Anthony Loke: Airports need private investments

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This article first appeared as 'Airports need private investments' in The Edge Malaysia Weekly, on May 13, 2019 - May 19, 2019.

IT may not be that Malaysia is blowing its own trumpet when we say the country has all it needs to be an aviation hub. The country is at the centre of the Asean region as well as Asia-Pacific. From Kuala Lumpur, you can reach the capital cities of Indonesia, Thailand, Vietnam, Cambodia and Singapore in under two hours.

And in Borneo, Sabah’s capital city Kota Kinabalu could be the gateway to Asean for passengers from China, Japan, South Korea and even further afield, the US.

Indeed, Tun Dr Mahathir Mohamad wanted the Kuala Lumpur International Airport (KLIA) to be an aviation hub when the government poured in millions to build the world-class facilities in the 1990s.

Two decades on, Mahathir is now the prime minister for the second time and KLIA — which was expanded with the low-cost carrier terminal, klia2 — has, to put it bluntly, yet to achieve this mission.

What are we missing, as a rising number of aircraft from all over the world are lining up at the airports of our closest neighbours, Singapore and Bangkok, waiting for take off?

Perhaps the more pertinent question is, should Malaysia be content with the current status, given that passenger traffic is rising each year? Furthermore, airport operator Malaysia Airports Holdings Bhd is making a good profit, so why rock the boat?

Transport Minister Anthony Loke Siew Fook’s answer is the same as Mahathir’s, that Malaysia must become an aviation hub. This is not for glory but the economic multiplier effect.

Loke is the new kid on the block in the aviation sector compared with the veterans who have been managing airports for years. But the 42-year-old minister is not afraid of taking bold steps to change the way the country’s airports are run.

Loke is practical and realistic. He understands that the main challenge to the aviation sector is that the government’s fiscal position is tight while the development of airport infrastructure, which in his opinion is crucial, needs big money. The allocation of RM40 billion in development expenditure in the national budget is just not enough.

“We are looking at the medium term, which is in the next three to five years. We want to develop our airports concurrently. Under the old model, you would not see the expansion of our airports all at one go.

“Each airport has to queue up and take its turn to get allocations from the Ministry of Finance — (for example) for Kota Baru, then the next year for Tawau, the following year for Miri, so it will take a long time and you will not see a leap forward in terms of airport development,” Loke says.

To resolve that, he wants to leverage the private sector, tapping its financial muscle and expertise to develop and modernise the country’s 39 airports.

In a nutshell, new operators, which could be foreign parties, will emerge. As a result, there will be a healthy dose of competition, which is likely to be a rude awakening for some quarters that are used to being in a dominant position all these years.

“So don’t dream of getting more allocation from the government for airport expansion. That is the first principle, no money from the government. The second principle is that airport infrastructure must be developed,” Loke tells The Edge in an interview.

“To depend on private investment, you have to make the whole available framework attractive, and it has to be open. Our system was very closed previously with the operating arrangements very tight ... MAHB runs everything.

“When we say we want to open up, people ask if MAHB will lose out? We have to impress upon them that they will not be at the losing end.

“Because (if) you open up (the sector), then the whole industry will grow, the whole aviation sector will grow, and MAHB cannot manage everything. They don’t have the funds, they don’t have the capacity to develop all airports across the country,” says Loke, adding that competition is good for the whole industry and MAHB as well in the long run.

 

New operating agreement

Last month, the Ministry of Transport replaced the two existing operating agreements (OAs), signed with MAHB in February 2009, with four new ones.

Under the agreements, the airports will be divided into four clusters — KLIA, including klia2, another for designated airports in Peninsular Malaysia and one each for airports in Sabah and Sarawak.

According to MAHB group CEO Raja Azmi Raja Nazuddin, a major difference between the previous OAs and the new ones is the clustering of the airports according to regions. He knows this also means a new set of rules.

