on provision of special assistance to disabled passengers.

Mavcom also indicated that it would place more focus on passenger concerns in Sabah and Sarawak moving forward.

“We appreciate that the aviation issues in Sabah and Sarawak are unique and quite separate from Peninsular Malaysia,” said Azmir.

The proposed amendments would come as the MoT is looking into a proposed mechanism to cap air fares during peak demand periods.

Last Wednesday, Transport Minister Anthony Loke indicated that the cap may extend beyond festive seasons to other times of the year, but said no final decision had been made pending Mavcom’s study into the matter.

To this, Mavcom said it is currently looking into the proposal and has yet to submit its feedback to the ministry.

“New policies, especially those which have great impact on the sector, need to be implemented with care,” it added.