This article first appeared in The Edge Malaysia Weekly on April 3, 2023 - April 9, 2023

MALAYSIA Airports Holdings Bhd (MAHB) needs to raise money, and fast. The airport operator is under growing pressure to ramp up the Kuala Lumpur International Airport’s (KLIA) infrastructure to re-establish it as one of the world’s leading airports.

Skytrax’s ranking of the world’s best airports is a reminder of how KLIA had once created meaningful international competition. The country’s main international airport, which opened in 1998, was one of the top 10 airports in the world during the early 2010s.

But somewhere along the way, the airport dropped out of the list even as MAHB’s counterparts in Singapore, Doha, Tokyo and Seoul continued to aggressively expand their airports to maintain their dominant positions. Other issues, particularly Covid-19 and efforts to reverse its two years of underperformance, took precedence for MAHB.

However, the need to catch up has become more pressing after Transport Minister Anthony Loke recently said he wants to see KLIA make a comeback in Skytrax’s top 10 list, dominated currently by Singapore’s Changi Airport and Qatar’s Hamad International Airport.

The recent IT outages and aerotrain breakdowns that it took too long to recover from is yet another loud wake-up call for MAHB.

Industry experts say that while MAHB can raise money through the sale of shares or via joint ventures, increasing the passenger service charge (PSC) — commonly known as airport tax — at major airports in the country will help to generate enough cash flow for the expansion and modernisation of existing terminals.

“PSC rates in Malaysia remain among the lowest regionally and globally. In fact, passenger charges at KLIA have remained constant since 2019. However, KLIA is still frequently compared to Changi. Today, KLIA’s 67th position is far behind Singapore’s Changi [at No 1]. So, if you want to be at the same level as Changi, you need to be prepared to pay a higher PSC at KLIA in order for the airport to keep up its services,” says an industry expert.

“A comparison of PSCs between the two airports shows that passengers departing from Changi to Kuala Lumpur pay S$40.40 (RM134.35) while those departing from KLIA to Singapore pay only RM35 because Singapore is part of Asean. It goes to show that the Singapore government recognises that PSC revisions are necessary to allow the airport operator to partially recover part of its aeronautical operating costs and fund new investments required to cater to growing passenger traffic,” he adds.

The Edge is given to understand that MAHB spent about RM183 million a month in 2022 to maintain the 39 airports under its purview, up from RM140 million a month in 2021.

Still, it looks likely that Malaysia’s PSC will remain unchanged — at least in the immediate future — as Loke has reportedly said there will be no increase this year.

Meanwhile, analysts point out that a recent proposal by the Malaysian Aviation Commission (Mavcom) to keep airport tariffs status quo for now but will be adjusted for inflation each year during the first regulatory period (RP1) of 2024 to 2026 could work against MAHB’s ability to generate enough cash flow for capital expenditure (capex) purposes, particularly for airport expansion and maintenance.

“While Mavcom also proposes a mechanism for MAHB to recoup losses incurred during RP1 in RP2 (ostensibly from 2027 to 2029), we are concerned about MAHB’s cash flow in RP1. While the proposals in Mavcom’s second consultation paper (CP2) are not cast in stone, they do significantly raise MAHB’s earnings risk over the medium term,” Kenanga Research aviation analyst Raymond Choo Ping Khoon said in a March 1 report.

Mavcom is currently developing a framework to determine aviation service charges at airports in Malaysia, where the rates would depend on the infrastructure and facilities, as opposed to a uniform rate. In its recently released CP2, the aviation regulator is proposing to defer the transition to a cost-based approach to setting aviation charges until after the Malaysian aviation sector has recovered from the pandemic.

“Their decision to defer the application of a regulated asset base (RAB)-based framework until the sector has recovered is appropriate, because applying it now during a period of low passenger traffic would only result in excessively higher charges. Applying RAB during low traffic would jerk up the rates very suddenly. So that should be avoided if possible as it would be better to increase rates gradually,” says an industry observer.

“Escalating current PSC rates by inflation and applying them against forecast passenger demand, operating expenditure (opex) and capex, Mavcom found MAHB would be able to maintain a credit rating of A to A+ during RP1. Hence, MAHB would continue to be able to raise funding with Mavcom’s proposed rates and generate good cash flows to operate their business,” he tells The Edge.

