This article first appeared in Corporate, The Edge Malaysia Weekly, on July 11 - 17, 2016.
HOPES were high that relations between Malaysia Airports Holdings Bhd (MAHB) and AirAsia Bhd would improve under Datuk Badlisham Ghazali, who took over as managing director of the country’s largest airport operator on June 23, 2014. Although MAHB and AirAsia are business partners, their relationship has been less than cordial due to a number of issues in recent years, including the relocation of AirAsia’s operations from the old low-cost carrier terminal (LCCT) to klia2 and how the new terminal should be built.
The 54-year-old Badlisham, who joined the company from Multimedia Development Corporation and only a few days before the opening of klia2, thus gave MAHB an opportunity to gather his perspective as a relative newcomer to the aviation industry and mend ties with AirAsia. But after two years at the helm, he finds himself in a similar predicament as his predecessor — this time, the dispute is over klia2’s name, which AirAsia wants changed to LCCT.
Badlisham does not mind if AirAsia wants to rebrand klia2 as a destination airport for affordable travel, but he insists it is not a low-cost terminal.
“If AirAsia wants to rebrand klia2 such that when people mention klia2, they think of low-cost travel and AirAsia (being the largest tenant there), that’s okay with me. As it is, our aeronautical charges are among the lowest in the region. The passenger service charge (PSC) at Kuala Lumpur International Airport (KLIA) is lower than those at most other major airports in Asia. So, should I also call KLIA [a] low-cost travel [airport] and klia2 [a] lowest-cost travel [terminal]? But one thing is for sure — it is not a low-cost terminal,” he tells The Edge in an interview at the company’s headquarters in Sepang.
Since June 2007, passengers flying out of the then LCCT and now klia2 have been paying a lower PSC than those departing from KLIA and other international airports in the country. The reduction came at a time when the government wanted to increase Malaysia’s potential as a hub for low-cost carriers. Air travellers departing from the main airports now pay a PSC of RM65 for international flights and RM9 for domestic flights. For international and domestic passengers departing from klia2, they pay RM32 and RM6 respectively.
The newly established Malaysian Aviation Commission (Mavcom) is in the midst of reviewing the aeronautical charges in the country, including the PSC, aircraft landing and parking fees and other airline ancillary charges.
Badlisham is hopeful that the government will soon do away with the two-tier PSC structure. “We have lived with this (two-tier PSC) regime in the last nine years and have made it work in terms of our financials,” he says. However, closing the gap is a goal MAHB is pursuing aggressively as it looks to increase earnings in a highly competitive, low-margin industry.
“But to get equalisation of the PSC, it has to have some basis and we have said that in our original charges regime, there is no basis [for the two-tiered system] except for a benchmark, which was probably done 10 years ago. In other countries, the PSC is based on service levels or costs, [that is] the more I invest [in the airport], the more I have the opportunity to raise service levels for airport users. But it is not the regime we put in here. We’ve invested RM4 billion in klia2, but there has been no corresponding PSC increase because it is not based on costs or service levels to some degree. Mavcom has to set that right,” he adds.
On overdue airport charges airlines owe to MAHB, Badlisham says it is facing the problem not just with AirAsia but also other major carriers. He declines to provide the amount owed to the airport operator and the airlines involved, only to say that the problem is “still manageable” and has yet to hurt MAHB’s profitability.
“Late payments are part and parcel of doing business when you are transacting with millions of passengers ... you have to check and reconcile with the manifests. So far, we have not written off [late payments] from these major carriers. We are taking steps to recover overdue payments from them, including taking punitive action. We may also deny the airlines [involved] services. But it is to our benefit to settle it amicably. Obviously, there is motivation on both sides to settle the matter.”
He says MAHB has also been in discussion with the government to extend its concession period at KLIA, which will help reduce the depreciation/amortisation of the capital expenditure incurred for klia2 and increase its net profit. MAHB’s concession to operate KLIA expires in 2034.
It was previously reported that the negotiation on the extension of the concession period was for another 35 years to 2069 and the negotiation was expected to be completed by the first half of 2014.
Badlisham inherits a company that has outperformed both operationally and in the stock market, as MAHB’s share price has jumped 22% since January 2012. Year to date, the share price has risen 10% from RM5.57 on Dec 31, 2015. It closed at RM6 last Friday, giving the company a market capitalisation of RM9.96 billion.
However, Badlisham had taken over the managing director’s post at a time when the company had to incur costs for the acquisition of the remaining 40% stake in Istanbul Sabiha Gokcen International Airport (ISGA) for RM1 billion. (MAHB is now in full control of Istanbul’s second largest airport.)
The acquisition saw MAHB’s total debt rise 20% and sent its net profit tumbling 94% to RM37.84 million in the financial year ended
Dec 31, 2015 (FY2015), from a year ago. Revenue stood at RM3.87 billion, up 16% from the previous year.
In April, MAHB reported a 48% drop in net profit to RM17.01 million in the first quarter ended March 31, 2016 (1QFY2016), compared with a year earlier. Revenue climbed to RM1.02 billion from RM876.18 million previously.
But Badlisham is still bullish about the company’s FY2016 performance. He says it will “definitely be better” than last year’s because of higher traffic volumes and a turnaround of loss-making ISGA. ISGA has not recorded a net profit since starting operations in November 2009.
“The basis of the projection is such that there will be growth in passenger numbers for both airport systems in Malaysia and Turkey. Our guidance for [passenger volume growth for] Turkey is 16% and Malaysia, 2.5%, this year,” he says. The airport operator handled 35.4 million passengers at its Malaysian airports in the first five months of this year, up 3% from a year ago.
