This article first appeared in The Edge Malaysia Weekly on December 18, 2023 - December 24, 2023

AFTER months of build-up, the government is expected to finally lift the lid on new airport tariffs by February 2024. According to sources, Asean and international travellers flying out of Malaysian airports are likely to pay more in airport charges.

The good news for travellers, though, is that the passenger service charge (PSC), or airport tax, for domestic passengers will be kept at current levels, sources say.

Airlines operating out of Terminal 2 (T2) of the Kuala Lumpur International Airport (KLIA) can also expect to breathe easy as plans to standardise the PSCs between T1 and T2 have been dropped under the revised proposal, sources say. 

This decision will be welcomed by Air­Asia, the biggest tenant of T2, which had fought hard against a uniform PSC for both the terminals.

What does it mean for passengers? No equalisation of PSCs means that international passengers flying out of KLIA T1 will continue to pay higher airport charges than those departing from KLIA T2. 

“Having said that, it doesn’t mean the PSC on international flights at T2 will not be increased, but the quantum of increase will be lower than that at T1,” a source tells The Edge.

Analysts have been waiting to see the Malaysian Aviation Commission’s (Mavcom) third and final consultation paper on aviation service charges, and the long-awaited operating agreement (OA) between Malaysia Airports Holdings Bhd (MAHB) and the government come through in the fourth quarter of 2023. The new OA will provide better clarity on the capital expenditure responsibility between the government and MAHB for airport development.

Sources say the new airport charges were delayed for release because Transport Minister Anthony Loke did not agree with some of the increases to the PSCs, as well as the proposal to equalise the PSCs between KLIA T1 and T2, which saw Mavcom going back to the drawing board.

The proposal to equalise the PSCs between KLIA T1 and T2 has caused considerable friction among airlines, MAHB and Mavcom for years. AirAsia and some critics believe the facilities at T2 are not on a par with those at T1. Hence, airport charges at T2 should be lower.

Mavcom — the economic regulator of the aviation industry, which sets aeronautical charges such as the PSCs and aircraft landing and parking fees — had in January 2018 equalised the PSCs across all Malaysian airports. Amid strong protests, in October 2019, Loke decided to roll back the earlier decision and reduced the PSC for international passengers from RM73 to RM50 at all Malaysian airports except KLIA T1.

The PSCs for other sectors at all Malaysia airports are the same — RM35 for passengers travelling to Asean countries and RM11 for domestic passengers.

In an interview, Mavcom executive chairman Datuk Seri Saripuddin Kasim tells The Edge that the new rates will be “fair to all parties” and that it was a “balancing act” to come up with them. He declines to reveal details of the new PSCs.

He says the third consultation paper, which provides further details on a regulatory framework to determine the aeronautical tariffs at Malaysian airports for the second regulatory period (RP2) from 2027 to 2029, is in the “final stages” of completion.

“We will issue our decision paper soon. We have tabled it to our competition and economics committee, but not to our commissioners yet. Once they endorse it, we target to gazette [the new airport tariffs] in February at the latest,” he says.

According to sources, the timing of the release of the new airport tariffs is likely to coincide with the signing of the long-awaited new OA between the government and MAHB. In February this year, MAHB obtained approval in principle from the government on the material terms of the OA 2023 to manage 39 airports in the country until 2069.

Sources say that, under the new OA, the benchmark PSC could be removed as part of plans to ease the government’s subsidy burden. This would see the possible elimination of the marginal cost of support charges (MARCS) PSC mechanism.

The current OA provides MAHB with a compensation mechanism via the MARCS PSC scheme, under which the government pays the airport operator any difference between the actual PSCs and the benchmark rates. Mavcom’s website shows that the present benchmark PSC is RM8 for domestic passengers and RM40 for international passengers at KLIA T2; at KLIA T1 and other airports, it is RM11 for domestic passengers and RM80 for international passengers.

“To cushion the effect of the removal of the benchmark PSC, the new PSC that MAHB is allowed to levy on international passengers will have to be able to cover the inflation expectations over the concession period,” says an industry source.

