The story of tenants not seeing eye to eye with landlords is one that endures the test of time. Tenants often find fault with their landlords in upholding their rented property’s expectations, whilst landlords feel they do their level best to provide what they deem as meeting the bar.
Whilst mostly common in the property scene, such a situation is also present in aviation, specifically for Malaysia Airport Holdings Bhd (MAHB) as it deals with being the sole airport operator in the country, handling at least 80 different airlines flying both domestic and international.
This includes ferrying a growing hoard of passengers over the years, the latest of which reaching 99 million for the full year 2018.
According to latest statistics, MAHB’s passenger traffic grew by 2.5 per cent year on year (y-o-y) to 99 million for all of its domestic airports in 2018.
MIDF Amanah Investment Bank Bhd (MIDF Research) in a January 11 note saw that more than 50 per cent of the increase was contributed by passenger traffic at the low cost terminal Kuala Lumpur International Airport 2(klia2), with more than 90 per cent of the load carried by the AirAsia Group Bhd (AirAsia).
Locally, domestic traffic at Malaysian airports recorded a modest growth of 0.4 per cent y-o-y in 2018.
The main reason for this was the shift of airlines seat capacity by some local carriers from domestic to international sectors, MIDF Research said.
“As such, the international traffic of airports in Malaysia grew at a stronger pace of 4.5 per cent y-o-y to reach 51.6 million passengers in 2018,” it said in the note.
“We opine that the strength in international traffic in 2018 was partly supported by MAHB’s efforts to attract 13 new airlines such as Citylink Garuda Indonesia, Condor Flugdienst from Germany and Indian low-cost airline, IndiGo Airlines.”
Looking at airports specifically, klia2 is observed to have higher passenger growth of 5.3 per cent y-o-y, which represents a net increase of 1.6 million passengers.
As international passenger movements continued to retain more than 50 per centmarket share since January 2017, MIDF Research believed low cost carriers were set to benefit as international passengers command higherrevenue in terms of ticket prices and ancillary items.
“In addition, we opine that the pent-up demand for international travel will place LCCs such as AirAsia and AirAsia X at a significant advantage over its competitors,” it added.
This is given the companies’ ability to leverage on its network of airlines operators in South East Asia while constantly introducing and retaining optimal routes couples with innovative strategies to drive cost lower.
A battle over travel taxes
Thus, we see many responsibilities held by an airport operator. Nevertheless, not all is ‘smooth-flying’ in the industry as prominent player, AirAsia, continues to keep MAHB in check.
One such issue is the Passenger Service Charge (PSC), which AirAsia urges regulators and policymakers in the airline industry to rebuff the additional RM23 PSC, believing this to be an unfair and unreasonable attempt by MAHB “to enrich itself”.
AirAsia Malaysia chief executive officer Riad Asmat said MAHB has argued it needs more profits to operate smaller loss-making airports on behalf of the government, “but it is obvious from its exponential growth in profits over the last three years, even after taking into account losses in its Turkish operations, that this is not the case.”
The airport operator used its monopoly to enrich itself further by revisiting and rescinding the decision to raise the PSC, he said, adding the additional PSC to be collected would amount to more than RM100mil a year that will go straight to MAHB’s bottom line rather than to the government.
“MAHB will continue to be among the most profitable Malaysian companies for many years to come – but this will come at a cost to the wider Malaysian economy and at the expense of engines of growth such as AirAsia and AirAsia X,” he said in a statement.
Meanwhile, AirAsia X Malaysia chief executive officer Benyamin Ismail opposed the price hike from each passenger travelling through klia2, saying it is “unjustified high charges given its passenger-unfriendly airport environment”.
“Furthermore, since klia2 opened, there have been constant flight disruptions and cancellations due to major apron and runway defects, unscheduled closure of runways, ponding of water on the best of days and fuel pipeline ruptures.
“We will not be part of this scheme to burden the travelling public by making them pay more for below par services,” he added.
Following this, MAHB is suing low-cost carrier AirAsia Group Bhd and its long-haul affiliate AirAsia X for a combined RM36.11 million for outstanding airport taxes.
