THE government is considering opening up the rural air services (RAS) in Sabah and Sarawak to other airlines in a bid to keep subsidy costs in check and improve efficiency, people familiar with the matter say.

It is understood that the proposal is in the early stages and no timetable or firm plan is in place.

The service, which ensures rural areas in Sabah and Sarawak are provided with regular scheduled flights, is currently solely operated by MASwings Sdn Bhd, a wholly-owned subsidiary of Malaysia Airlines Bhd, which, in turn, is fully owned by Khazanah Nasional Bhd. However, the 10-year RAS agreement with MASwings is due to expire in September next year.

According to the Transport Ministry’s website, the cost of the RAS operation by MASwings is fully borne by the government in the form of subsidies and aircraft rental payments.

It was reported that under the agreement, the government provides RM190 million in annual subsidies to MASwings, which operates scheduled passenger flights between 49 remote towns and villages in Sabah and Sarawak.

Last February, Transport Minister Datuk Seri Liow Tiong Lai announced that the government, in principle, had approved the extension of  MASwings’ RAS concession for another seven years. The government will continue to provide subsidies of about RM190 million per year. Liow was also quoted as saying that some RAS airfares will be increased next year as the government has withdrawn the subsidy for certain routes that are also served by other airlines, for example, Kota Kinabalu-Sibu.

According to sources, the Malaysian Aviation Commission (Mavcom) took over the administration and management of the RAS from the ministry in March and is reviewing options for the service.

“Mavcom is carrying out a study on how to structure the RAS. It wants to make the RAS more effective and efficient, and see whether the operation can use less than the allocated subsidy by the government while making sure that it will still facilitate air connectivity across rural areas in Sabah and Sarawak,” a source tells The Edge, adding that the study is still in its early stages.

The sources say the study will also look at other essential air service systems adopted by other countries such as the US Department of Transportation’s Essential Air Service (EAS) programme. This includes opening up the routes to more than one operator, they add.

When contacted by The Edge, Mavcom declines to comment on the matter.

Under the US’ EAS programme, it allows for a competitive bidding process among carriers to keep the subsidy costs in check and give communities and the US Department of Transportation opportunities to switch air carriers if appropriate. The department also subsidises the selected carriers and generally offers two to four-year contracts.

The RAS is reportedly not profitable and the government has continued to subsidise it as a social service programme, with the annual cost ballooning from RM60 million in 2006 to RM190 million currently.

To recap, the RAS was previously operated by FlyAsianXpress Sdn Bhd (FAX), which was owned by several directors of AirAsia Bhd, including Datuk Kamarudin Meranun and Tan Sri Tony Fernandes. It operated 22 routes and 104 flights daily in Sabah and Sarawak from Aug 1, 2006, but was shuttered on Sept 30, 2007, due to financial troubles, after repeated delays and cancellations. In November 2011, Deputy Transport Minister Jelaing Mersat told Parliament that the government had spent RM249.1 million in subsidy to FAX for 14 months to operate the RAS.

FAX has since been renamed AirAsia X Bhd and its focus now is on mid and long-haul flights.

MASwings was then appointed by the government to undertake the RAS in October 2007.

A search with the Companies Commission of Malaysia reveals that in the financial year ended Dec 31, 2014 (FY2014), MASwings’ net loss widened to RM24.87 million from RM15.77 million in FY2013. Revenue fell to RM304.25 million from RM306.66 million during the same period.

The Transport Ministry’s website also reveals that MASwings operates 49 RAS routes, 19 of which are serviced by 10 ATR 72-500s and the rest by Twin Otter Viking DHC6-400s. The planes operate from 10 airports and 14 airfields within Sabah and Sarawak.

The Sabah and Sarawak governments had expressed interest in the past to take over the operations of MASwings. Sarawak Tourism Minister Datuk Amar Abang Johari Tun Openg was reported last October as saying that negotiations with Khazanah and Malaysia Airlines’ board of management on taking over MASwings were ongoing, but proceeding slowly and cautiously after Malaysia Airlines was taken over by a new management.

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