Saturday 13 Apr 2024
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This article first appeared in The Edge Malaysia Weekly on December 4, 2023 - December 10, 2023

THE Malaysian Aviation Commission (Mavcom) was aware that MYAirline Sdn Bhd was talking to a potential investor and that it had some overdue salaries to pay, but the aviation industry regulator was completely caught off-guard when news of the budget carrier’s sudden suspension was announced.

“We were shocked,” Mavcom executive chairman Datuk Seri Saripuddin Kasim tells The Edge in an interview. “We had been in touch with MYAirline all the time, and we didn’t see it coming.”

The low-cost carrier announced its closure on the morning of Oct 12 as it cancelled all its flights and urged passengers not to head to the airport and to seek alternative travel arrangements. Competitors, including AirAsia, Batik Air and Malaysia Airlines, stepped in to offer discounted fares to affected MYAirline passengers.

In the aftermath of MYAirline’s abrupt suspension of service, Mavcom — which oversees the commercial and economic matters relating to the civil aviation industry — faced a backlash. Questions were raised regarding its failure to foresee the financial collapse of MYAirline less than 11 months after launching its first flight. There was also sharp criticism of Mavcom’s technical counterpart, the Civil Aviation Authority of Malaysia (CAAM), over its decision to extend MYAirline’s air operator’s certificate (AOC) for two years, only to see the airline halt its operations three days later.

Critics questioned why Mavcom granted MYAirline an air service licence (ASL) to operate in November 2022, when its co-founder and major shareholder Datuk Allan Goh Hwan Hua was linked to companies mired in controversy, including allegations of illegal deposit-taking and money laundering.

Records as at Aug 30, 2023, from the Companies Commission of Malaysia (SSM) show that international trade consultant Zillion Wealth Bhd and money lending and financing company Trillion Cove Holdings Bhd have 99.25% equity interest and a 0.625% stake respectively in MYAirline. Both Zillion Wealth and Trillion Cove named Goh as a director. Meanwhile, former MYAirline CEO Rayner Teo Kheng Hock holds 0.125% stake in the airline.

Goh is linked to payment gateway company i-Serve Online Mall Sdn Bhd, one of seven companies that were compounded a total of RM50 million by Bank Negara Malaysia in September for accepting deposits without a licence. SSM data shows that Goh held a 31.75% stake in i-Serve as at Sept 13, 2023.

Saripuddin says there were no signs of financial and operational distress that could have led to a sudden suspension of MYAirline’s operations. “Based on our licensing requirements for airlines, any material change must obtain our approval. But at the time, MYAirline had not reached that level yet. MYAirline has a share capital worth RM80 million, including RM48 million preference shares, and had received a cash injection of about RM30 million. At the same time, it was already in negotiations with potential new investors [to help shore up its balance sheet].

“And under our current framework, there is a criterion to determine the fit and proper status of the shareholders, management and board of directors. That means a person has to make a declaration that there is no civil or criminal case against him or her, and [has been] cleared by CTOS.

“Based on our SOP (standard operating procedure), a person being investigated will still comply with the ‘fit and proper person’ criterion until the person is charged and convicted. Then, such a person would have failed to satisfy the criterion. In Goh’s case, he has direct interest in i-Serve and indirect interest in MYAirline. [At the time of filing an application for MYAirline,] we knew he was being investigated by Bank Negara, but [was] not charged.

“So, based on our current ‘fit and proper person’ criterion, a person is disqualified only if charged and convicted. We were aware of his case and we were in communication with Bank Negara, but there was no compound issued against i-Serve at the time. At the same time, Goh had filed for judicial review proceedings against Bank Negara [to challenge the central bank’s orders to freeze several of i-Serve’s accounts and to challenge seizure orders issued by the central bank]. This means we had to wait for the court’s decision.”

According to Saripuddin, the commission was also convinced that MYAirline’s budget carrier business model was “workable and viable”.

“That’s why we had granted a conditional approval for its ASL first. After obtaining the AOC from CAAM, the airline came back to us and, before we awarded the full ASL to MYAirline [which allows it to sell air tickets and undertake commercial air transport flights], we found there was no material change to its business model as submitted a year ago. It also had competent people in the management, most of whom were from AirAsia. We found everything in order and decided to approve its licence [in November 2022],” he says.

When Bank Negara’s imposition of a RM50 million compound on i-Serve Group was announced in September, Saripuddin says Mavcom was already in the process of evaluating MYAirline’s application for ASL renewal. “Its ASL was expiring on Nov 14 and it was supposed to submit its application for the renewal of its licence at least 90 days before the date of expiry, that is, in August or September. [By then,] we were aware of some of its problems. We were in the process of assessing it, including the ‘fit and proper person’ criterion. And, yes, if the person did not comply with the criterion, they would definitely have had to go.”