In a filing with Bursa Malaysia, AirAsia said MAHB via its subsidiary, Malaysia Airports (Sepang) Sdn Bhd (MASSB) has filed a lawsuit against the airline’s wholly-owned unit AirAsia Bhd seeking RM9.4 million for unpaid PSCs.
In a separate filing, AirAsia X said it has also been served with a writ of summons of RM26.72 million by MASSB for PSC arrears.
Both AirAsia and AirAsia X said they will defend these proceedings “vigorously” as they believe the claims are made “without justification and are unreasonable”.
‘Not the same standards’
The PSC is paid by departing passengers and is collected by the airlines upon purchase of tickets. It is later passed on to MAHB upon completion of the flight.
While the PSC is set at RM73 per passenger beginning January 1 this year, both airlines had only been collecting RM50 per passenger. MAHB is now demanding that the airlines pay up the RM23 difference per passenger from July onwards.
However, AirAsia said AAB has not collected, and refuses to collect, from travelling passengers. AirAsia has done likewise.
MASSB insists that klia2 should charge the same rates as the Kuala Lumpur International Airport (KLIA) (Main Terminal). We strongly believe and have so represented to MASSB numerous times, that klia2 is a low-cost airport and the charges levied should reflect the level of services provided.
“We maintain that we are not obliged to collect the same PSC for passengers departing from klia2 and will not do so for the sake of all the stakeholders in the aviation and tourism industries,” said AirAsia and AAX.
In what is seen as a tit-for-tat response to MAHB’s lawsuit, the two airlines said they intend to pursue cross claims against the airport operator in relation to the infrastructure and state of the airports and its operations which include major apron defects, random closure of runways, damage to aircraft and rupture of fuel pipelines.
“We believe these claims far exceed the claims MASSB is seeking. We have attempted – without success – on numerous occasions to engage MASSB on these issues but regrettably MASSB has decided to bring these issues to the public arena by commencing legal action,” they said.
Both AirAsia X and AirAsia are still involved in legal proceedings against MAHB in regard to a burst fuel pipe at klia2 Terminal in Kuala Lumpur in 2016 which allegedly caused substantial losses to AirAsia X.
Rustling up structure for airport REIT
Another key development in the aviation industry is the up-and-coming airport real estate investment trust (REIT), a first of its kind with expectations to generate more than RM700 million per annum.
The government planned to sell a 30 per cent stake of its airport assets via the REIT structure for targeted net proceeds of RM4 billion.
This would deliver more than RM766 million per annum, said Maybank Investment Bank Research (Maybank IB) in a report.
“The exact structure of the Airport REIT is sketchy for now, but we do not think it will be punitive to MAHB due to safeguards from its operating agreement with the government,” it said in a report on the Budget announcement.
Maybank IB pointed out that the government intended to use the proceeds and upgrade existing airports and expand capacity for congested ones.
“This is a positive way to raise funds without tapping into the federal tax pool. In theory, there are many merits to do this and it will provide the capital market with an income generating infrastructure asset of quality.
“The government, under Budget 2019, stated that it is considering to monetise other assets via the REIT structure such as hospitals and rail infrastructure. Therefore, this Airport REIT is a benchmark for other initiatives.”
The airport REIT is expected to be finalised between the second and third quarters (2Q and 3Q) of 2019. However, MayBank Investment Bank Bhd analyst Mohshin Aziz said the airport REIT was most likely to be one year away from realisation.
“Currently, very little information is available on the structure. It is still work-in-progress pending the
finalisation of the on-going regulated asset based negotiations between Malaysia Airports Holdings Bhd (MAHB) and the Malaysian Aviation Commission,” he said in a separate research note.
Mohshin said the new company would be an added layer between the government and MAHB, citing that selected airport assets would be injected into the new company.
“This is to derive an equivalent asset value of RM4 billion (for the 30 per cent stake to be sold) and later listed on Bursa Malaysia (presumably).
“The ReitCo will get rental income either directly from MAHB via the revenue share mechanism or government pays out the revenue share it receives into the ReitCo,” he added.
