This article first appeared in The Edge Malaysia Weekly on June 3, 2024 - June 9, 2024

PLANS to reform the country’s largest airport operator Malaysia Airports Holdings Bhd (MAHB) (KL:AIRPORT) to regain its altitude have been welcomed by those who watch the industry. But they see challenges ahead for Gateway Development Alliance Sdn Bhd (GDA), the consortium led by Khazanah Nasional Bhd and the Employees Provident Fund (EPF) to privatise MAHB, in putting the airport operator back on course to compete with international rivals.

The objectives of their RM10.79 billion proposal to privatise MAHB — to enhance air connectivity, improve service delivery and to take the airport operator to the next level — are definitely good, say industry experts, as the country’s airport infrastructure has long suffered underinvestment. Its primary gateway, the Kuala Lumpur International Airport (KLIA), has also lacked long-haul connectivity for years.

The proposal came amid a series of embarrassing incidents involving MAHB, including a four-day technical outage at KLIA that left thousands of passengers stranded and the delayed replacement of its aerotrain system.

Industry experts recognise the need for the government to attempt something new, given MAHB’s poor track record as an airport operator of late — whether it is a breakup of its monopoly on the aviation industry or bringing in new shareholders, and therefore ideas and expertise, into the monopoly.

However, its choice of bringing in new shareholders, who are expected to be able to assist in operating airports, is seen as an acknowledgement that neither MAHB nor Khazanah and EPF are adequately equipped to bring Malaysia’s airports back to the level seen when KLIA was ranked among the top 10 airports in the world. “This is a damning verdict reached by Khazanah and EPF,” an aviation expert notes.

Following MAHB’s announcement on May 15 of the RM10.79 billion voluntary conditional takeover bid by GDA for the remaining shares in MAHB they do not currently own at RM11 per share, Khazanah managing director Datuk Amirul Feisal Wan Zahir and EPF CEO Ahmad Zulqarnain Onn had shed more light on the deal in a Bernama interview last week.

Amirul Feisal said by taking MAHB private, Khazanah is streamlining the shareholding structure to make it more effective for the four consortium partners — Khazanah, EPF, Global Infrastructure Partners (GIP) and Abu Dhabi Investment Authority (ADIA) — to align their strategy and work closely with the government, which continues to hold the golden share.

He also said Khazanah and EPF had undergone a thorough review of potential technical partners, including top global airport operators, before choosing GIP as a partner.

That same report quoted Ahmad Zulqarnain as saying Khazanah and EPF would boost their collective shares in MAHB from around 41% to 70% post-privatisation. “International investors like ADIA and GIP are stepping in to replace short-term investors with long-term capital investors effectively, considering that foreign shareholding is already at 27%,” he said.

“Privatisation is not really the main issue here. It has been talked about for many years now. There are merits to it. Transport Minister Anthony Loke had mentioned that strategic decisions can be made faster as a private entity. In the recent past, MAHB’s board had failed numerous times in addressing pressing matters.

“Glaring examples are network switches that caused temporary closure of KLIA in 2019 and the delayed replacement of the KLIA aerotrain system. MAHB knew it had to replace the aerotrains in 2016, but only decided to replace them in late 2021. It is rather perplexing how dire dilapidated critical assets were not upgraded or replaced on time,” says a source close to the airport group’s operations.

Khazanah and EPF, in explaining the deal, said GIP brings to the consortium a demonstrable track record of leading airport transformations, as it has done at its other airport investments such as Sydney Airport, Gatwick Airport and Edinburgh Airport.

But airports under GIP’s management are also not exactly highly ranked internationally based on Skytrax’s 2024 airport ratings — London Gatwick (No 48), Sydney Airport (No 55) and London City Airport (No 82), the aviation expert notes.

“And from experience, Gatwick, Edinburgh and City airports are distinctly uncomfortable airports, leaving the impression the airport operators prefer to cram as many passengers as possible into an airport terminal, which saves on capital expenditure but certainly at the expense of customer experience.

“There is a balance that needs to be achieved, but are the balances struck by those airports, which lean much more towards cost savings than enhancing customer experience, really what we are aiming for in Malaysia? There seems to be a disconnect between Khazanah and EPF’s claims of looking to enhance customer experience while choosing GIP as a lead partner,” he says.

An industry expert points out that while GIP has operated standalone airports, it has never operated a network of airports such as the one in Malaysia. It also does not seem to have experience operating in a non-Western environment.

“Here, MAHB manages 39 airports, comprising large, complex infrastructure like KLIA Terminal 1 and Terminal 2, medium-sized infrastructure such as in Kota Kinabalu and Penang, smaller airports like those in Ipoh and Kuantan, and rural short take-off and landing air strips such as those in inner Sabah and Sarawak. These airports need to coexist as a system,” he says.

Another potential challenge GIP will face is coordination with various agencies and local airport stakeholders — such as immigration, customs, Ministry of Transport, the Malaysian Aviation Commission (Mavcom) and the Civil Aviation Authority of Malaysia — to improve airport operations and customer experience.

These agencies are not the easiest to work with, notes industry experts, adding that even MAHB, with its years of working with these stakeholders, has clearly struggled.

“It will be interesting to see how GIP handles them, or if the government is going to bend backwards for it when in the past they have not done so for MAHB,” one says. Still, as part of a consortium, Khazanah and EPF are likely to ensure GIP’s input will be considered as well.