Saripuddin says the commission did not notice a red flag, however, as it had yet to conclude the evaluation process of MYAirline’s application.

“Because of the incomplete application submitted by MYAirline, we were in the process of getting more information. But it isn’t uncommon for airlines to have this issue,” he says, adding that Mavcom had also launched a probe into MYAirline, following a complaint from a whistle-blower over delays by the airline in paying salaries.

“We had received the complaint towards the end of September. We went in and were proven correct. In the midst of our evaluation process, however, MYAirline had decided to suspend its operations. It was very unfortunate.”

On Oct 16, MYAirline’s interim accountable executive Datuk Seri Azharuddin Abdul Rahman was reported as saying that the cash-strapped airline had suspended its operations, as a prospective investor had withdrawn at the 11th hour. MYAirline’s board is still looking for investors to help revive the airline and Azharuddin had said Goh was willing to relinquish all his shareholding in the budget carrier.

On Nov 1, Mavcom suspended MYAirline’s ASL after it failed to comply with its licence conditions and the sudden suspension of operations. Its ASL has since expired on Nov 14.

“We had decided to suspend its ASL rather than revoke it after taking into consideration the plight of the employees and affected passengers with refunds of RM22 million, travel agent deposits of another RM23 million and outstanding salaries still pending. They still hold an AOC, which has been suspended for a period of 90 days pending investigations by CAAM.

“Under our current SOP, if an airline’s ASL is revoked, we will usually impose a one-year cooling-off period. That means it will not be able to make a further application for a new licence for at least a year. With suspension, if MYAirline is able to secure investors to resume operations, the application for an ASL will normally take a minimum of 90 days to process,” Saripuddin says, noting that Mavcom has not received any new application for an ASL since the collapse of MYAirline.

“Many parties had shown interest in applying for an ASL but after the MYAirline incident, [they went] all quiet. In a way, it is a blessing in disguise. Investors will have to think twice or thrice now [before starting an airline] because the airline industry is a capital-intensive business and the daily cash burn rate is high. It is a tough business. But there is still room for new airlines. We do not see overcapacity in the industry yet.

“As a regulator, we don’t just look at the domestic market. We also look at regional and global markets. There is a lot of capacity still required to be injected. That is why SKS Airways Sdn Bhd is starting its jet operations next year. There is still opportunity. We are in constant communication with SKS Airways. As far as we are concerned, there is no issue [with its financial viability]. Currently it operates only island-hopping flights.”

Saripuddin assumed the role of executive chairman of Mavcom in May 2020, replacing Dr Nungsari Ahmad Radhi, who had resigned. Saripuddin was previously a commissioner of Mavcom since its inception in March 2016, while serving in his capacity as the secretary-general of the Ministry of Transport until January 2019. Prior to his retirement from the civil service in November 2019, he served as the secretary-general of the Ministry of Federal Territories.

The following are excerpts from the interview:

 

The Edge: What is your view on Malaysia’s aviation industry post-pandemic?

Datuk Seri Saripuddin Kasim: The year 2023 has been a good one for airlines. The worst is over. The year 2021 was the worst. In 2022, we saw passenger traffic recover to about 50% of 2019 levels and as at October this year, we had reported total passenger traffic of 69.9 million — close to 65% of 2019 levels. We expect that by year’s end, passenger traffic will reach 84 million, compared with 109 million in 2019. In fact, based on our projections, we will be able to reach full recovery to 2019 levels by next year. Prime Minister Datuk Seri Anwar Ibrahim recently announced 30-day visa-free entry into Malaysia for visitors from China and India from Dec 1, which is expected to result in better growth of passenger numbers. Right now, traffic from China is still slow, about 50% of pre-pandemic levels. With the new initiative by the government, we believe the number of passengers from China will be back to normal by 2Q or 3Q next year. India is another good market for Malaysia.

The number of air traffic rights that airlines have applied for coincides with passenger traffic growth numbers. The capacity is almost back to pre-pandemic for all airlines. Although Malaysia’s aviation industry saw a setback stemming from the collapse of MYAirline, its share of the domestic market was small, at only 5%. There is no big impact on capacity because the other incumbent carriers were quick to inject seat capacity.

Can you tell us what happened in the case of MYAirline?

MYAirline’s announcement of the suspension of its operations on Oct 12 was unexpected. All licence holders are under close monitoring by Mavcom. We monitor their financial position on a quarterly basis and their performance, such as flight disruptions and number of consumer complaints, on a daily basis. With regard to MYAirline, there were no signs of financial and operational distress that could have led to a sudden suspension of operations. At the same time, we were also aware that they were in negotiation with a new investor. We knew they had some overdue statutory payments to employees, but we didn’t expect the suspension of service. That was shocking because we were in touch with MYAirline all the time.

Were you aware of rumours that MYAirline was not paying its staff and vendors before its suspension?

