The Malaysian aviation sector faces uncertainty as the government pushes multiple agendas that will shift the ground and sky significantly for the sector. Apart from restructuring industry regulator Mavcom, it is also looking to break the monopoly of MAHB by opening the industry up to more airport operators, not to mention possibly instructing Khazanah Nasional to pare down its stake in MAHB.
Meanwhile, the government has conceded defeat in trying to turn around loss-making Malaysia Airlines, which it has controlled since 2000. It seeks to bring a strategic investor into the airline, and that will significantly alter the dynamics of the intensely competitive Malaysian domestic market that is home to four carriers despite a relatively small population of 30 million.
(Nov 4): Clouds of change are gathering for what could be a landmark re-making of the Malaysian aviation industry. The question is whether Putrajaya will get it right — and how soon.
The stakes are high and go beyond just for the corporate players for whom the ground is shifting. Clearly, in the larger picture, the looming changes represent an opportunity for a major reset of the national strategy for the aviation sector.
If done right, such a reset may help the government’s attempt to overhaul the economy, spur growth and indirectly uplift the lives of many Malaysians. Here’s why.
The aviation sector is undoubtedly important to Malaysia, which is a trading nation that also counts the tourism sector among the pillars of its economy. Air transport is a key way to bring tourists into the country, not to mention investors and by extension, capital.
Overall, including the tourism spillover effects, the air transport industry supported 450,000 jobs in Malaysia in 2018, according to data from the International Air Transport Association (IATA).
IATA estimates that the air transport industry and its supply chain alone accounted for US$5.2 billion ($7.09 billion) of Malaysia’s GDP last year. Adding US$5.1 billion in estimated spending by foreign tourists, the gross value added contribution to GDP was US$10.3 billion, says IATA.
“In total, 3.5% of the country’s GDP is supported by inputs to the air transport sector and foreign tourists arriving by air,” according to IATA.
In comparison, Singapore’s air transport industry supported 375,000 jobs in 2018. However, the island nation’s air transport sector contributed US$36.6 billion — more than triple Malaysia’s figure — to its GDP with inputs accounting for 11.8% of GDP.
Given that there is little to separate Malaysia and Singapore geographically as potential hubs smack in the heart of Southeast Asia — which IATA has described as the centre of gravity for global aviation growth — the emerging question is what Singapore has that Malaysia does not.
Historically, the local aviation sector has predominantly been governmentcontrolled. First, there is the national carrier Malaysia Airlines (MAB), which had mostly been government-controlled bar a privatisation spell in the 1990s that did not go well (see “Clock is ticking for Malaysia Airlines” on next page).
There is also Malaysia Airports Holdings (MAHB), the dominant airport operator, which runs 39 out of 40 airports nationwide. The public-listed operator was a spin-off of the Department of Civil Aviation (DCA).
Fast forward to the present day, there is also an independent industry regulator created by the Malaysian Aviation Commission (Mavcom) Act 2015.
Mavcom came into being on March 1, 2016, amid criticism of regulatory conflict given that the government, which decides on policy, also owns airports and has ministry officials on the MAHB board.
As for private sector players, there is AirAsia group, which has two arms locally — AirAsia Malaysia and AirAsia X. The only other airline calling Malaysia its home market is Batik Air (formerly Malindo Air), controlled by Lion Air.
There are many finer details to be considered in reviewing Malaysia’s aviation strategy, opines independent aviation analyst Brendan Sobie, founder of Sobie Aviation and former chief analyst at the Centre for Asia Pacific Aviation.
Among others, a new airport development and operatorship strategy must balance the needs of many socioeconomically important but economically unviable small rural airports currently subsidised by MAHB’s profitable airports.
The government also needs to make major decisions on all three airlines under MAB’s holding entity, the Malaysian Aviation Group (the other two being Firefly and MASwings).
“New policies and regulations better supporting the airline sector overall, including the privately owned airlines, should be considered as part of the new overall aviation strategy,” says Sobie.
“It is important to have all the components aligned properly and to also align the overall new airline strategy with other areas such as tourism,” he adds.
Changes looming
There are signals from the current government that indicate how it wants to change the dynamics of the existing aviation landscape significantly.
The opportunity here is to unify the local aviation stakeholders, who have long been fighting each other, in order to start working together to advance national interests.
First, the government has reinforced signals that it intends to break the structural monopoly of MAHB.
Transport Minister Anthony Loke told a closed-door investors’ forum on Oct 17 that the government will adopt a public-private partnership (PPP) model for new airport development and operations — hinting that new players could come in to share MAHB’s pie.
Second, the government is calling it a day after two decades — and billions of ringgit — of unsuccessfully trying to turn around ailing national carrier Malaysia Airlines by courting private strategic investors to come in.
Thirdly, the government is openly on a collision course with Mavcom and is mulling a restructuring of industry regulators, which may involve merging Mavcom with the Civil Aviation Authority of Malaysia (CAAM), the only other industry regulator.
These developments signal several key messages as far as a national aviation strategy reset goes.
For one, the relook at the regulatory bodies may mean that the government disagrees with the industry’s direction, particularly that spearheaded by Mavcom.