“The mechanism proposed by Mavcom also seems to be predicated on ensuring MAHB generates adequate revenues to raise debt and maintain a minimum reasonable credit rating of BBB+. They have chosen this method after eliminating other approaches, including remaining at the present charges, equating the charges to the benchmark PSC contained in the current operating agreement (OA) with the government, and setting charges to recoup losses incurred by MAHB during the pandemic,” says the industry observer.

“The decision to not go with any of these methods is reasonable and, in fact, appropriate,” he adds.

However, there are some areas of the framework that would be good for Mavcom to give more clarity to, he points out.

“First, is the income generated by MAHB sufficient to cover the capex it needs to incur during RP1? For example, KLIA needs a new aerotrain system and a baggage handling system. Both are seemingly urgent and significant. Will the RP1 revenues be adequate? MAHB has been rightly under fire for the recent infrastructure failures at KLIA, so this is pertinent to address.

“The fact that Mavcom is hinting that MAHB should identify ‘high priority’ investments and is entertaining the possibility of MAHB recovering any shortfalls in RP2 suggest there is a distinct possibility that those revenues will be inadequate. Greater transparency on MAHB’s capex would go some way towards giving some colour to this question, especially as capex plans are normally prepared years in advance, as would be the case for any infrastructure,” he notes.

“Second, Mavcom makes reference to an ‘efficient’ firm as a reference for MAHB to be benchmarked against in calculating the tariffs. The consultation paper does expand on the concept of efficiency from the standpoint of gearing, but little else otherwise. Some elaboration on the reasonableness of opex would be helpful. For example, the cost of operating shuttle buses between the main and satellite terminals at KLIA is surely an opex that could have been avoided if MAHB properly maintained or made replacements to the aerotrains when they should have — should consumers be paying higher PSC rates as a result of this higher opex when MAHB plainly should have done much better?” he says.

“Third, the RP1 rates proposed in the consultation paper seem to continue on with uniform rates across all airports. This approach is questionable, given that airports across the country are not the same in terms of facilities and level of service. Surely someone flying from Kota Baru airport should not be paying the same rates as those flying from KLIA and klia2?” he says.

The industry observer points out that the success of the framework and, consequently, the stability of Malaysia’s aviation sector also depend on Mavcom having the freedom to exercise its regulatory powers freely without political interference or foul play.

Maybank Investment Bank aviation analyst Samuel Yin Shao Yang says in a recent consultation paper published by Mavcom that he likes the fact that tariffs for 2024, 2025 and 2026 will be raised by 6.9%, 2.3% and 2.4% respectively to reflect inflation. Currently, tariffs are raised every five years.

However, he notes that inflation in electricity tariffs (+20 sen/kWh) and staff costs (+9% in FY2022) may outpace the Consumer Price Index-based tariff adjustments. ”Also, our CPI [basket] includes subsidised items. To base airport tariffs on CPI may not be sufficient to raise enough for capex,” he tells The Edge.

Yin says the other thing that he did not fancy in Mavcom’s second consultation paper is the proposal that MAHB’s loss of RM1 billion for its Malaysia operations during the Covid-19 years will not count to the loss sharing mechanism. “MAHB will also not be able to recoup major investments, such as KLIA’s aerotrain and baggage handling systems, and the Penang and Subang airports expansions until RP2.”

MAHB has noted that it is spending RM743 million for the aerotrain replacement and RM1.1 billion for the new baggage handling system. “If combined with the Penang and Subang airports’ expansions, the capex would amount to at least RM3 billion. But Mavcom is basically saying MAHB cannot recoup the investments until the period of 2027 to 2029. To me, that is not fair because you don’t know what things are going to be like then. Under the proposed RAB model, they can basically start charging next year. That is fair,” says Yin.

The main objective of the proposed RAB framework is to ensure that MAHB receives revenue such as PSC paid by departing passengers and aircraft landing and parking fees paid by airlines that are sufficient to cover costs to operate and develop airports. It was initially planned that capex in 2020 to 2022 would be self-funded by MAHB under the RAB framework at no cost to the government. However, Covid-19 hit the country.

Still, raising the PSC remains a contentious decision. Critics opine that while an increase in PSC may seem small, any new charges will impact travellers, particularly at a time when Malaysia’s passenger traffic is still recovering. Total passenger movements in February for airports in Malaysia came up to 5.8 million passengers. This translates into a recovery of 71% from 2019 levels.

