This article first appeared in The Edge Malaysia Weekly on November 25, 2024 - December 1, 2024

THE debate over whether Malaysia Airports Holdings Bhd (MAHB) (KL:AIRPORT) should be privatised is practically over. On Nov 15, the Malaysian Aviation Commission (Mavcom) gave the green light to the Khazanah Nasional Bhd-led consortium’s proposed RM10.3 billion takeover of MAHB, removing the regulatory hurdle for the deal to close.

The proposed privatisation will give Gateway Development Alliance Sdn Bhd (GDA) — a consortium made up of sovereign wealth fund Khazanah, the Employees Provident Fund (EPF) and New York private equity firm Global Infrastructure Management LLC (GIM), through special purpose vehicle GIP Aurea Pte Ltd — control over 39 airports in Malaysia and one in Türkiye, the most valuable of which is Kuala Lumpur International Airport (KLIA).

As GDA closes in on its takeover of MAHB and readies the ground for the airport operator’s privatisation, expectations are high that it will enhance passenger experience and improve connectivity of the airports in the country and the state of their infrastructure.

Khair Mirza, head of airport investor resource and industry research at Canadian transport infrastructure consultancy Modalis Infrastructure Partners Inc, says a top priority for the consortium to tackle is shareholder alignment, something that the publicly listed MAHB appears to be grappling with because the different stakeholders have competing objectives. This also includes the alignment of local ministries.

“Generally, differences of opinions are a norm in professional circles. The acceptance of differing opinions and to continue to work professionally despite any possible or past differences of opinion is common at internationally competitive, privately driven airports and non-airport businesses. If achieved at MAHB with its multiple, varied stakeholders, it would go a long way to fulfilling more of its intrinsic potential,” he tells The Edge.

Khair says strategically, the new consortium should also consider the multiple impacts of the government’s policy advocating for more operators of airports in Malaysia.

“Early clarity can help ensure optimum use of the consortium’s time and focus on either to improve its managed airports both short and long term, or the criteria and timeline of complying with such a change in the underlying policy.

“For instance, in the short term, while KLIA is expected to continue to strengthen and gain market share from rival airports — competing for comparable passenger, airline and retailer segments — it is also expected to see a shift of some passenger traffic to the Sultan Abdul Aziz Shah Airport in Subang, Selangor (Subang Airport). This is much in the way that London City Airport has flourished alongside London’s main international hub, Heathrow, or GIP’s own experience in maximising London Gatwick Airport’s theoretical capacity, given the main hub’s capacity constraint [as it is] restricted to operating a two-runway system. So, an early litmus test will be to watch how the consortium manages the evolution of Subang Airport’s business plan and development,” says Khair.

Operationally, he points to a number of critical projects that have been ongoing at KLIA for the better part of at least a decade. “The short-term resolution of KLIA’s automated people mover (APM) or aerotrain system will be watched closely by both the public and industry players with much interest. It has been a significant drag on the sustainable rating of KLIA’s user satisfaction score that is regularly measured by the industry’s global association, Airports Council International (ACI).”

Khair also points out that in the past, there had been resistance from certain airlines and retail partners to garnering sufficient shareholder support for financial assistance to enable MAHB’s airports to compete on a more even footing against its international peers.

“While there has been notable success on the retail front, KLIA Terminal 1 and Terminal 2 may require more investment rather than less before the airport can raise its efficiencies and user-friendliness on a footing closer to that demonstrated by government-funded [and subsidised] capital city airports in rival hubs,” he adds.

An industry observer says it is envisaged that the privatisation is undertaken to achieve one key objective, that is, utilising international best practices in building value into the airport assets to unlock their inherent potentials.

“This can arguably be undertaken better when the company is private, where decision-making can be done more effectively and faster. This would normally work in a true private setting where private capital is utilised. In this particular case, public funds are still being utilised where every decision can and may be scrutinised by the public and can perhaps cause certain frictions along the way. It is hoped that those steering this initiative are cognisant of this reality and are prepared to deal with this along the way,” he adds.

According to the industry observer, the privatisation process would normally involve coming up with at least a roadmap, if not a full-scale implementation plan.

He notes that each of the airports that the consortium manages has different dynamics. “A few are profitable, and the rest are not. It uses a cross-subsidisation mechanism. Without a proper strategy and clear roadmap that is transparent and makes sense to stakeholders, implementation may be at risk despite best intentions.”

The industry observer estimates that the upgrading of MAHB’s airport system could involve a sum of not less than RM15 billion over the next 10 years. 

He also points out that a comprehensive plan should be developed for MAHB to compete with other more developed regional airports.

“Infrastructure alone will not cut it. Passengers and airlines gravitate more towards economic and tourism destinations rather than just gleaming airport infrastructures. A holistic approach in working together with the government in economic activities and tourism has to be done in tandem. Policy and regulations also have to be studied and addressed. Is the government willing to have an open sky policy or give fifth freedom rights to international airlines?

“The absence of a strong national carrier should also be addressed quickly. It is not a stretch to say that all major and successful airports are serviced by strong national carriers. Malaysia Airlines Bhd’s journey to recovery has taken a long time. Not forgetting the airport ecosystem has to be streamlined with clear accountability. In an airport, many regulatory agencies are intertwined, such as immigration, police, customs and wildlife,” says the industry observer.

Shukor Yusof, founder and analyst at aviation advisory firm Endau Analytics, who believes the privatisation of MAHB is not a good idea, agrees that it is still unclear what the role Malaysia Airlines will play in the consortium’s overall plan.

