What’s the impact of AirAsia’s relocation to Indonesia on Malaysia’s government-owned airport operator Malaysia Airports Holdings?
Tan Sri Tony Fernandes’ recent announcement that he is stepping out of Malaysia and relocating to Jakarta had certainly got tongues wagging. Initially, it gave the impression that he is packing the bags of his hugely successful made-in-Malaysia airline, AirAsia Bhd, for the neighbouring country.
Insiders say that Fernandes was not averse to the public holding that view, maybe even quietly contributing to it. Such feelings, they say, stemmed from an ongoing and sometimes bitter battle with Malaysia’s government-owned and monopolistic airport operator Malaysia Airports Holdings Bhd (MAHB).
Fernandes has since given the official view that talk of him moving to Indonesia isn’t true. Yes, he admits to buying a house there but Fernandes also owns abodes in far-flung places such as France and London.
The move to Jakarta is to spearhead the group’s next stage of growth that is regional. ‘While it is no secret that I am deeply disappointed by Malaysia Airports, I will not move out of Malaysia because of this,’ he tells Malaysian Business. He says while he has bought a house in Jakarta, ‘Malaysia is home and I plan to come back every weekend. Airasia Asean is the regional office.’
Was cost a consideration for the shift? Tony says that operation costs in both cities were about the same and AirAsia’s planes would be continued to be serviced in Malaysia under SAE. He lambasts the constant delays in the completion of the Kuala Lumpur International Airport 2 (KLIA2) in Sepang, which he thinks is a complete waste of time, with the consistent untruth shocking.
MAHB and AirAsia blame each other for the new budget terminal’s bloated cost that has nearly doubled to RM3.9 billion from the initial RM2-billion price tag. This is 33 times the cost of the construction of the Low Cost Carrier Terminal (LCCT) at just RM108 million.
KLIA2 is to be Malaysia’s next-generation hub and was scheduled to open in April 2013, six months behind its original schedule. It boasts seamless connectivity between low-cost and full-service carriers catering to 30 million passengers a year, with the provision to expand to 45 million.
MAHB has declined to comment in this article, saying that it has countered Tony’s criticism in the recent past. In a document entitled ‘Why KLIA2 has to be bigger’ posted on its website, the airport operator said that it was building a bigger KLIA2 upon the request of AirAsia. It also said that AirAsia had asked for a fully automated baggage handling system from a semi-automated system, causing the delay in the opening.
Some quarters think that MAHB needs to beef up its readiness to face the competition, pointing out that most Asean countries are competing against each other to persuade the greater involvement of low-cost carriers. For instance, Thailand has made Don Muang the low-cost hub for Bangkok and the Philippines has designated Clark as the gateway for no-frills carriers, while Singapore is building a new budget terminal to more than double its capacity to 16 million passengers a year from seven million.
Some analysts commented that this cost would defeat the purpose of using KLIA2 as a low-cost terminal, which needs much simpler facilities, and in turn, an affordable airport tax. Worst still, there is talk that the cost of KLIA2 could balloon to RM5 billion due to cost overruns, given that they have been delays in the completion date from September 2011 to now. There is talk that the opening of the airport could drag to the early second-half of 2013, considering that the construction is only half done at this juncture.
On the flip side, there is another group which supports the extensive design of KLIA2, which will have 60 gates, eight remote stands, 80 aerobridges with space to accommodate 225 retail outlets.
Need for expansion
Firstly, there is a need for a new terminal for low-cost carriers such as AirAsia since the LCCT is fast approaching its capacity of 15 million passengers. The present LCCT was designed as a temporary airport only and it would be turned into a cargo terminal once a replacement is ready. Moreover, there is no transfer facility from LCCT to the main terminal of KLIA at the moment. However, the new KLIA2 is designed to have such connectivity.
Besides, apart from LCCT, KLIA’s passenger growth has also been encouraging. It was reported that the KL International Airport (KLIA), including the LCCT, registered passenger movements of 16 million between January and May this year, up 5.1% from the same period a year ago, representing approximately 38.5 million passengers on an annualised basis. Adjusting for the seasonal impact, both KLIA and LCCT could potentially service 40 million passengers by end-2012 as compared with 37.7 million and 34.1 million in 2011 and 2010 respectively. This amount of passengers is potentially topping both airports’ capacity in the future.
It was reported that KLIA currently has a capacity to handle 25 million passengers per year while the number of passengers at the existing LCCT has recorded between 18 million and 20 million passengers per year, which is far above the designed capacity of 15 million. Hence, the new airport – KLIA2 – is needed to accommodate the increase in passenger movement every year for both low-cost and full-fledged passengers. With the completion of KLIA2, the total capacity can be increased by another 25 million to 65 million passengers (KLIA’s 35-million passenger capacity and KLIA2’s 30 million).
Even so, there appears to be some unanswered doubts about MAHB’s prospect. For instance, will KLIA2 be classified as a LCCT or a full-fledged airport? In mid-2007, the Malaysian government reduced airport tax for passengers at the LCCT from RM9 to RM6 for domestic passengers and from RM51 to RM25 for international passengers. The reduction was aimed at raising Malaysia’s potential as an operational hub for low-cost carriers in Asia. However, due to the construction cost of KLIA2, there is a concern that it no longer can be classified as an LCCT, but as a full-fledged airport instead. Under such circumstances, the airport tax may increase and hence curb demand and passenger traffic growth.
Driving rental income from retail space
Another reason to inspire MAHB to build a bigger and thus more costly terminal, say some analysts, is to improve their retail space revenue, ie, revenue from Duty Free & Non Dutiable Goods. From the table, it is clearly shown that the revenue from Duty Free & Non Dutiable Goods has been on a rising trend with a three-year (2008/11) CAGR of 16%. According to Kenanga Research, the growth of this can be more impressive as the retail revenue per pax in LCCT of RM22.47 as at end-2011 is almost catching up with KLIA’s RM36.78/pax. However, due to the limited retail floor space in LCCT, MAHB is finding it hard to expand its retail revenue. With the opening of KLIA2, it is expected that retail revenue could grow at a faster pace.
Draining MAHB’s resources?
However, another group of analysts are concerned about the additional cost from this venture and worry that it could erode its additional revenue, and worse still, drain MAHB’s cashflow. This will have a negative implication on MAHB’s share price as it is perceived as a dividend stock.
Based on an interest cost of 4.5%, the cost of KLIA2 of RM3.6 billion is expected to incur interest payments of RM162 million per year. Coupled with a minimum effective depreciation rate of 3.3% for the new airport, there is potential for another RM120 million in additional cost for depreciation amounting to RM282 million in total. This amount represents 10.2% of MAHB’s FY11 revenue. Note that this is purely for illustration purposes as MAHB has done a 10% (or 110 million) new share placement to raise approximately RM600 million to reduce its borrowing earlier this year.
However, some analysts think that the additional 15 million capacity in passengers should easily generate an additional RM337 million revenue, assuming the revenue per pax at LCCT remains at RM22.47. However, note that this assumption is premised on the fact that KLIA2 will be able to reach its full capacity (it was reported that KLIA2 will max out its capacity by 2016.) Still, this means that there is a risk that MAHB may not see any earnings accretions until 2015/16.
By James S & Gurmeet Kaur
16 July 2012