This article first appeared in The Edge Malaysia Weekly on June 26, 2023 - July 2, 2023

SARAWAK is reportedly approaching a deal to take over MASwings Sdn Bhd, a move that airline industry experts say should free its parent Malaysia Aviation Group Bhd (MAG) from having to provide public-service rural air services (RAS) in Sabah and Sarawak and allow it to fully focus on its commercial outfits like national airline Malaysia Airlines Bhd (MAB) and low-cost carrier FlyFirefly Sdn Bhd.

MASwings currently operates the RAS routes under a six-year public service obligation (PSO) agreement that was inked with the federal government in 2019 and expires at end-2024.

On June 15, Sarawak Premier Tan Sri Abang Johari Openg said the state government had agreed to a deal in principle to take over MASwings, subject to the state carrying out due diligence on the turboprop operator. The announcement was in line with the Sarawak government’s plan to set up its own boutique airline, which was approved in principle by Prime Minister Datuk Seri Anwar Ibrahim in April.

Abang Johari said the establishment of the airline could lead to less expensive fares, especially for flights between Peninsular Malaysia and Sabah and Sarawak. Hornbill Skyways Sdn Bhd is the only state-owned airline in Sarawak. It holds an air services permit that allows it to operate charter flights.

Economist and former Malaysian Aviation Commission (Mavcom) executive chairman Dr Nungsari Ahmad Radhi is of the view that the potential takeover of MASwings could help relieve MAG of the burden of running the RAS operations.

“MAG would be able to concentrate on MAB and Firefly. However, I think the financial burden on the federal government would be the same. I’m not sure what the terms of the takeover are [but] I assume it will include the subsidies,” he tells The Edge.

The operational costs for RAS incurred by MASwings are currently fully borne by the federal government in the form of subsidies and aircraft lease payments. It was previously reported that Putrajaya allocates a subsidy of RM209 million per year for RAS.

Nungsari points out that it will be difficult for MASwings to lower airfares between Peninsular Malaysia and Sabah and Sarawak if it operates on a strictly commercial basis.

“If you track the fares, the prices between Sabah and Sarawak and the peninsula are competitive. There’s enough competition among airlines serving these routes. As usual, the way tickets are priced, those buying closer to the date of travel will pay more than those who purchase the tickets early. Ticket prices for the same flight can vary widely. There’s a peak demand/load problem on certain days in the year,” he says.

Nungsari believes that the entry of a new airline will not do much in terms of increasing competition. “While it will add capacity and likely help ease prices a bit during peak demand, there are no guarantees. The issue really is, can such a new entrant survive? And for how long?

“A new airline cannot survive on MASwings’ routes. It has to develop more routes, which then requires more capacity [in terms of] aircraft and crew. It will have no problem getting air traffic rights to serve domestic routes, but it will need many more international routes — to Indonesia, in particular, and beyond — to make sense.

“The economics look tough. Of course, there are operational challenges too. Most of all, there’s the financial challenge.”

A senior airline executive believes that the current PSO will be protected, regardless of which party is undertaking it. According to him, MASwings is operating on a cost-recovery model under the PSO agreement whereby the government’s subsidy helps the airline bear the cost of operating uneconomical RAS routes. In return, MASwings must meet the set targets such as on-time performance, number of flight cancellations and customer satisfaction.

“I am sure that the federal and Sarawak governments would want to ensure that the PSO remains — that is the commitment to the people of Sabah and Sarawak. The question right now is, how will it be done?” he asks.

“We haven’t started the negotiations with the federal government yet,” a source close to the Sarawak government tells The Edge.

The senior airline executive says MASwings’ profit and revenue contributions to MAG are modest and the potential takeover by Sarawak would not have a substantial impact on the group.

“In general, without the cost-recovery mechanism from the government, it would be tough [to operate the RAS routes]. Also, if there are routes found to be commercially viable, they will be removed from the PSO agreement,” he adds.

In 2016, the federal government decided to remove six routes from the RAS programme — namely the urban routes of Kuching-Sibu, Kuching-Bintulu, Kuching-Miri, Kota Kinabalu-Miri, Kota Kinabalu-Tawau and Kota Kinabalu-Sandakan — after taking into consideration the commercial potential of these routes.

Later, in November 2018, the cabinet approved the allocation of the Kota Kinabalu-Sibu and Kota Kinabalu-Bintulu routes for operation by Capital A Bhd from January 2019.

According to Mavcom’s website, there are now 41 RAS routes, with 13 routes being serviced by ATR 72-500 aircraft and 28 routes being serviced by the Twin Otter Viking DHC6-400 aircraft.

Companies Commission of Malaysia (SSM) data shows that MASwings has been profitable since the financial year ended Dec 31, 2018 (FY2018).

In FY2021, it saw a net profit of RM13.76 million, up 37% from RM10.05 million in the previous year. However, it recorded a 20% decline in revenue to RM57.63 million from RM71.82 million over the same period. MASwings has yet to file its financial statements for FY2022 with SSM.

Shukor Yusof, founder and analyst of aviation consultancy Endau Analytics, says a potential takeover of MASwings by Sarawak raises a number of questions, given that its purpose is to support air transport in Sabah and Sarawak.

“If Sarawak wants to take over MASwings, how is it going to facilitate that? While it makes sense if the state is truly interested in having a dedicated East Malaysian airline, it cannot ignore Sabah. MASwings currently services both states, so it is entirely between Sabah and Sarawak to figure out how they want to operate the airline if it becomes a reality. But I doubt that will happen because it is difficult to run an airline in the first place,” he tells The Edge.

“Even though they are part of Malaysia and are both located in Borneo, Sabah and Sarawak are two separate states with different aspirations and ideas on how to move their economies forward. Sabah’s revenue generator is very much tourism, whereas Sarawak’s are oil and gas and timber. The terrain in Sarawak is also different from that in Sabah. It would be a complex undertaking to take over [MASwings].

“And even if Sarawak is able and can afford to take over MASwings, we must ask the question: What happens to Sabah, which is not as well endowed as Sarawak in terms of funding. It doesn’t make sense for MASwings to be taken over by Sarawak and yet Sabah is left [to fend for itself]. It would also be unfair. If you want to help, you help both. If you want to benefit, you benefit both.”

Shukor concurs that the removal of MASwings from MAG’s balance sheet would be positive for the latter as it would allow MAG to focus on running a full-fledged commercial airline without being encumbered by a national service entity, with its own planes and separate team.

“The money [from MASwings] still comes from the federal government. It is not generating its own profits,” he adds.

Ultimately, Shukor believes that MASwings is better off being part of the larger MAG. “That’s because if you are a private airline, you have to renegotiate bilateral air service agreements, which are done on a government-to-government basis.”

He says a cost-benefit analysis is needed to compare the costs and benefits of a takeover of MASwings by Sarawak. “You need to balance between what Sarawak wants and whether it is practical to have it or not when you look at the population. Does Sarawak really need an airline or could it just buy a stake in MAB from Khazanah Nasional Bhd, for example? There are many ways to work around it instead of just taking over MASwings.” 

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