He says: “Firstly, the takeover and privatisation exercise is a costly affair. Secondly, privatisation requires a lot of discipline, which is lacking in Malaysia. They could have learnt from Singapore’s Changi Airport and South Korea’s Incheon Airport, which are corporatised entities. GIP is there to make profits.

“My concern is also that the proposed privatisation so far doesn’t take into consideration Malaysia Airlines. Typically in any airport, they work with the country’s flag carrier. [But here,] there is no clear indication of what the role of Malaysia Airlines will be as a national airline.

“I do think that the privatisation is to the detriment of Malaysia Airlines. While there is a good chance that it can improve MAHB’s operations and balance sheet, those of Malaysia Airlines could worsen because it would be neglected if more new airlines were to operate in the country. And Malaysia Airlines is unlikely to grow and expand in the near term because it cannot receive new aircraft on schedule because of global supply chain issues,” says Shukor.

An industry expert says the formation of the new consortium and at the same time MAHB’s extended operating concession to 2069, from 2034 previously, will provide the airport operator with an opportunity to revisit its foundations for the long term.

“There are many areas that MAHB can look to improve upon such as the connectivity of its airports and the state of their infrastructure, but two areas MAHB will do well to give renewed attention to at this juncture are to enhance service culture and long-term talent development.

“For a start, a strong service culture should translate into higher standards of customer experience, especially those of passengers, over the long term. At the moment, many of our airports, including KLIA, appear to be treated as another piece of functional infrastructure instead of a venue that delivers high standards of service to users,” the industry expert explains.

He also points to MAHB’s current board members and senior management’s lack of experience in the services industry at the consumer level.

“Added to the fact that MAHB is a monopoly, it is of little surprise that passenger experience at Malaysia’s airports is hardly the best. Things are hardly much better at some of the airports under GIP’s management, particularly Gatwick, London City and Edinburgh, hence the choice of GIP as a partner is perplexing, even after placing the politics aside. So, one hopes this coming change in shareholding will anyhow bring forth a change in mindset among the Malaysians, moving the culture at our airports towards something that is more service-oriented.”

At the same time, the industry expert says MAHB should look to develop a much deeper talent pool of airport professionals to take the group forward. “The fact that MAHB has had five CEOs in the last 10 years, all of whom were sourced externally, says something about the government stakeholders who probably have a strong say on the choice for the post. But it is also revealing about the availability of talent internally, or lack thereof. This state of affairs is entirely unfitting of an operator of a major strategic national asset.”

He says MAHB has to put in place talent development structures that will ensure its senior management of the future can be drawn from within and who have inculcated traits and skill sets necessary to run Malaysia’s airports over the long term. This includes not just airport operations, but also facility management, infrastructure planning, financial management, aeropolitics and customer experience.

“It would be quite tragic if the formation of this new consortium is merely an exercise intended to create financial gains for the new incoming shareholders, with little long-term benefit accruing to MAHB, the local aviation industry and the Malaysian public,” adds the industry expert.

Modalis’ Khair believes that a board reshuffle for the sake of a reshuffle would only affect emotions and not result in outcomes. “In any event, new shareholders in any industry will ordinarily bring new representatives to the board and, in some instances, offer close support to the management too. From that perspective, perhaps one governance best practice that may endear itself to shareholders could be to proactively shy away from ‘professional’ board members whose majority of monthly income is contingent on their directorship,” he says.

An airport expert says the consortium must ensure that MAHB continues to post robust earnings even as a private company. The group returned to profit in its financial year ended Dec 31, 2022 (FY2022) after two straight years of losses due to the Covid-19 pandemic. It reported a 190% year-on-year surge in net profit to RM543.2 million in FY2023.

The airport expert also expects the consortium to continue to invest in infrastructure — for example, build terminals and upgrade airports, as well as improve the airports’ customer service level. “They must also bring in more airlines and install technology for efficient operations. With or without the consortium, MAHB will have to do these anyway. It is only how much better they (GDA) can do it.”

Endau’s Shukor expects one of the consortium’s immediate focuses to be on improving KLIA’s connectivity by attracting more foreign airlines to operate here. 

Nevertheless, he says much would depend on what the economic conditions are like next year. “My view is that for the next three to four years, there is going to be a lot of instability geopolitically and perhaps a downturn in the financial markets. If you look at the ringgit, the strengthening of the ringgit against the US dollar reversed slightly recently, which is good because it means Malaysia is a cheap place to visit. However, compared with Thailand and Indonesia, Malaysia still lags in terms of tourist arrivals.”

According to the experts, even with a well-conceived plan, implementation is key.

“Implementation lies with the board and management of MAHB. It is assumed that MAHB’s constitution will be amended when the company is privatised. The board will then invariably be reconstituted. Accountability, hopefully, can be achieved with this. Over the past years, it is observed that many shortcomings have occurred without accountability on the board. Two that come to mind are the network glitch at KLIA in 2019 and the recent KLIA aerotrain debacle,” says the industry observer.

Still, getting the privatisation over the finish line is contingent on the consortium owning not less than 90% of total MAHB shares. As at Nov 22 this year, Khazanah — through UEM Group Bhd (33.24%), EPF (7.86%) and Abu Dhabi Investment Authority (0.13%) — held a collective 41.22% stake in MAHB. The proposed privatisation is due to be completed by the end of this year.

GDA is offering MAHB shareholders RM11 per share to take the company private. MAHB shares closed at RM10.60 per share last Friday (Nov 22).

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