MAHB faces headwinds, and not just because of Covid-19

This article first appeared in The Edge Malaysia Weekly, on September 6, 2021 - September 12, 2021.
Mohd Shukrie: Because of the current tariff structures for PSC, we do not make much profit from domestic travellers. Most of the profits are actually being made from international traffic.

Mohd Shukrie: Because of the current tariff structures for PSC, we do not make much profit from domestic travellers. Most of the profits are actually being made from international traffic.

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MALAYSIA Airports Holdings Bhd (MAHB) continues to face headwinds as Covid-19 pandemic-related restrictions and border closures remain in place. Group CEO Datuk Mohd Shukrie Mohd Salleh does not expect passenger traffic to recover to 2019 levels until end-2023 at the earliest.

Analysts are projecting the airport operator to remain in the red for the financial years ending Dec 31, 2021 and 2022 (FY2021 and FY2022), after reporting its first loss in its 22 years as a publicly listed company in FY2020, with a net loss of RM1.12 billion. Only 25.8 million passengers travelled through the 39 airports it manages in the country in 2020, down 76% from 105.3 million people in 2019.

And passenger traffic figures in 2021 will likely end up below that of 2020 due to the recent surge in new Covid-19 cases in Malaysia, according to Maybank Investment Bank Research in an Aug 23 report.

For the recent second quarter ended June 30, 2021 (2QFY2021), MAHB’s net loss widened to RM226.09 million, from RM221.3 million in 1QFY2021, as passenger traffic was 24% lower than the 1.7 million passengers it had handled in the March quarter. On a year-on-year basis, the 2QFY2021 net loss was considerably steeper than the RM91.07 million net loss that the group had reported in the same period last year.

Nonetheless, Mohd Shukrie predicts passenger traffic at its Sabiha Gokcen International Airport (SGIA) in Istanbul, Turkey, will recover faster than its airports in Malaysia to reach 2019 levels by the fourth quarter of next year, considering that its daily numbers are already running at 60%-70% of pre-pandemic levels. In contrast, daily traffic at Malaysian airports is around 5%-10% of pre-pandemic levels due to Covid-19 restrictions introduced since June to contain fresh outbreaks.

Still, even if the interstate travel ban is removed — which is widely expected in 4Q2021 — it won’t be enough to turn MAHB around.

“Because of the current tariff structures for passenger service charge (PSC), we do not make much profit from domestic travellers. We do cross subsidisation (between profitable and non-profitable airports). Most of the profits are actually being made from international traffic,” he said during a recent media briefing.

Pandemic-related headwinds are not the only pressure that MAHB must contend with. As a government-linked company, MAHB faces a host of regulatory constraints, which has slowed down its growth plans.

A new land lease agreement and development agreement for land surrounding Kuala Lumpur International Airport (KLIA) in Sepang as well as the long-awaited new operating agreement (OA) have been finalised, but they need to be tabled for the new Cabinet’s approval before proceeding, according to Mohd Shukrie.

“Under the current OA with the government, the land lease agreement that we have is not conducive in terms of attracting investors in the event that we ourselves, or we partner with someone, to develop the land around KLIA. The government takes cognisance of the issue and that has been adequately addressed in the new agreement that will be tabled to the Cabinet soon,” said Mohd Shukrie, but did not elaborate. MAHB currently owns the lease to the land on which KLIA sits for another 48 years, until 2069. It was previously reported that it wants the government to tweak the lease to 99 years.

“With the approval, we should be in a better position to develop the land surrounding KLIA. It is going to have a longer tenure and the terms will be a lot friendlier to attract investors and ourselves to come and invest,” he added.

However, the approval of the new OA is likely still far off because the aviation services charges — such as PSC and aircraft landing and parking charges — are once again being reviewed.

“I was told that the Malaysian Aviation Commission (Mavcom) needs six to nine months to do a study on the rates … in terms of what rates should be charged under a slightly different framework under the new OA,” said Mohd Shukrie.

“Thus the sooner that study can be completed, the sooner the new OA can be tabled [to the Cabinet] and signed. The groundwork is pretty much done.”

And then there is the RM1.3 billion Subang Airport Regeneration plan. MAHB is still awaiting approval from the government to proceed with the plan, which was revealed in April after three years in the works. This time around, however, it is up against construction and property firm WCT Holdings Bhd, which had proposed to redevelop the airport at a cost of RM3.7 billion over 10 years through its 60%-owned subsidiary Subang Skypark Sdn Bhd.

