This article first appeared in The Edge Malaysia Weekly on February 17, 2020 - February 23, 2020

MALAYSIA Airports Holdings Bhd (MAHB) is going ahead with its plan to replace ageing assets at the Kuala Lumpur International Airport (KLIA) as scheduled. This is despite the fact that the government is reviewing the regulated asset base (RAB) framework, which would have set out the funding mechanism for airport operators to spend on airport developments in the country.

Last May, MAHB said it would be spending RM500 million to RM600 million over the next three years as part of its asset replacement exercise, which includes upgrading the baggage handling system (BHS) and aerotrains at KLIA.

“While the funding model is being reviewed by the government, our priority has not shifted with regard to replacing ageing assets, that is, the BHS and aerotrains,” says MAHB acting group CEO Datuk Mohd Shukrie Mohd Salleh in an email reply to questions from The Edge.

“The board of directors of MAHB has approved the BHS replacement exercise and work is in progress to appoint consultants for the design and supply of the system. The replacement of the aerotrains is also in the final planning stage,” he adds, noting that the programme will take two to three years to complete.

The 46-year-old, who assumed his current post on Jan 6, also says the expansion plans for MAHB’s airports that are reaching design capacity are ongoing.

“We are currently working closely with the government to develop a new master plan for KLIA and other international and domestic airports under our operating agreements (OAs),” he says.

“The infrastructure expansion plans are medium and long term in nature. We will do what is necessary to manage airport capacity within our affordability, for example by implementing capacity optimisation initiatives through the use of technology and process improvements.”

The proposed RAB framework, which set the development and maintenance capital expenditure allocation for MAHB at RM4 billion for the 2020-2022 period, was originally slated for implementation on Jan 1 this year.

However, this was scuttled after Transport Minister Anthony Loke said last October that he was looking at alternative funding models for airport developments. Two months later, his ministry announced that the Malaysian Aviation Commission (Mavcom), the authority responsible for developing the RAB framework, will be dissolved and its main functions transferred to the Civil Aviation Authority of Malaysia.

Amid the uncertainty on the local aviation scene, KLIA’s nearest rival, Singapore’s Changi Airport, revealed that work will commence on the expansion of its Terminal 2 this month, which will allow the airport to handle an additional five million passengers yearly. The gateway’s total capacity will increase to 90 million passengers per year once the exercise is completed in 2024.

On this, Mohd Shukrie says there is still room for growth at KLIA, especially with optimisation and technology enhancements.

“KLIA has a combined capacity of 75 million passengers per year, and the current traffic is only 62 million. We are already doing the master plan for all airports under our OAs to look at the expansion requirements holistically,” he says.

“One of the more urgent airports is the Penang airport, which is already operating above its capacity of 6.5 million passengers per year. The traffic in Penang hit 8.3 million last year.”

MAHB is still finalising four new OAs with the Ministry of Transport, which will set the legal framework for the operator to run KLIA, designated airports in Peninsular Malaysia and airports in Sabah and Sarawak. They will replace two OAs signed in February 2009. The ministry told The Edge last September that the OAs would be finalised by end-2019.

An industry expert says for foreigners looking to invest in Malaysian airports, the question of allowable returns and ownership plays a crucial role in their decision.

“Since MAHB has a monopoly in managing airports in Malaysia, the role of new players such as operators and investors will need to be defined before they can come in. If the RAB is not to be implemented, a clear mechanism for the adjustment of aeronautical tariffs will need to be in place for any investor to present a business case,” he tells The Edge.

“That is because 40% to 70% of airport revenues are derived from aeronautical charges.

“The utmost importance of a successful public-private partnership framework for airports is a clear objective set by the government for the process and solid support across all the relevant government units. Good examples can be seen in India, Japan and Brazil.”

On concerns that KLIA may be further left behind if its expansion plans continue to be delayed, the industry expert points out that three conditions must be met for any major airport in Asia to be successful.

“Firstly, the airport must have a strong, healthy and competitive hub carrier that has a large catchment or can provide fine capillarity to domestic or adjacent markets,” he says.

“Secondly, the airport has to offer seamless transfer processes for international-domestic, domestic-international, international-international and domestic-domestic passenger flow. Competitive minimum connecting times and a commercial product for the relevant transfer passenger segment are a must.

“Lastly, tourism initiatives, hub carrier strategic positioning and airport development and expansion must be strategically aligned and complementing.

“These factors are today not in place at KLIA.”

Last Tuesday, Mavcom chief operating officer Azmir Zain told a news conference that the commission will announce more details about the RAB framework “quite soon”.

While competition is good because it improves the service level and financial and operational efficiency, he said Mavcom is of the view that the process of introducing greater competition into the airport sector should be done gradually and judiciously because of the cross-subsidy mechanism in practice in Malaysia.

“Thus, the situation of allowing an investor to cherry-pick only the profitable airports could have detrimental effects on what [airports] remain in MAHB,” he said.

“What is also important to note is that there are already investors in MAHB. Apart from the government, there are also domestic and foreign institutional investors as well as retail investors. So, their interests need to be adequately safeguarded when transitioning Malaysia’s aviation industry from what it is today to something that has a greater element of competition.”

Of the 39 airports MAHB currently manages, only six are profitable.

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