“This year, we will feel the [full-year] impact of Malaysia Airlines Bhd’s capacity cuts [made] last year. The fact that we are only forecasting 2.5% growth for 2016 despite recording 3% growth for the January-May period means we are weathering the effects of Malaysia Airlines’ cuts. By comparison, Asia-Pacific passenger traffic grew 6% to 7% during the same period and we usually grow at that rate or higher,” he explains.
Badlisham says Malaysia Airlines’ route cuts have reduced the international seat capacity by a quarter.
“This has some impact on the progress of our KLIA hub as Malaysia Airlines used to handle one third of KLIA’s traffic. We are hopeful about its turnaround plan and foresee a strong recovery sooner than later with Malaysia Airlines effectively using its oneworld partnership and affiliation through code shares, such as the one with Emirates, to ensure that long-haul connectivity remains,” he says.
“We expect to feel the full impact of Malaysia Airlines’ code-sharing deal with Emirates this year. Indeed, Emirates has already mounted an Airbus A380 for its service to Dubai from Kuala Lumpur.”
To fill the void left by Malaysia Airlines, MAHB has been working hard over the past year to attract new foreign airlines and new flights as well as increase the frequency of flights to the country. The endeavour is paying off. It has welcomed new airlines such as Shaheen Airline and VietJet Air.
“Airlines that currently fly into the country like KLM Royal Dutch Airlines, British Airways and Turkish Airlines have also increased their frequencies,” Badlisham says.
Meanwhile, passenger traffic from China is recovering steadily this year after the MH370 and MH17 tragic incidents in 2014, thanks to the increased flight frequencies by AirAsia and Malindo Air. China passenger numbers grew 26% year on year in May. However, they have yet to recover to the levels seen nearly two years ago.
Badlisham notes that ISGA has also been performing well. Traffic in the first five months of this year rose 15% to 11.8 million passengers from a year ago.
He says the planned turnover of the Turkish operations in FY2016 remains intact despite tensions between Turkey and Russia and the recent terror attack on Istanbul’s Ataturk Airport. Since the downing of a Russian warplane that violated Turkey’s airspace near the Syrian border on Nov 24 last year, Russia has reportedly imposed a wide range of sanctions against Turkey. Among them are the termination of a visa-free travel agreement between the two countries and a call on its nationals to boycott Turkey as a tourist destination.
“We are concerned about what’s going on in Turkey as its passenger growth is driven by the domestic and regional tourism sectors. The tensions with Russia have led to a drop in the number of Russian tourists visiting Turkey over the last six months. But we are heartened to note that both the presidents of Turkey and Russia have been in talks [to restore ties] and hopefully, that will restart the inflow of Russian tourists into Turkey. But there is no doubt that Turkey’s arrivals will take a hit in the short term. This is something that we will be mindful of,” says Badlisham.
“It is too early to tell what the overall impact of these issues will be on ISGA’s passenger traffic performance. So far, it is still holding up because domestic and regional travels still have to go on and there have been no cancellation of flights at our airport.”
Nevertheless, he notes that ISGA is in a sweet spot. “Passenger volume is growing at the rate we want. We are now receiving more Middle Eastern carriers as well. Additionally, the Turkish government has begun work on the second runway at ISGA, which includes two rapid-exit taxiways scheduled to be ready by end-2017. We will also invest €20 million (RM89 million) to add more parking bays at the airport.”
Analysts tracking MAHB are also upbeat about its FY2016 prospects.
Hong Leong Investment Bank Research, in a June 30 note to clients, says despite the short-term impact on ISGA, it remains positive on MAHB’s earnings potential mainly because of the expected recovery of air travel demand in Malaysia, its KLIA Aeropolis development (see Page 59) and potential tariff adjustments and concession extension. “We maintain ‘buy’ [call on MAHB] with an unchanged target price of RM7.50,” it adds.
Busy year ahead for MAHB
The airport operator is setting the scene for a busy 2016 as its five-year business plan, Runway to Success 2020, kicks off. As part of the plan, MAHB will focus on facilitating connecting traffic between KLIA and klia2 by launching a service for passengers transferring flights between the two terminals next month.
Citing the GatwickConnects service as an example, Badlisham says MAHB will initially start with providing landside transfer service (after Immigration) where once passengers land at KLIA or klia2, they collect their luggage from the baggage reclaim hall and go to the MAHB desk where its team will assist in connecting them to their next flight, allowing them to go straight to security without having to take their luggage with them. The current connectivity is from the landside through the express rail link, bus shuttle or other public transport.
“Towards the end of the year, we will provide the airside transfer service (before Immigration) between the two terminals, which includes baggage checks, interlining with airlines and airside transfer buses between the terminals. However, we won’t be forcing the airlines to participate in this service,” he adds.
Will these new transfer services make klia2 less of an LCCT? “I can’t say [so] because the terminal itself is not low-cost. For me, this is beyond semantics. [At the old LCCT,] you got what you paid for. There were no aerobridges. klia2 is not low-cost, but neither is it expensive. There are enough parking bays for airlines to use aerobridges and there are more amenities here,” says Badlisham.
“It serves primarily low-cost airlines, but it also serves hybrid airlines. We look at klia2 as another terminal ... like Changi Airport has Terminal 1 and Terminal 2. If Malaysia Airlines CEO Peter Bellew says he wants to move part of the national airline’s operations to klia2 to cut cost, we welcome him [to do so]. And if AirAsia says it wants to move half of its operations to KLIA, we also welcome it. We don’t designate the airlines by terminal. It is a one-airport system.”
He adds that the company’s main focus for klia2 in the next few years is to carry out continuous maintenance and improvements as scheduled to address the settlement at the apron while ensuring that operational efficiency and airside capacity are not affected.
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