More cautious commentators suggest that it would have made more sense for MAHB’s major shareholders to tap another airport operator to help MAHB improve the 39 airports the latter currently manages in the country. MAHB also owns and operates Istanbul Sabiha Gökçen International Airport — the second-largest airport in Türkiye.

“It is good to get international flavour and expertise. Question here is whether it is a right fit. Private equity or investment firms have a main objective of delivering returns on investments. Airport operators have actual operating experience and economies of scale in procurement advantages. If an airport operator fails, it has its credibility and financials at stake. Even GIP roped in an airport operator, Vinci Airports, to run London Gatwick Airport.

“[In terms of] MAHB’s expansion capacity, the new operating agreement (OA) [between MAHB and the government] provides for this. MAHB on its own can already undertake expansion and upgrading and is able to recoup its investment under the new OA regime. Thus, questions remain as to what value GIP and ADIA can bring to the table,” the industry expert says.

An alternative step to meeting the objectives that Khazanah and EPF laid out would be to shake  up MAHB’s board of directors and management team, or hire external consultants to assist them or provide knowledge transfer, the aviation expert suggests.

To aviation industry analyst Shukor Yusof of Endau Analytics, any meaningful reform to the aviation sector will require involvement of national carrier Malaysia Airlines Bhd.

“If we look at world-class airports in Asia such as Changi Airport and Incheon International Airport, Singapore Airlines (SIA) and Korean Air participate closely in the developments undertaken by the respective airport managements,” he tells The Edge.

He points out that both MAHB and Malaysia Aviation Group Bhd (MAG), the parent company of Malaysia Airlines, also have a common shareholder in Khazanah.

The industry expert concurs, noting that increasing air connectivity involves multiple factors, among others, international business activities, trade activities, open skies policy, tourist attractions and international events.

According to him, most airports around the world recognise that a strong national carrier plays an important role in making airports vibrant and successful. “A holistic strategy has to be adopted to enhance connectivity. Within Khazanah’s purview, it should focus on bringing Malaysia Airlines up to par with the likes of Emirates and SIA and contribute towards increasing connectivity,” he says.

“Many airlines have requested Malaysia for open skies policies. Many countries have adopted this given they have robust home carriers. Malaysia has not adopted this. The rationale has always been to protect Malaysia Airlines. There is nothing wrong with protecting a home carrier, but we must first ensure that the home carrier is managed well and has good management to scale it up to the level that it can stand on its own feet, not only from registering profit, but to build a fleet significant enough to compete internationally,” the industry expert adds.

He notes that Khazanah had injected billions of ringgit into Malaysia Airlines for recapitalisation without a transparent mechanism to show return on investment metrics.

At this point, GDA’s plans for MAHB did not mention anything about MAG, but it cannot be ruled out yet.

Last Thursday, MAHB’s closing price of RM9.93 apiece was at a 10% discount to the RM11 offer price to privatise and delist MAHB. According to some analysts, the widening price gap post the announcement could possibly reflect the risk that the proposed privatisation may not go through. 

Bloomberg data shows that four of 17 analysts covering MAHB are urging minority shareholders to accept the offer of RM11 per share, which is above the stock’s all-time high. Four others are saying to buy the stock right now, while eight are calling it a “hold” and one is calling it a “sell”.

The median price target of RM10.35 is a 4% premium from Thursday’s closing price of RM9.93. The stock is up 33% since the start of the year, but down 5% from the last traded price of RM10.40 before the May 15 privatisation announcement.

In a May 21 report, Bloomberg quoted Northcape Capital Ltd, which owns a 1.7% stake in MAHB, as saying there is a risk the consortium will not get the 90% threshold needed to delist the airport group due to the low valuation offered.

According to industry experts, minority shareholders should note that the government has recently extended MAHB’s OA to 2069, that is, by an additional 35 years.

They say this renders the intrinsic valuation of MAHB to be far higher than it would be if its OA was to expire in 2034 originally. In other words, MAHB’s valuation should, in theory, be higher with the longer OA period.

“The fact that MAHB’s OA had increased by 35 years means their valuation should intrinsically be far higher than it is today. Minorities should be interested to know how Khazanah and EPF’s offer price compares to that higher valuation,” the aviation expert says, adding that the proposed privatisation of MAHB, which is expected to be completed during the fourth quarter of 2024, is still subject to approvals from Mavcom, the Turkish Competition Authority, the General Authority of Saudi Arabia and the Egyptian Competition Authority.

In a May 15 report, CGS International is of the view that GDA may be willing to pay higher as it could be taking a longer-term view of the potential of MAHB and Istanbul Sabiha Gokcen Airport, including improving long-haul traffic connectivity at the Malaysian and Turkish airports, upgrading operations, enhancing the passenger experience and growing the airports’ capacities.

Khazanah and EPF are not commenting further. “We are unable to comment further beyond previous statements made on the matter,” they say in an email reply to questions from The Edge.

While shareholders ponder whether to accept the takeover offer, other airports in the region are stepping up.

Dubai has started work on a US$35 billion (RM165 billion) airport terminal that is set to have the world’s largest capacity upon completion, while Changi is planning to create a fifth passenger terminal. Thailand too will add a new passenger terminal at Suvarnabhumi Airport. And just last week, India announced that the new terminal of Tiruchi International Airport is slated to open by mid-June. 

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