This article first appeared in The Edge Malaysia Weekly on October 14, 2019 - October 20, 2019

SWITZERLAND-listed Flughafen Zürich AG, which operates nine airports — including the Zurich International Airport — in five countries, is keen to participate in the growth of the Malaysian aviation market, especially in the expansion of the Penang International Airport.

Daniel Bircher, CEO of the airport operator’s local unit, Zurich Airport International Asia Sdn Bhd, says discussions are ongoing with the Malaysian authorities, including the Ministry of Transport (MoT) and the Malaysian Aviation Commission (Mavcom), on opportunities here.

“We have not talked about a specific proposal but we are here and interested in investing when the opportunity comes,” he tells The Edge in an interview.

“We spoke about the preferred airports and clusters but how that [Zurich Airport’s participation] would look like will depend on [several factors, including] the Regulatory Asset Base (RAB) framework, whether the airport project would be built under a public-private partnership build-operate-transfer modality, the duration of the concession and how the process of award works.”

Bircher says the company will wait for Mavcom’s RAB framework and the four new operating agreements (OAs) between MoT and Malaysia Airports Holdings Bhd (MAHB) to be announced and finalised respectively before it submits a proposal.

“The RAB and OAs will determine what roles foreign operators and investors can play [in the growth of the airport sector]. We will continue our discussions [with the authorities]. We have given our input following the release of Mavcom’s second consultation paper [on the RAB framework in June] and are awaiting the results.”

The commission is due to announce the RAB framework in the next few weeks, which will provide clarity on the future development of airports in the country.

In April, MoT divided the 39 airports MAHB manages in the country into four clusters — the Kuala Lumpur International Airport (KLIA), Peninsular Malaysia, Sabah and Sarawak — as part of plans to open up the sector to new private airport operators.

Bircher says the company looks favourably on the Penang and Sabah clusters. “Based on our preliminary analysis, the Penang cluster is interesting. For example, Penang, Langkawi and Alor Setar can be clustered together. And I think if the Penang International Airport itself were available, that would be something that we would look at closely because we know that there is a large investment required there.

“We also feel that Sabah is an interesting investment opportunity. It makes sense to have Kota Kinabalu, Tawau and Sandakan in the same cluster.”

However, Bircher finds Sarawak “a bit more challenging” as the state has many small airports. “On the one hand, you have airports like Miri, Sibu and Kuching that generate good traffic, but on the other, there are small airports with one or two flights a day to just one destination.”

On the size of ownership Zurich Airport is looking at, Bircher says it will depend on whether its investment involves a single airport or a cluster.

“We also have to see whether there are any specific foreign direct investment limits since airports have always been looked at as strategic assets for the country,” he explains.

Citing Zurich Airport’s investment in Brazil, he points out that its equity in the various airports varies from 10% to a controlling stake. Nevertheless, it is unlikely to go it alone in developing and operating airports in Malaysia.

“In new markets, we are quite happy to work with local companies, either funds or infrastructure-based, that know the financial situation of the country, the financial institutions, the labour laws and the union issues,” Bircher says.

He is responsible for driving the expansion of Flughafen Zürich in Southeast Asia, using Kuala Lumpur as a key base from which it can grow in the region. Major shareholders of the Swiss firm include the Canton of Zürich (with a 33% stake) and the City of Zürich (5%).

The decision to expand Flughafen Zürich’s footprint in Asia was made two years ago, says Bircher, adding that the airport operator is already present in India.

“If you look at the potential markets, I would say India and Indonesia are strongly growing markets that require a lot of investment [in airport facilities],” he says.

“And while the basic infrastructure of airports is available across Malaysia, there have not been a lot of investments made in the last couple of years, including technology upgrades. There are 14 airports that are operating close to or above their terminal designed capacity, such as the KLIA and Penang International Airport.”

Bircher notes that Malaysia’s air traffic is expected to more than double to 250 million in the next 20 years. “We are basically here to see what possible projects are available, whether the government wants to privatise or wants private investment in the airports. We have quite a bit of experience in the privatisation process in India and Brazil.”

On whether dedicated low-cost carrier (LCC) terminals should be built as the market grows, he says, “When you build infrastructure, it has to be modular and flexible. I don’t think it is the right approach for an airport to build infrastructure for a specific airline model or a specific airline.

“I worked for five years in India and during that time, I saw four airlines collapse. Airlines come and go. I am not saying any airline would collapse here but in India, it was Kingfisher Airlines and Jet Airways.”

Bircher warns of the risks involved in building an airport specific to a certain client or model. “As an investor, how do I know whether the airline’s model will still work in the same way in 20 years? So, I need to build an airport in a way that I can change it. That is possible. Rather than to build big structures, it is recommended to build modular, simpler structures of airport terminals that can be expanded. That would also address the concerns of certain types of airlines today as to what they expect from airports today and tomorrow.

“At the end of the day, there are basic requirements at the airports that each airline and passenger needs, such as check-in facilities and baggage systems. The big investments, apart from infrastructure, are the IT, security and baggage systems.

“Therefore, I don’t see such a big difference between the needs of LCCs and other types of airlines. Airport-related costs account for between 4% and 6% of an airline’s overall cost and, thus, cannot be the deciding factor in its survival or operations.”

As Malaysia’s aviation sector grapples with the legality of the reduction in the passenger service charge (PSC) for destinations beyond Asean from RM73 to RM50, regulatory stability and clarity are considerations for foreign investors like Zurich Airport.

“The faster PSC is taken out of the political process, the easier it is for the investors. In my past experience, PSC has not really been a deciding factor in one’s travel plans or an airline’s choice of destination. Rather, it is ground transport to and from the airport, airfares and the timing of the flight,” says Bircher.

“But we are aware that it (PSC) is a sensitive issue because to the public, this is something you have to pay and the question is always, am I paying the right amount of money for the service I am getting? That is why we always support having service level agreements in our concessions because they support your internal efforts to standardise and maintain service quality.”

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