While the proposed increase in airport charges will make long-haul flights more expensive, industry sources argue that the rates are not going to determine whether travellers decide to fly. “It is important to note that Malaysia has some of the lowest aviation charges in the world,” the source says.

According to Mavcom’s first consultation paper, released in August 2022, KLIA T1’s international PSC of RM73 is lower than Singapore’s and most major airports outside Asean such as London, Dubai, Paris and Seoul.

In 2022, passenger traffic in Malaysia totalled 52.7 million, of which international traffic accounted for 16.5 million while domestic traffic was 36.2 million. KLIA T1 and KLIA T2 recorded 25.4 million passenger movements last year — international passengers totalled 14.3 million and domestic passengers stood at 11.1 million.

CGS-CIMB Research aviation analyst Raymond Yap notes that the impending signing of the new OA could excite the market, as investors have not yet factored in any potential improvement in the operating terms into MAHB’s valuation.

“The signing of the new OA could see better terms for MAHB in the areas of benchmark PSC increases, user fee rates, and/or codifying a rate of return on airport investments,” Yap says in a Nov 30 report.

He also anticipates that the new Mavcom tariff proposals may be effected next year, noting that higher aeronautical tariffs may benefit MAHB, with an uplift in aircraft landing and parking charges.

He says downside risks for MAHB include a potential delay in the commencement of the proposed aeronautical tariff increases, although he thinks it may still be implemented before mid-2024. “But even a one-year delay may require only a 2% cut in our core net profit estimate for the financial year ending Dec 31, 2024 (FY2024), which is not material, in our view.

“A slower-than-expected pickup in tourist arrivals from China, owing to its economic slowdown, is another downside risk. It remains to be seen whether the mutual visa-exemption programme between China and Malaysia will move the needle in a significant way.”

Malaysia is granting 30-day visa-free entry for visitors from China, India and several Middle East countries from Dec 1, 2023. China, in turn, announced that it would permit 15-day visa-free entry for visitors from Malaysia for a one-year trial period between Dec 1, 2023 and Nov 30, 2024.

In a Dec 5 report, TA Securities says expectations are running high on travel demand to and from China and Malaysia, thanks to the establishment of visa-free entry. “MAHB’s traffic data for December 2023 to 1Q2024 would serve as [an] important indicator of the return of Chinese visitors to Malaysia. In addition, we believe Malaysia’s tourism industry is hopeful for China’s President Xi Jinping’s visit, which may bring more excitement to Malaysia’s travel and hospitality industry. Note that the government has set the target of attracting five million Chinese tourists on a yearly basis after the visa-free regime. This is a tall order, in our opinion, considering the fact that only 3.1 million Chinese tourists visited Malaysia in 2019.”

RHB Research says its preference for MAHB is premised on the anticipated recovery of international tourism, driven by the gradual recovery of China’s economy and increasing airline capacity.

“The implementation of visa-free travel for China and India citizens should serve as a catalyst to boost international tourism, as the two countries posted the third- and sixth-largest numbers of tourist arrivals to Malaysia in 2019. We consider China as a key laggard at present, with Malaysia-China passenger movement reaching only 58% of the 2019 pre-pandemic level as at September 2023. This mirrors the recovery trend in China’s international traffic, which stands at 54% of September 2019’s level,” the local research firm says in a Nov 30 report.

According to the average of analysts’ estimates calculated by Bloomberg, MAHB is expected to report a net profit of RM417.9 million for FY2023 and RM740.5 million for FY2024. The group returned to the black last year, with a net profit of RM187.2 million compared with a net loss of RM766.4 million in the previous year.

Of the 18 analysts covering MAHB, 15 have a “buy” rating and three a “hold”, with an average target price of RM8.12, which indicates a potential upside of 11.5% from last Thursday’s closing price of RM7.28. Shares in MAHB have gained 11% so far this year. At the close of trading last Thursday, its stock was valued at RM12.2 billion. 

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