Mohshin said the government planned to use the proceeds (airport REIT) and upgrade existing airports as well as to expand capacity for congested ones.
“This is a positive way to raise funds without tapping into the federal tax pool. The other airport assets that are upgraded can later be injected into the ReitCo when they turn profitable and generate sufficient income for the fund,” he said.
Mohshin said the airport REIT could be a benchmark for other initiatives, considering the government wanted to monetise other assets via the REIT structure such as hospitals and rail infrastructure.
REIT a powerful way to monestise infra assets
The proposed REIT is a powerful way for the government to securitise and monetise its infrastructure assets, says the Malaysian REIT Managers Association (MRMA).
MRMA in a statement said it would also be a strategic way to unlock the country’s aviation infrastructure value, creating a sustainable structure to fund the airports’ future capital expenditure and expansion as well as igniting capital market interest.
Chairman Datuk Jeffrey Ng said with the right pricing and valuation, the Airport REIT initial public offering (IPO) would garner strong interest from both institutional and retail investors as the REIT is supported by high-quality government-backed assets.
“In line with the local bourse’s priority to attract higher foreign participation in the domestic capital market, we suggest that the government consider increasing the free-float of the Airport REIT to more than the proposed 30 per cent stake in order to increase liquidity and tradability of the proposed REIT.
“With a sizeable free-float, the IPO will attract greater interest from international funds,” he said.
Furthermore, the success of the proposed Airport REIT is premised on balancing growth potential vis-à-vis protecting any downside risks.
He said as the distributable income from the Airport REIT is based on user fees collected from the established airport management concession holder MAHB, the lease structure of the REIT should have a minimal guaranteed income.
This would protect the downside risk while unitholders may also enjoy the upside growth of the user fees derived from aeronautical and non-aeronautical revenues, which include duty-free retail, food and beverages offerings, car park management and advertising, he added.
Complex structure a puzzle
The airport REIT structure, however, is not without its share of complexities.
Maybank IB Research’s Mohshin pointed out that airports are in constant need of maintenance capital expenditure as most airports will reach their design capacity over a 10-year cycle and require major capacity expansion.
Malaysia’s REIT structure only allowed a 15 per cent provision for expansion, he further highlighted, and this might not be sufficient for airports.
“The Malaysian REIT sector is yielding an average of 6.3 per cent in 2018. Assuming that this ReitCo pays 6.3 per cent yields, it will have to pay RM252 million in dividends for the equivalent RM4 billion asset value not owned by the government,” he said in the report.
This did not appear to be much of a problem, given that MAHB’s user share payment to the government exceeds RM400 million per annum and is growing in tandem with traffic growth. The government owns all airport assets in the country and is the beneficial owner of the land title.
In a separate report, AllianceDBS Research Sdn Bhd (AllianceDBS Research) said the planned REIT appeared to be primarily securitising cash flows from user fees, where the existing agreement is MAHB pays a progressively escalating proportion of airports revenues to the government.
Meanwhile, Maybank IB said the departure levy would be negative for airlines, adding that MAHB would be largely unaffected.
“The departure levy will negatively impact AirAsia and AirAsia X ’s passenger load as their passengers are perceived to be price sensitive.
“Historical accounts are mixed regarding the impact of tax hikes on air travel; in Europe, it caused a multi-year traffic decline while in Hong Kong and Singapore, it merely reduced the traffic growth momentum slightly. The jury is not yet out whether the departure levy will kill passenger demand.”
Mavcom believes the REIT could materially constrain the development of the Aeronautical Charges Framework/Regulated Asset Base framework (RAB Framework) and renegotiation of the Operating Agreement.
The proposal, if not carefully designed, could affect the RAB Framework and Operating Agreement which seek to resolve issues surrounding airport development funding, industry investment, airport planning, capital expenditure (capex) discipline and quality of service.
In its 2019 Budget Commentary, Mavcom said one of the key issues that remain before the airports are injected into the REIT is the complexity of the ownership of the land on which these airports are located, as some airports sit on land with multiple ownership structures.
