This article first appeared in The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

The country’s civil aviation industry was set for a smooth take-off early this year, continuing on the path to recovery post-pandemic as most countries rolled back their travel restrictions, including China — one of the last to reopen its borders to tourists, in March.

Analysts were predicting that the worst was over for the sector following the turnaround in 2022, with 2023 expected to be a year of growth. Demand for travel had been strong last year, with 52.7 million travellers passing through the 39 airports that Malaysia Airports Holdings Bhd (MAHB) manages in the country, marking a significant 391% increase compared with the previous year.

Major aviation players in Malaysia also returned to profit, rebounding from their pandemic doldrums as global travel picked up, with the airlines looking to the return of regular flights to China as the next bright spot for them.

Medium-haul, low-cost airline AirAsia X Bhd (AAX) saw a turnaround in its financial performance for the 18-month period ended Dec 31, 2022, with net profit coming in at RM32.98 billion, after a write-back of RM33 billion of liabilities to profits following the completion of its debt restructuring in March 2022. It recently exited Practice Note 17 (PN17) status, and is on track for another profitable year after registering a net profit of RM339.1 million in the nine months ended Sept 30, 2023.

Malaysia Aviation Group Bhd (MAG), the parent company of Malaysia Airlines Bhd, recorded a net operating profit of RM556 million for full year 2022, from an operating loss of RM770 million in the previous year. This year, it is on track to achieve its first full-year net profit since the airline group was privatised in 2014. The turnaround comes two years after the completion of a restructuring exercise in February 2021 that saw it achieve a reduction in its liabilities of over RM15 billion.

Capital A Bhd, the largest low-cost carrier in Asia, is also expected to post its first full-year profit since the pandemic started. For the nine months ended Sept 30, 2023, it recorded a net profit of RM996.55 million compared with a net loss of RM2.74 billion a year earlier.

The budget carrier recently proposed the listing of a unit, which is the licensee of the AirAsia brand, via a special purpose acquisition company (SPAC), on Nasdaq in the US at a US$1 billion (RM4.77 billion) valuation. Capital A has entered into a letter of intent with Aetherium Acquisition Corp (GMFI) for the proposed business merger. In a Nov 2 report, Kenanga Research said it is positive on this corporate development by Capital A, which will form part of the proposed regularisation plan to lift the carrier out of the PN17 status. Both parties intend to complete the negotiation three months from the execution of the letter of intent.

As for MAHB, it showed a return to profitability after two straight years of losses due to Covid-19 in the financial year ended Dec 31, 2022 (FY2022). It remains on track to continue its positive trajectory for full year FY2023, after generating a net profit of RM255.5 million in the nine months of 2023, compared with a net loss of RM171.9 million a year earlier.

In a further sign of things to come, the airport operator finally obtained in-principle approval from the government in February on the material terms of its operating agreements (OAs) to operate and develop the 39 Malaysian airports until 2069. The new OAs have been in the works since 2018, thus the announcement fuelled hope for the unveiling of the funding mechanism of future airport developments, and how the new terms of the OAs would affect future passenger service charge (PSC) and user fee calculations.

The government also approved MAHB’s Subang Airport Regeneration Plan, affirming the airport operator’s position to lead the redevelopment of the Sultan Abdul Aziz Shah Airport in Subang, Selangor. The plan, however, was revised to include the return of scheduled commercial passenger flights using narrow-body jets.

SKS Airways Sdn Bhd, a new airline that took off in January 2022, is expected to be the first jet operator operating out of the airport when it takes delivery of the first of 10 Embraer E195-E2 jets by the second quarter of 2024. Since 1998, Subang airport has been limited to handling only propeller-driven aircraft such as turboprops, business jets, helicopters, and light and military aircraft.