Among others, Loke also told investors at the forum that the government is already looking at alternatives to the Regulatory Asset Base (RAB) framework, which Mavcom spent three years developing.
The RAB framework will govern airport charges and the airport operator’s returns. It proposes to guarantee a 10.88% weighted average cost of capital to MAHB shareholders.
In August, Loke also slashed passenger service charges (PSC) for international departures (except from KLIA) starting Oct 1, a move that Mavcom says is ultra vires. Mavcom had set the existing gazetted PSC rate under its PSC rebalancing exercise, which has generally increased PSC rates since 2017. Mavcom says its RAB framework, when in force, will generally result in lower PSC rates for most airports.
A second message is that the government appears to be stepping back from the aviation sector via the looming divestment of MAB, which it owns via sovereign wealth fund Khazanah Nasional. It is up in the air whether it will also step back from MAHB amid plans to allow more private players in to compete with the airport operator.
It is worth noting that in September, Prime Minister Tun Dr Mahathir Mohamad reiterated that Khazanah would sell assets that are “not useful” to reduce debt and return to its original mandate.
“There would be some control over certain industries, but as to government involvement in business, we’ve always believed that the government should not be in business,” Mahathir told fund managers in New York in late September.
It is unclear as yet whether the divestments will include Khazanah’s stake in public-listed MAHB. At present, Khazanah holds 33.12% as the single largest shareholder, ahead of the Employees Provident Fund with 12.17%.
It is worth noting Khazanah categorises MAHB as a strategic asset.
Turning tide
Seen from a different perspective, a government withdrawal from direct involvement in the aviation sector could signal a shift in emphasis to the private sector taking the lead — a turning of the tide for private players such as AirAsia.
Locally, domestic players are operating in a hostile environment despite the fact that all should be working together for mutual benefit, which will indirectly favour the Malaysian economy.
It remains to be seen if a strategy reset will result in a healthier environment that could unshackle the sector’s growth potential, particularly if all players could start marching together towards the global battlefield as opposed to constantly fighting each other.
It is worth noting that AirAsia has long criticised MAHB as unwilling to cooperate in order to facilitate its growth despite being its single largest customer in terms of passenger volume.
Among AirAsia’s key arguments are that MAHB has abused its structural monopoly and declines to listen to ideas from airlines on how to grow together. In response, MAHB has said that it needs to balance the needs of all airline stakeholders and not just AirAsia’s.
AirAsia has also been at odds with Mavcom despite having initially called for such an independent regulator.
Among others, AirAsia criticises Mavcom as too bureaucratic and slow to protect airline rights versus that of MAHB, while also not doing enough to uphold passenger interests.
To be fair, the role of an independent regulator is crucial, says Vinoop Goel, IATA’s regional director for airports and external relations, Asia-Pacific.
“Having an effective independent aviation economic regulator is important to ensure that the monopoly power of airports can be kept in check in the absence of competition,” he says.
“Since Mavcom’s inception, we’ve seen a marked improvement in Malaysia’s aviation landscape through the establishment of clear policies to deliver on its mandate as an economic regulator and to better protect consumers.”
Question of time
However, the question is not just about getting it right but also how fast the government can push any sort of industry strategy realignment. In a nutshell, the longer it takes, the more opportunity cost is lost for the industry to move forward.
Restructuring Mavcom may require amending or abolishing the act that established it, which in turn needs to go through Parliament.
As it stands, the potential reboot of what Mavcom has been doing vis-à-vis the RAB framework may also potentially mean three years’ of work would go down the drain.
Another opportunity cost of moving too slowly is the adverse effect from urgent airport expansion works coming to a halt until the uncertainties clear up.
For perspective, Mavcom highlighted in its inaugural industry report in August 2017 that in 2016, seven Malaysian airports were already congested beyond their designed terminal building capacities.
Addressing the congestion requires significant short-term and medium-term investments, some of which have begun. For example, in October last year, MAHB completed an RM80 million ($26.07 million) expansion of the Langkawi International Airport terminal, boosting capacity from 1.5 million passengers per annum to four million.
However, the primary responsibility for expansion lies with the government as the asset owner. Any investments from the operator would likely be offset by the user fee payable to the government — essentially the government’s share of income.
While the government’s intention to adopt the PPP model may alleviate some of the cost burden on the public purse, the question then is on calculating the fair return on investment for the private investor so as not to burden passengers.
That was among the objectives of the RAB framework. Given that the government is considering alternatives, the risk is that the RAB framework’s scheduled implementation in 2020 may be delayed. In turn, that may put a halt to capital investments to upgrade and expand existing airport terminals.
In a 2018 interview with The Edge Malaysia, MAHB admitted that it had a duty to determine that it could recoup a reasonable return for shareholders on any capital investments it makes. Hence, multiple planned investments were put on hold pending ongoing negotiations with the government on its operating agreement.
The recent uncertainties may hold up more urgently needed investments. For passengers, such delays risks worsening the level of services and facilities at Malaysian airports and the ripple effect could spread to tourism and other sectors.
Khairie Hisyam Aliman is an assistant editor with The Edge Malaysia