“With the new Cabinet line-up having been announced, hopefully this (Subang Airport Regeneration) paper will be tabled to the Cabinet soon. But similar to the other papers that I had mentioned earlier, on our part, we have done all the papers and provided all the information; it is now in the hands of the Ministry of Transport (MoT). We will help MoT to get the proposals tabled to the Cabinet as soon as possible,” said Mohd Shukrie.

‘We are ever ready’

Mohd Shukrie said all MAHB airports are “ever ready” for the reopening of international borders. “The airlines might take a bit longer [to prepare for the border reopening] because they have gone through some retrenchment exercises. The beauty of our airports is that we have never closed them except for Melaka airport because it had zero traffic since the beginning of the pandemic.”

MAHB has also reduced its headcount by 700 employees since the start of the pandemic to 9,285 due to natural attrition, he said, adding that the group did not retrench staff during the pandemic.

The rents to be paid by tenants of MAHB airports have largely been restructured to be based on the volume of traffic, said Mohd Shukrie. “The whole idea is to keep at least 70%-80% of our current retailers at the airports because the last thing we want to see is shops being closed when the border reopens.”

In ensuring airport safety so that passengers can travel with peace of mind in the Covid-19 era, MAHB airports are working towards being accredited by the Airports Council International for their safety measures. To date, the airports that have received the global airport health accreditation include SGIA, KLIA, Langkawi, Penang and Kuching.

MAHB is also spending between RM600 million and RM700 million on the latest technological systems over the next five years as part of its Airports 4.0 initiative, which aims to future-proof its airports with a fully integrated digital ecosystem and ensure that they remain competitive and be on a par with, if not better than, other global airports.

“Including the major refurbishment programmes for the baggage handling systems and aerotrain, the capital expenditure would be RM2 billion to RM3 billion,” Mohd Shukrie said, noting that the group had spent close to RM50 million to upgrade its network at KLIA following the network failure in August 2019 that caused flight delays and long queues.

“In terms of adoption of technology, ultimately, we are looking at the entire network of airports that we have. But for starters, the focus will be on KLIA followed by other international airports such as Kota Kinabalu, Kuching, Penang and Langkawi as well as SGIA. Thereafter, it would be the smaller domestic airports,” he added.

The technologies that it has planned for the next five years include biometric facial recognition, self-service bag drop, flight information system display, Internet of Things, airport collaborative decision making (ACDM) system and equipping KLIA with 5G technology.

“KLIA is reaching its designed capacity of 25 million passengers per year. The adoption of ACDM, for instance, would allow us to stretch that capacity to around 35 million passengers per year without having to build another terminal,” he explained.

For starters, MAHB expects to introduce facial recognition technology at 75 touch points comprising 10 self-service enrolment kiosks, 10 check-in counters, 12 security e-gates, 42 boarding gates and one passenger lounge in KLIA by the end of 2021. In addition, it plans to install the self-service bag drop at six counters in KLIA and is working with Malaysia Aviation Group Bhd (MAG) on this.

Why running an airport is a tricky business

On the anticipated opening of a competing airport in Kuala Muda, Kedah, which is being jointly developed by a private firm, ECK Group of Companies, and the Kedah government, Mohd Shukrie pointed out that klia2, which was built at a cost of RM4 billion, is still struggling to make money until today.

“Let me share the profit and loss of running an airport. If you spread all the cost across passenger revenue, the cost per passenger is about RM18 to RM25. Currently, the PSC levied on departing passengers for domestic and Asean flights is RM11 and RM35 respectively, while that for international flights is RM73. So we don’t make money from domestic passengers,” he said.

“Thus, any airport for that matter, even if you have the traffic, the next question you have to ask is, is it domestic or international traffic? Because if it is domestic traffic, all I can say is, best of luck to you. At best it will achieve earnings before interest, taxes, depreciation and amortisation neutral. Don’t talk about the net profit, you will not get there.

“To me, looking at how we struggle to get the right yield and returns from our expansion of Penang International Airport, it is going to be tough for anyone to start a brand new airport of that size and still be able to make money,” he added.

For its part, MAHB is spending RM1.2 billion on the expansion of Penang airport, which will see its capacity increasing to 12 million passengers per year from the current 6.5 million.

Slated to be ready by 2026, the proposed Kulim International Airport (KXP) will be able to handle 15 million passengers per year. According to reports, the first phase of the project is expected to cost RM6 billion, which includes land acquisition costs. KXP is also conceived as a catchment area for cargo from the northern region, southern Thailand and western part of Kelantan.

The fact that about 60%-70% of air freight is transported in the bellies of passenger planes is another area of uncertainty the project owner may be underestimating, Mohd Shukrie said. “This means that you cannot have an airport that focuses on cargo unless you have commercial airplanes operating out of the airport as there are not many dedicated freighters in the country.”

 

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