Things were going well, but then went off the rails. In March, a video of 114 passengers who were stranded and forced to walk along the platform between train tracks in the rain, after a technical problem halted the 25-year-old aerotrain service at Terminal 1 of the Kuala Lumpur International Airport (KLIA), went viral. Critics slammed MAHB for the constant breakdowns of the aerotrain service as international travel demand was picking up, describing them as a national embarrassment.

It has now been nine months since the suspension of the aerotrain services for upgrading works, but progress has been slow as MAHB has yet to decide on a new contractor to undertake the new automated people mover or aerotrain replacement programme after terminating the RM743 million contract awarded to Pestech International Bhd. The airport operator had cited non-performance compromising significant project milestones and risking delays to deliver the project within the required deadline as its reasons for the termination.

For MAG, it hit “turbulence” in the second half of 2023 after cutting ties with its long-time catering partner Brahim’s Food Services Sdn Bhd (BFS), facing a backlash from passengers for disruptions to their in-flight dining options and for flight delays during the transition. While MAG has had to endure a barrage of criticism following its decision to sever ties with BFS on Aug 31, where admittedly the national carrier should have been better prepared to deal with the transition to its new food and beverage providers, the move was viewed as a step in the right direction as the contract terms with BFS were deemed “lopsided”.

Indeed, MAG’s board of directors and management’s determination to end an agreement that was seen to be more favourable to BFS earned them praise, particularly for a national carrier that has been chastised in the past for its history of bailouts that amounted to RM28 billion at end-2020.

“If we don’t have the courage to take on legacy contracts, then why do you need me as a CEO?” its group managing director Datuk Captain Izham Ismail was quoted as saying.

And as MAG pledged to fully restore its in-flight meal services by mid-November, the matter was quickly overshadowed by the collapse of low-cost carrier MYAirline Sdn Bhd, which abruptly suspended all flights indefinitely on Oct 12 — 10 months after taking to the skies. It was reported that the suspension affected 125,000 passengers who had already purchased RM22 million worth of tickets until March 2024, as well as more than 900 staff who have been told to work from home. Its interim accountable executive Datuk Seri Azharuddin Abdul Rahman said the cash-strapped airline was left in the lurch after a prospective investor withdrew “at the 11th hour”.

The collapse of MYAirline caught aviation regulators completely by surprise and left passengers, who had booked their flights with the airline, shocked and infuriated as the move came when the aviation market was in a strong upward cycle.

Pictures of MYAirline passengers stranded in airports flooded social media. Why regulators didn’t see it coming remains a hot topic until today. Technical regulator, the Civil Aviation Authority of Malaysia, in particular, received a lot of flak for granting a two-year extension of MYAirline’s air operator’s certificate, only to see the airline halt its operations three days later.

Following the collapse of MYAirline, the industry is once again confronted with the problem of overcapacity in the local airline industry. In fact, back in January 2022, when news broke of the Malaysian Aviation Commission (Mavcom) granting preliminary approvals for MYAirline and SKS Airways, MAG’s Izham was reported as saying, “My concern here is that ... can a country with a 32 million population take more airlines? [The new airlines] are flooding the market with unnecessary capacity.

“This is where regulators and policymakers [have] got to be really clear on what they want to do. Do they want to flood the market with capacity in a free-for-all situation or do they want to make aviation companies contribute to the country’s economy by being profitable and sustainable?” he had said.

The aviation industry was dealt another blow after a private jet crashed onto a highway in Shah Alam, Selangor in August, killing 10 people including Pelangai assemblyman Datuk Seri Johari Harun. All eight on board, as well as another two motorists on the ground, died after the aircraft plummeted to the ground and exploded on impact.

Still, amid the turmoil, the industry registered a win when the government rejected a bid to build an international airport on Tioman Island, Pahang, saying the proposal would cause damage to the environment. Tioman is currently served by a short take-off and landing (STOL) port.

The main concern over the project was the potential destruction of the coral reefs and loss of habitat to hundreds of species of marine life on the island as construction of the airport would see 76% or 142.7ha of the area being reclaimed from the sea, according to an environmental impact assessment of the project. Two of seven villages on Tioman Island would also be affected.

