Aviation experts voice concerns on Mavcom-CAAM merger plan

This article first appeared in The Edge Malaysia Weekly, on December 16, 2019 - December 22, 2019.

Is a merger between the two regulators a solution to the many problems plaguing the civil aviation industry? Photo by Reuters

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THE plan to merge the Malaysian Aviation Commission (Mavcom) and the Civil Aviation Authority of Malaysia (CAAM) into a single regulatory body overseeing both the commercial aspects and safety standards of the industry has caused concern among some parties.

The plan not only came as a surprise to many, but the explanations provided by the proponent, the Ministry of Transport (MoT), are also seen as inadequate and raise even more questions.

The differences between Mavcom and CAAM, not only in their roles but also their set-up, show there is little synergy and their respective roles cannot be replicated by the other, say some experts.

“I can’t really see how the regulatory functions of the two are complementary and I am also unsure if Mavcom’s functions exist in other countries’ airworthiness authorities,” an official from the Malaysia Aerospace Industry Association (MAIA) tells The Edge.

News of the proposed merger was first reported by The Edge Financial Daily last Thursday. MoT issued a statement on the same day confirming the proposal and said the merger would make service delivery more efficient.

The ministry’s view is that merging the two regulators will optimise available human and financial resources and drive the development of the civil aviation industry, making it more internationally competitive.

The announcement prompted a strong response from Mavcom executive chairman Dr Nungsari Ahmad Radhi, who expressed disappointment that MoT did not consult the commission before making the decision.

“We are all on the same side; we all have the same concerns about the state and development of the industry in Malaysia, the health of the aviation service providers, consumer welfare and investor confidence. There is also this urgent issue of CAAM’s downgrade [by the US Federal Aviation Administration from Category 1 to Category 2 last month] that needs to be addressed together.

“All those notwithstanding, the decision by the government to repeal the Malaysian Aviation Commission Act 2015 is a decision that there is no need for an independent economic regulator for the aviation industry that looks into commercial licensing, competition matters as well as consumer welfare and public service obligations; functions that did not exist before Mavcom was set up,” Nungsari said in a statement.

Is a merger between the two regulators a solution to the many problems plaguing the civil aviation industry? To delve deeper into this issue, one must look at the current situation.

Malaysia has had a good run in terms of passenger growth over the last decade with the proliferation of low-cost airlines. The growth of AirAsia Group Bhd and its affiliates is the main reason for the boom in passenger numbers at local airports.

At the same time, the expansion and upgrading of airports depend on the government’s spending cycle, which means responding to overcrowding issues, both on land and air at major airports, is often delayed by Malaysia Airports Holdings Bhd (MAHB).

For example, the Penang government had been requesting the federal government to expand Penang International Airport (PIA) for years as strong growth in passenger volumes had led to overcrowding issues during peak hours.

The PIA reached full operating capacity of 6.5 million passengers per year in 2015. Last year, it served 7.8 million passengers, and the number will continue to rise as tourists and businesses flock to the island, worsening the overcrowding problem.

It was only in 2017 that the government, under the then Barisan Nasional administration, agreed to expand the airport. However, the proposal was only approved in July this year.

The regulated asset base (RAB) framework was supposed to help solve the question of investment in airports as the operator, MAHB, would be able to invest in expansion or upgrading of facilities using its own financial resources.

There would be a direct correlation between the amount of investment the airport operator puts in to expand or upgrade airports and the increase in aeronautical revenue through passenger service charges, landing charges and aircraft parking fees. Investors would be more comfortable with this approach rather than wait for the government to decide when to invest.

The PIA expansion was supposed to be the first project funded by MAHB using RAB. However, with the plan to dissolve Mavcom and transfer its functions to CAAM, the RAB is now in question and with it, PIA’s expansion.

MAHB is also in the midst of upgrading the baggage-handling system at the Kuala Lumpur International Airport.

At the same time, there are also grouses about the equalisation of the passenger service charge (PSC) by Mavcom at KLIA and klia2, especially from the AirAsia Group.

AirAsia, the largest low-cost carrier in Asia, maintains that klia2 is an inferior airport compared with KLIA, and thus, the PSC should not be equal. The airline’s founder and group CEO Tan Sri Tony Fernandes has said that since AirAsia Group is the largest user at klia2, its voice on the PSC issue should be given more weightage.

 

What do observers say?

Apart from Nungsari, others have questioned the ministry’s merger plan. Among the most vocal has been Consumers Association of Penang (CAP) president Mohideen Abdul Kader.

In a statement, Mohideen says the association is strongly against the decision, questioning why Mavcom, which it sees as a functioning regulator, is being dissolved and merged with CAAM, which it deems a struggling regulator.

“Let us not forget that when CAAM was downgraded, the Institute of Malaysian and International Studies of Universiti Kebangsaan Malaysia came out to say that they found CAAM lacked manpower [experienced engineers and pilots] and that the staff it had were inexperienced and underpaid.

“They also said the downgrade was partly due to MoT’s inability to make the necessary changes in CAAM so it can function as it should. So, why is a self-sufficient regulatory body that is functioning as it should be disbanded in favour of a regulatory body that is struggling, inefficient and incompetent?”

Credit Suisse managing director and head of equities for Malaysia, Stephen Hagger, deems the plan as bad news for Malaysia Inc.

“Mavcom provided an independent body to deal with competition and public service obligations, that is, a referee for the airlines, the airports and the consumers without political meddling. They have spent the last three years working on the RAB,” he says in a note to investors.

“The RAB is by no means perfect, but a solid first step in the evolution of regulation.

“Given that Mavcom executives will likely resign and CAAM executives will be reassigned, the merger will be a hollow act,” he adds.

Meanwhile, the MAIA official says the government needs world-class talent to run the merged entity.

“First, you have an aviation authority that you need to get back in shape after the downgrade and, second, you now have to do the aviation commission’s job as well, which is in itself technically complicated.

“We must make sure through this merger that the new regulator gets the best qualified talent to do the job and that would mean that salaries would have to be attractive,” he says.

 

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