In 2019, the government reduced the PSC for international flights to RM50 from RM73 at all airports in Malaysia, except for KLIA, following a dispute between AirAsia and MAHB. AirAsia had since 2018 opposed the move to equalise the PSC in Malaysia as it maintained that the airport facilities at klia2 were not on a par with KLIA’s. Loke said at the time that the reduction was not related to the dispute, but to encourage tourism for Visit Malaysia Year 2020 and to attract more airlines to operate in the country.

However, analysts and industry observers point out that simply having lower PSCs does not guarantee that foreign tourists will visit Malaysia. They say this is evident from the fact that despite airport aeronautical charges — including PSC, landing fees and parking fees — in Malaysia remaining among the lowest in the region, the number of tourist arrivals by air is still lower than those in Singapore and Bangkok.

“PSC does not dictate consumers’ travel behaviour. That’s because PSC only represents a small percentage of the fares. A check on Malaysia Airlines’ website shows that a return economy plane ticket to London in April costs about RM9,930. Of this, the PSC out of KLIA is RM73 while that out of London is RM304. Thus, the RM73 PSC is not significant enough to influence a passenger’s travel decision,” says an industry observer.

Aviation consultancy Endau Analytics founder and analyst Shukor Yusof concurs, noting that KLIA and Changi are not a like-for-like comparison. “I don’t think it is right for the government to just wash its hands and expect KLIA to be able to compete effectively with the likes of Changi. At this stage, there is no point in comparing ourselves with Changi because Changi is playing in a different league altogether,” he says.

“Singapore has established itself as a world business centre, so a lot of cross-border activity goes through Changi. If you want the same level of standard as Changi, then everything that surrounds KLIA needs to be upgraded as well. And that’s the role of the government, not MAHB. There is only so much the airport operator can do with limited funds as KLIA is not a high-revenue-generating airport like Changi. If you compare KLIA to some airports in the region like Jakarta and Manila, I would say we are better.

“MAHB’s role is mainly to ensure that the airport and facilities are kept well within accepted standards of the International Air Transport Association and the International Civil Aviation Organization. Thus, even a RM1 increase in PSC per departing passenger, for example, adds up to a lot, especially when people are starting to travel again. This is important given that the government has less funding for them.”

According to Shukor, MAHB also needs to raise its game in terms of how it trains its people. “Many of the complaints are about MAHB’s sluggishness and slack service that passengers face at the main airports, especially KLIA and klia2.”

An industry observer agrees, citing 

a recent industrial court case involving an IT manager who was sacked by MAHB over a technical glitch incident at KLIA in 2019. It was revealed that it had been caused by the company’s ageing core network switches, which had not been replaced since 1998.

“The claimant had over the years submitted multiple proposals to the company to upgrade or replace its ageing equipment and even highlighted the dire consequences if it did not do so. But MAHB’s board of directors failed to respond quickly,” says the industry observer. It was reported that the IT manager was awarded a total of RM885,295.30 as compensation and back wages by the industrial court.

“More recently, MAHB had to issue an apology to all passengers who experienced difficulties due to technical issues faced by its aerotrain system at KLIA. Once again, it was found that MAHB’s board had been deliberating on its aerotrain replacement programme since 2017, but it was only in 2021 that the project was approved and awarded. What’s taking them so long to decide?”

Shukor believes the recent aerotrain breakdown serves as a wake-up call for MAHB. “To be fair, this is a culmination of many years of decay within the organisation and other government-linked companies to do with services. If you just want to lambast MAHB for being incompetent and disruptive, I’d like to think that is a bit unfair because the airport operator also runs a few other airports around the world very successfully, including Istanbul Sabiha Gokcen Airport in Turkey. So in terms of management capability, they have it, although it can be improved.

“Funding is the key factor. If the government wants KLIA to be like Changi, then it has to take a leaf out of what Temasek Holdings (Private) Ltd and the Singapore government are doing for Changi in terms of continuously upgrading and monitoring, and surveying the landscape to maintain its relevance and its position as an air transport hub,” stresses Shukor.

“The blame game should just stop and they should put their heads together and decide on ‘Where do we want to go from here?’ I think the government wants to do too many things at once. It also wants to establish the Subang Airport Regeneration Plan. But that’s purely a private play because it wants MAHB to team up with some private consortium to do that. But with KLIA, I think it is the responsibility of the government to ensure that MAHB has the funds that it can use (to keep up its services).”
 

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