The project developer was Tioman Infra Sdn Bhd, a wholly-owned subsidiary of Tioman Hill Resort Sdn Bhd, which in turn is 50%-owned by Berjaya Corp Bhd. The other 50% is held by the Pahang royal family through Aimvesco Sdn Bhd and the estate of the late Sultan Ahmad Shah Sultan Abu Bakar.

Next year to mark end of dramatic y-o-y increases

Heading into 2024, analysts expect the pace of recovery to continue within the aviation sector with foreign tourist arrival figures beating pre-pandemic levels on the back of stronger government policy support, the ramping-up of international air travel capacity and firm demand from niche subsectors, particularly medical tourism.

In a Dec 14 report, AmInvestment Bank believes that a full recovery to pre-pandemic levels is due in 2024, consistent with the International Air Transport Association’s (IATA) global forecasts, as current passenger traffic has only come to 78% of 9M2019 levels.

IATA sees global airline industry net profit reaching US$25.7 billion in 2024 (2.7% net profit margin) — a slight improvement over 2023’s expected net profit of US$23.3 billion (2.6% net profit margin). Some 4.7 billion people are expected to travel in 2024, a historic high that exceeds the pre-pandemic level of 4.5 billion recorded in 2019.

However, IATA says 2024 is also expected to mark the end of the dramatic year-on-year increases that have been characteristic of the recovery in 2021 to 2023.

That imminent explosion of demand from Chinese tourists that analysts and the airlines predicted this year? It never materialised. Instead, while some of Asia-Pacific’s main domestic markets such as China, Australia and India recovered quickly from the pandemic, international travel to/from the region was subdued as China only eliminated the last of its international travel restrictions in mid-2023.

“China’s international travel remains 40% below pre-pandemic levels. The region [Asia-Pacific] is expected to post a small loss in 2023, turning to a profit in 2024,” says IATA.

Factors to watch in the new year

In the coming year, the industry faces a number of headwinds including geopolitical tensions, such as the military conflicts in Israel and Ukraine, and a fresh threat from Covid-19 variants, which could affect passenger demand for air travel, as well as create operational constraints.

The cost of fuel remains the single largest concern, which could impact airfares and profitability as it represents about 40% of airlines’ operating costs. The good news is from a 3Q2023 high of nearly US$130 per barrel, jet fuel prices have eased to US$102 per barrel, says Maybank Investment Bank Research in a Nov 22 report.

The aerotrain issue will continue to plague the aviation sector into 2024. Transport Minister Anthony Loke had reportedly instructed MAHB to ensure that the first aerotrain set must be operational by July.

The market is also awaiting the new OAs between MAHB and the government, as well as Mavcom’s third and final consultation paper, which will unveil the new aeronautical charges such as the PSCs, and aircraft parking and landing charges. Recently, The Edge, citing sources, reported that domestic PSCs are expected to remain unchanged while international PSCs will likely increase.

Meanwhile, the clock is ticking on a more viable and holistic regularisation plan to lift Capital A out of its PN17 status. The market was awaiting details of the regularisation plan to be announced by end-December 2023, which include the proposed merger of Capital A International (CAPI) and GMFI, which would then lead to CAPI’s debut as a new publicly listed company on Nasdaq. Last Friday, however, Capital A sought another extension of time from Bursa Securities, until June 30, 2024, to submit its regularisation plan. 

Capital A’s long-awaited plan to divest its aviation business to AAX, in exchange for shares that will subsequently be distributed back to its shareholders, will continue to draw interest.

All eyes are also on whether MYAirline, backed by businessman Datuk Allan Goh Hwan Hua, will get to fly again, and whether its staff will be paid their outstanding dues. MYAirline’s Azharuddin reportedly said that Goh is willing to relinquish his entire stake in the carrier. The airline has so far failed to attract a white knight since it cancelled all scheduled flights in October.

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