Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on December 13, 2019

KUALA LUMPUR: The ministry of transport (MoT) has confirmed that the cabinet has decided to dissolve the Malaysian Aviation Commission (Mavcom) and transfer its functions to the Civil Aviation Authority of Malaysia (CAAM), whose chief executive officer (CEO) quit recently after the US Federal Aviation Administration downgraded Malaysia’s air safety rating due to its shortcomings as an aviation regulator.

The news sent Malaysia Airports Holdings Bhd’s (MAHB) share price on a downhill as uncertainties arise on its operating landscape moving forward. The stock slipped as much as 30 sen or 3.8% to an intraday low of RM7.82 yesterday. It closed at RM7.89, down 2.83% or 23 sen, with 3.87 million shares traded.

This is simply because the dissolution of Mavcom has sparked concern on whether the proposed Regulatory Asset Base (RAB) framework, which is expected to be implemented next month, would be delayed or worse, scrapped altogether

The framework, which is developed by Mavcom to ensure adequate investments on local airports, will serve as the basis for funding and developing Malaysia’s airport network.

The expectation of the implementation of RAB, which will offer MAHB 10.88% return on its future investments, has been the main source of fuel for the airport operator’s share price rally since June.

Mavcom executive chairman Dr Nungsari Ahmad Radhi expressed his disappointment over the cabinet’s decision to merge the two aviation regulatory bodies.

Nungsari said in a statement that the decision was done without consulting the commission.

He commented that the decision to repeal the Mavcom Act sent a signal that there is no need for an independent economic regulator for the aviation industry that looks into issues, such as commercial licensing, competition, consumer welfare and public service obligations.

The MoT said in a separate statement that the integration would be done in order to optimise human resources and budgets as well as increase operational efficiency and service provision.

The merger will primarily involve the repeal of Mavcom’s founding act, the Mavcom Act 2015 (Act 771) and amendments to CAAM’s founding act, the CAAM Act 2017 (Act 788).

The ministry would simultaneously restructure CAAM’s new organisation structure to ensure that this rationalisation process is done with the intention of considering the new duties CAAM will undertake.

Detailed discussions will be held between MoT and the finance ministry, the Public Services Department and the Attorney-General’s Chambers over the different facets of the merger, said MoT.

Nonetheless, Transport Minister Anthony Loke was quoted by the Malay Mail as saying that Mavcom would continue to operate independently for the next six months, as it would take a few months for the government to amend and repeal laws, as well as discuss the potential structure of the new merged regulator and how to transfer Mavcom’s functions to CAAM.

Who will fund airport expansion?

Nomura Research’s Ahmad Maghfur Usman wrote in a research note that he did not see the need for a merger given that both entities have different functions. More so, it requires legislative amendments to unwind the Mavcom Act.

“This could likely put a brake to the RAB framework implementation as well as the finalisation of the New Operating Agreement, which could be pushed out to six to 12 months from now,” Ahmad commented. Consequently, he said this would burden the government with maintenance costs for the marginal cost support, which ranges from about RM200 million to RM220 million annually.

A delay in the RAB framework would delay urgent expansion and capital expansion (capex) needs for some airports — notably Penang International Airport and Kuala Lumpur International Airport (KLIA)’s main terminal, which needs to upgrade their baggage handling systems (BHS) and aero trains.

In the mid to longer-term, the RAB framework would still be implemented, as there will still be a need for a framework that governs sustainable capex planning and cost structure recovery in the civil aviation industry.

Despite the uncertainties, Nomura maintains its buy call on MAHB shares with target price of RM10.27.

CGS-CIMB’s Raymond Yap trims MAHB’s earnings forecast on home operation by 10% to factor in the possible abortion of RAB framework for the financial year ending Dec 31, 2020 (FY20) and FY21. The 10% cut will translate into a 7% reduction on MAHB’s group business including its Turkish operations.

Yap earlier imputed a 17% hike in aeronautical charges expecting the RAB to kick in next month. He downgraded MAHB to “hold”, from “add” previously, with a lower take profit of RM8.33 versus RM9.40 previously.

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