“There are 39 airports in the country but not all are making money for MAHB. If you unbundle them right now, if you cluster them now, it is actually good for MAHB in the long term. It can focus on airports that are already money-making,” says Loke.

“We broke it into four, for example, if MAHB wants to have one new partner for Sabah, then it can create a new joint-venture company. The benefit for MAHB is that it will not have to come up with (large) capital (expenditure). Because, number one, it wants to focus on KLIA, but we need expansion at all other airports, not just KLIA. We need expansion at Sandakan, Tawau, Kota Kinabalu, Kuching, Miri, Sibu and so on. MAHB by itself cannot focus on so many airports.”

That said, Loke reiterates that the changes will not be at the expense of MAHB. “I don’t want the market to react negatively ... MAHB will (continue to) be a good counter. It will not be at the expense of MAHB.”

Loke seems to have learnt the lesson that he needs to be mindful of the market’s reaction and its effect on share prices.

When Communications and Multimedia Minister Gobind Singh Deo cut the fixed broadband price, Telekom Malaysia Bhd’s share price tumbled. The impact was so severe that the heavyweight was dropped from the FBM KLCI components list.

In Loke’s situation, it could be even more impactful as he wants to do away with an existing model that is highly dependent on government funding.

“We want to do away with that model; we want it to be more private-sector driven,” he says. To encourage investments, Loke is dangling a carrot — the regulated asset base (RAB) framework.

Under the framework, airport operators will be assured of a certain rate of return on the capital expenditure they put in to upgrade the airports or for capacity expansion.

Some analysts view that the RAB framework as good for MAHB as it provides certainty on the airport operator’s return on any capex it pumps in.

“We want to have a framework from which the private sector can get returns when it invests,” he says.

 

In talks with foreign operators

Although the four new OAs were signed only about a month ago, Loke says he has already been approached by foreign airport operators. “A lot [of people are keen on operating the domestic airports] ... even foreign airport operators have come to see me, just a few days ago. Banks have come to see me as well, saying that a lot of investors are looking, and I have met a few European airport operators who have shown interest.”

Asia-Pacific is the sweet spot for growth for many industries, including aviation. According to Loke, Malaysia is on the radar screens of international airport operators. “The fastest growth in aviation will be in Asia-Pacific. No other region will be as fast. When you look at the region, where is the potential growth? Potential growth is in Malaysia, Vietnam, Thailand and Indonesia.”

Singapore’s Changi Airport is an aviation hub in the Asean region but the city state has its limitations, for instance, land for expansion.

“You cannot build another two runways at Changi, for example. They are now building the third runway but we can build up to five runways at KLIA,” says Loke.

He is excited about the proposals that some foreign airport operators have presented, which have given him a fresh perspective on many issues. For instance, one suggested a non-standard passenger service charge (PSC) at the same airport.

“If airlines fly in more frequently, your PSC could be lower compared with an airline that flies in maybe once a week or so. Our understanding in Malaysia has always been that the PSC must be standard. I was always told that it must be the same for all airlines,” says Loke.

The PSC has been a bone of contention between MAHB and AirAsia Group Bhd and its long-haul sibling AirAsia X Bhd. MAHB is currently suing the two low-cost carriers (LCCs)  for not collecting PSC from their passengers.

The two LCCs argue that different PSCs should be charged at KLIA and klia2, given that the latter is an LCC terminal. And they are not satisfied with the facilities and services provided.

MAHB disagrees, saying that klia2 is not an LCCT. It insists that the facilities at klia2 are equal to those at KLIA.

This argument could go on forever, and paying different PSCs at the same airport would be unacceptable to many.

Loke says the ball is in the operator’s court. “If the operator is willing to take that risk and be more innovative in terms of pricing, then the consumers (passengers) will benefit. This is something I am looking forward to.”

In a liberalised operating landscape, MAHB will face competitive tension and will have to share the pie with the new operators. But Loke’s rationale is that a smaller share of an expanding pie would be a better deal for the airport operators, consumers and the economy.

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