This article first appeared in The Edge Malaysia Weekly on June 24, 2019 - June 30, 2019

THE Malaysian Aviation Commission’s (Mavcom) latest consultation paper on aeronautical charges has brought some cheer to Malaysia Airports Holdings Bhd (MAHB). The aviation regulator is proposing to shift the current tariff structure to the “price-cap” model, which lets the airport operator keep excess revenue it collects from passenger service charges (PSC) and aircraft landing and parking fees over the next three years.

“It works both ways. If MAHB handles less than the number of passengers that was forecast for the year, it will have to live with the lower revenue earned from the aeronautical charges,” Mavcom chief operating officer Azmir Zain tells The Edge in an interview.

Still, while MAHB undertakes the highest degree of traffic risk in a price-cap regime, it provides the most incentive for outperformance relative to targets set by the regulated asset base (RAB) framework, he says.

However, the price-cap regime is not yet set in stone. According to Azmir, there is still room for discussion among stakeholders on the other forms of control on aeronautical charges such as revenue cap or hybrid cap.

“A revenue cap regime will see Mavcom clawing back from MAHB any excess revenue earned [during the 2020-2022 period] in the following regulatory period. This will be reflected in the aeronautical charges, which will be reduced to take into account the excess revenue that MAHB had collected,” he adds.

He notes that this regime will be more appealing to debt holders as it allows for greater certainty of revenue for MAHB relative to traffic.

Last Tuesday’s consultation paper forms part of Mavcom’s development of the much-anticipated RAB framework, which outlines a new ceiling price for the aeronautical charges that is commensurate with the required capital expenditure (capex) by the airport operator in future. The first consultation paper was published in October 2018.

In the latest paper, another bright spot for MAHB is that it has the support of Mavcom to introduce a new PSC — levied on passengers in transit or transfer for up to 24 hours — for the next three years (also known as the first regulatory period or RP1).

The regulator is proposing to impose a transfer PSC of RM5 on domestic transfer passengers and RM20 on their international counterparts. MAHB, meanwhile, is asking for a lower transfer PSC of RM3 and RM17 for domestic and international transfer passengers respectively.

Azmir clarifies that the transfer PSC is not a levy to generate additional revenue for MAHB.

“This is not an additional charge [on passengers] because MAHB must adhere to the regulated price-cap. But under the RAB framework, MAHB will be free to allocate the charges across PSC, aircraft landing or parking fees and transfer PSC. The introduction of the transfer PSC, if anything, would potentially result in passengers paying slightly less PSC,” he explains.

According to Mavcom, the transfer PSC will also help to reduce the loss in revenue which was and is currently not captured for transit and transfer passengers.

Azmir declined to disclose the exact number of transit passengers MAHB handles, except to say that “it is a relatively large number”.

He also notes that the transfer PSC is nothing new. “It is actually a common revenue item for many hub airports across the world such as Singapore, Hong Kong, Dubai and London.”
 

What’s next?

Mavcom will hold consultation sessions with MAHB, airlines, various ministries, analysts and other stakeholders over the next few weeks to gather feedback.

“We recognise that there is a universe of stakeholders related to the aviation industry out there — from airlines, airport operators, ground handlers and the government to consumers — and we want to ensure that we get as many viewpoints as possible on the paper. This is so that whatever decisions that we take in terms of our regulation, it has hopefully gone through the process of attempting to appreciate the many viewpoints and interests coming from these various players,” says Azmir.

“We want to ensure that whatever we do, it is democratic and allows for all stakeholders the opportunity to give their viewpoints in terms of how aeronautical charges in Malaysia will be structured going forward.

“We are basically introducing a new methodology to calculate the PSC and aircraft landing and parking charges in Malaysia. The charges will be set based on capex and operating expenditure, as well as a fair rate of return for MAHB,” he adds.

This consultation closes on July 18.

“We will go through the feedback and adjust our assumptions accordingly. We hope to announce the new (aeronautical) rates and the RAB framework by October, with a view to implement the new rates from January 2020,” says Azmir.

The paper marks the beginning of the end of months of concern about the future of MAHB, which has been mired in uncertainty from the setting up of an airport real estate investment trust (REIT) to the opening up of the airport sector to other private operators, followed by ongoing concerns over the impact of a departure levy and court cases with its largest customers AirAsia Group Bhd and AirAsia X Bhd, for the last seven months.

Analysts are positive on Mavcom’s proposals in the paper as it has removed a large amount of uncertainty for a RAB framework, with RHB Investment Research pushing up its price target on MAHB to RM9.20 from RM8.15 previously and points to a further re-rating in the airport operator’s valuation.

MAHB was down 0.12% last Thursday to RM8.50 after running up a 7.3% gain on Wednesday. It closed up five sen or 0.59% up at RM8.55 on Friday, giving the company a market capitalisation of RM14.19 billion. Year to date, the stock is down 2.6%.

While she would much prefer a higher return on capital or weighted average cost of capital (WACC), Credit Suisse Equity Research analyst Joanna Cheah says the revised 10.88% by Mavcom is still incrementally positive for MAHB.

“On a starting RAB of RM8.3 billion, we estimate (MAHB’s) earnings before interest and taxes (EBIT) base in 2020 works out to be approximately RM908 million, or a 16% increase from 2018 levels. Assuming all else constant (similar earnings level for the other non-airport operations and our expectation of an improvement in Istanbul Sabiha Gokcen International Airport’s performance), we estimate there could potentially be an EPS uplift of 8% in 2020 from our current forecast,” she wrote in a June 19 note to clients.

Cheah also notes that the capex of RM5 billion for MAHB’s projects as proposed by Mavcom is scaled down significantly from MAHB’s November 2018 submission of RM10 billion for RP1.

“Higher capex in theory is positive for MAHB due to a larger RAB but we are happy with Mavcom’s reduction as it highlights the essence of instilling capex discipline under a RAB framework, and also to prevent MAHB from overstretching its balance sheet,” she says.

In the latest consultation paper, Mavcom also set out three tariff structures: The first is according to the individual airport’s service levels and infrastructure and the second is based on four clusters (geographical regions).

The third tariff structure is also based on four clusters, but the PSC for Asean and non-Asean is equalised from the current RM35 and RM73 respectively. The domestic PSC is also raised to RM14 from RM11 currently.

Azmir says for now, Mavcom does not have a preference on the PSC rate options, but notes that the different options would appeal to different stakeholders.

“The purpose of the paper is to have a robust conversation with the stakeholders in which the final decision will take into consideration all views from all stakeholders. This is to ensure that Mavcom does not make an important decision in isolation,” he adds.

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