We had received the complaint from a whistle-blower towards the end of September. We went in and were proven correct. However, CAAM had carried out a safety audit on MYAirline from May 29 to June 1, 2023, for their AOC renewal and, at that time, there were no findings to indicate financial distress. In fact, from the operational side, MYAirline did not face any flight disruptions, its on-time performance was at 95% to 98% and it had no issue with refunds. As a regulator, there were no major red flags at the time. And through an official letter in October, we were informed by MYAirline that it was in negotiation with a potential investor before its suspension. In fact, based on the documents that we had seen, the new investor had injected some money into the airline. That’s why we were quite comfortable with [the airline’s financial health]. But the investor pulled out at the 11th hour.

Should anyone be held accountable for the abrupt suspension of MYAirline’s operations? (Note: On Oct 8, MYAirline announced that its CEO Rayner Teo Kheng Hock was stepping down from the role for health reasons, to be replaced by its chief operating officer Stuart Cross, as the interim CEO. Cross subsequently resigned within days of the airline’s suspension.)

Under our current Malaysian Aviation Commission Act 2015, there is no penalty. But if these [accountable managers and post holders] want to join another airline one day, we will look at their track record and reputation. We have a number of cases where the new applicants got stuck because their board of directors and management could not pass our ‘fit and proper person’ test. For example, the nominated accountable managers and post holders were from the now-defunct Rayani Air Sdn Bhd and Eaglexpress Air Charter Sdn Bhd, so we didn’t give them the licence. We have a number of applications that were not passed.

Based on our current SOP, the minimum working capital required for a new airline is between three and six months, depending on their business model and business plans. A full-fledged airline’s capital requirement is usually more than that of a budget carrier. For example, MYAirline had raised its share capital to RM32 million before the start of operations in December 2022 to RM80 million by August 2023. MYAirline was in negotiations with its potential investor to inject more capital into the airline before its suspension in October 2023. So, basically, it complied [with the capital requirement].

Do you see MYAirline being able to find a ‘white knight’ to shore up its capital and revive its operations?

We do not know, but it has approached us for advice. There is nothing official for now. But as long as it still has a valid AOC, it can come [to apply for ASL from Mavcom] anytime. If it loses its AOC, it will have to start [the process] all over again and it may take a longer time.

What measures has Mavcom taken to ensure an incident such as MYAirline’s abrupt suspension does not recur?

We believe the existing framework for processing ASL is already comprehensive and sufficient. At the same time, we have formed a task force to look into two issues: refund and the way forward. We leave it to the task force to address, discuss and come up with any proposal to strengthen the internal operations of Mavcom. They are expected to complete the proposal by early next year.

Previously, we used to award the ASL for up to two to three years based on the airline’s financial viability of its business and the feasibility of its future business plan. For example, Malaysia Airlines and AirAsia were given three years’ extension before the pandemic. For the past few years, however, for new players, we have awarded the ASL for one year first. And since AirAsia X Bhd and Capital A Bhd slipped into Practice Note 17 status, we had awarded them a one-year ASL renewal, as well as imposed certain conditions. To protect the interest of stakeholders and consumers, we cannot award ASL extensions for too many years unless the airlines are financially strong.

With the impending merger of Mavcom with CAAM, do you see challenges in running the commission?

We have started losing staff since the announcement of the merger was made [by the Ministry of Transport] in December 2019. Today, 50% of the staff remains with us. We have also been recruiting new talent from outside. In terms of quality, we don’t compromise. I am confident that our team has the competency. I am happy with the current team that we have. We employ 52 people. We have fewer than 10 people in the licensing division and they work hard. While we may face challenges, I don’t believe it is the number of staff that is important, rather the quality.

This is the government’s call. The role of Mavcom, such as consumer affairs, will remain even after the merger. I want all the current talents to be retained. To me, the merger can continue but we cannot sacrifice on efficiency and quality. The merged authority must be more efficient. It cannot remain status quo.

What are your plans for Mavcom in the coming year?

For next year, we aim to have the proposed amendments to the Malaysian Aviation Consumer Protection Code (MACPC 3.0) gazetted, to announce the new passenger service charge (PSC) for airports in the country and expand the Quality of Service (QoS) framework, which measures passenger and user experience for stakeholders, to five airports — Penang, Kuching, Tawau, Johor Bahru and Miri — in addition to the  international airports in Kuala Lumpur, Langkawi and Kota Kinabalu. We will also be busy with the renewal of licences. Currently, we have 11 ASL holders (including the one held by air cargo operator My Jet Xpress Airlines Sdn Bhd that has been suspended for six months from Nov 1, as the airline did not comply with the ASL conditions), 14 air service permit holders, 35 ground handling licence holders, four aerodrome operator licence holders, and conditional approval for one GHL and five ASPs. 

 

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