“This is potentially an operational issue requiring resolution prior to inclusion of any airport asset into the proposed REIT,” it said.
It noted that the REIT’s yields and attractiveness to potential investors would be linked to the level of airport charges of those airports under the REIT, thus airport users including passengers and airlines, will need to be cautious of the possible risk of airport charges being subjected to artificial upward pressure by the REIT’s yield requirements.
“While the government’s proceeds arising from the REIT could be used to fund or subsidise MAHB’s capex requirements for future airport developments, it could also undermine the long-term capital planning process improvements being pursued by the RAB Framework and the new Operating
Agreement.
“In addition, there is lack of clarity on the utilisation of the initial RM4 billion proceeds of the REIT and the REIT could be a costlier source of funding for the government compared with other modes of financing.”
What about AirAsia’s growth story?
With all these small hurdles to AirAsia’s operations in Malaysia, group chief executive officer Tony Fernandes says the AirAsia Group will not get involved in any new ventures for the next three years.
“As 2019 approaches, I would like to confirm that AirAsia will not be opening up any more new airlines for the next three years. After Vietnam, we will focus on what we have. Focus this year is to make Indonesia and Philippines very profitable,” Fernandes wrote on Twitter regarding AirAsia’s business plans going forward.
To note, the LCC group signed a Memorandum of Cooperation with Thien Minh Travel Joint Stock Company (TMG) and Hai Au Aviation Joint Stock Company (HAA) regarding the launch of its newest, and for now last, unit AirAsia Vietnam (Hanoi) on December 6, 2018.
Earlier in 2018, the group scrapped plans for launching AirAsia China (Zhengzhou) and a Myanmarese unit.
“AirAsia X will have the best ever year in 2019. The most undervalued airline. Have done all the hard work. Cut silly routes. Renegotiated leases.”
Meanwhile, its Indonesian counterpart will transition into a non-scheduled carrier in early 2019, according to AirAsia X Group chief executive officer Nadda Buranasiri.
According to the carrier’s 3Q18 financial statements, Indonesia AirAsia X will cease scheduled services in early 2019 in favour of continuing as a non-scheduled airline.
Citing the increasingly difficult Indonesian market, the airlines did not clarify whether the transition means it will continue as a production carrier for other AirAsia X units or as an open ACMI/charter
operator.
“With the challenging operating environment in Indonesia, primarily due to the series of natural disasters that occurred in proximity to Bali, the company is underway to evaluate the available options for our Indonesian associate to ensure sustainability of the company” while “the last scheduled flight from Denpasar to Tokyo Narita will end in January 2019,” Buranasiri said.
Nevertheless, Fernandes says AirAsia is still looking at converting an unspecified number of its A330neo order slots into A321neo.
According to a Bloomberg report, Fernandes did not provide any further details although such a shift would be consistent with previous remarks to the effect that the LCC group would prefer to use the A321neo to boost capacity on slot constrained Asian city-pairs.
AirAsia itself currently has 100 A321neo on order from Airbus alongside 304 A320neo (of which twenty-three have thus far been delivered).
The group’s longhaul low-cost unit, AirAsia X, has sixty-six A330-900s on order from Airbus (AIB, Toulouse Blagnac) with a further thirty-four added to the pile back in July this year. Deliveries are due to start at the end of 2019.
AirAsia will not participate in airport REIT’
On this move, AirAsia Group has said it will not invest in the proposed airport REIT as the low-cost carrier does not want to lose focus on its airline business.
Fernandes said while the implementation mechanism of Airport REIT – proposed by the government in Budget 2019 – has not been finalised, AirAsia hopes it will attract more private sector players to participate in running the country’s airports.
“We don’t know the full mechanism, and AirAsia as an airline, we want to just focus on the airline business,” he told a press conference after the launch of Malaysia’s first digital airport control centre by Ground Team Red Sdn Bhd (GTR) at klia2.
“We would like to see full privatisation. So new players will come in, introduce different ways of running an airport.
“It is not our job to build airports. We don’t want to lose focus; our job is to move people from point A to point B, at the cheapest price and in comfort. That is our goal.”
Source: The Borneo Post