This article first appeared in The Edge Malaysia Weekly on December 23, 2024 - December 29, 2024

INTERNATIONAL travellers passing through the Kuala Lumpur International Airport (KLIA) — who were previously greeted by hoardings as retail spaces underwent renovation after the Covid-19 pandemic — will finally be able to dine at an expanded range of food and beverage (F&B) outlets and shop for products, including new brands previously not seen at the airport, come mid-2025.

After missing the deadline of 2021, Malaysia Airports Holdings Bhd (MAHB) (KL:AIRPORT) is set to wrap up its commercial reset initiative in the middle of next year. This initiative is part of a massive effort to revamp the retail offerings at KLIA and other major airports that MAHB manages in the country, to be more than just transport hubs and comparable to its regional peers, particularly Singapore’s Changi Airport.

According to Hani Ezra Hussin, senior general manager of commercial services at MAHB, about 85% of the total outlets at KLIA have commenced operations. The figure is set to reach 88% by year end as there are still two stores undergoing renovation and will open next year. “By mid-2025, almost all the outlets will be open,” she tells The Edge in an interview.

She notes that it is the norm, even for shopping malls, that occupancy rates do not hit 100%. “Typically, malls’ occupancy rates average around 80% to 85%. There must always be some space in case we need to do a reshuffling,” she says.

The 49-year-old, who joined MAHB in 2016 with the mandate to raise its airports’ retail profile, previously served as head of marketing, customer service and retail relations at high-end mall Suria KLCC.

Hani points out that it usually takes about six months for a new store to open at an airport, as the renovation takes longer to complete than one at a mall because of the shorter allowable hours to conduct construction.

MAHB’s commercial reset started in 2018, but has been hit by setbacks, mainly due to the pandemic.

“Although we had set out a three-year time frame for the reset initiative, it took longer than expected, owing to the pandemic, which saw airports closing their operations for two years. We had to restart the whole exercise in 2022 [following the reopening of the country’s borders],” she recalls.

Nevertheless, the airport operator continued to move forward with its call for tenders as it overhauled the retail and F&B spaces at the airports during the pandemic.

“[Since the start of the reset in 2018] we have launched more than 10 rounds of open tenders to make sure that when the borders fully open, the shops can begin renovations. Most of the tendering process [for a total of 808 outlets under the reset] has been carried out,” says Hani.

Langkawi International Airport was the first airport to undergo the commercial reset in 2018, timed to coincide with a major expansion to increase its annual passenger capacity from 1.5 million to 4 million.

“The reset in KLIA was only rolled out in mid-2018, starting with the departure hall that saw Din by Din Tai Fung and Costa Coffee open right before the pandemic hit. Because retail activity at the satellite building was the busiest, we decided to do the reset there later,” she says.

While the shop hoardings have been less noticeable in recent months, many travellers have expressed their disappointment at seeing hoardings in Terminal 1 (T1) and T2 of KLIA after the pandemic, questioning why the airport did not seize the opportunity to undertake renovations during the pandemic and to capitalise on the rebound in travel. The hoardings to facilitate construction works for the aerotrain replacement programme at KLIA T1 did not help matters.

Hani explains that many tenants were waiting for a recovery in passenger traffic before considering reopening their shops at the airports despite the easing of Covid-19 restrictions. 

She also points out that rents for tenants who signed up under the commercial reset strategy are pegged to passenger traffic. For example, retail tenants only need to pay 40% of their rent if passenger traffic achieved a recovery rate of 40% of pre-pandemic levels. When passenger traffic recovers to 50%, they will have to pay 70% of the rent.

Not only that, but apparently their contract also stipulates that if passenger numbers are still below 50% of pre-pandemic levels, retail tenants would not have to open their shops yet and if their shops stay shut, they would not have to pay rent.

Between January and November this year, 27.95 million passengers passed through KLIA T1, surpassing the pre-pandemic level of 26.3 million for the same period in 2019.

However, passenger traffic at KLIA T2 for the January to November 2024 period of 23.9 million was still 21% below the pre-pandemic level of 30.09 million passengers for the same period in 2019.

“The passenger numbers have to recover first to make sense for them to operate. It is a business. You operate to make a profit,” says Hani, noting that the cost of building out a retail space at the airport is not cheap.

“A perfume and cosmetics outlet could cost about RM10 million to build out. Who would want to invest if they are unsure whether passenger demand will recover or not?

“[Also] when KLIA was designed in 1998, it was never meant to focus on retail but more as a transport hub. So retail spaces at the airport were limited.”

Retailers are becoming more inclined towards retail areas that are open where walls and partitions are removed such as pop-up spaces. “But there are security considerations set by local authorities and the fire department that need to be followed. So, we had to get the buy-in from stakeholders for the new retail format, which led to delays in the opening of some retail spaces,” she says.

“We also realised that when it comes to Asian consumers, brands are important. In the past, we didn’t put any focus on getting the right brands to come. It was all about issuing a tender and we were bringing in generic brands that offer standardised products. However, consumers these days recognise brands and are willing to pay more for brands they like.”

To minimise disruptions to its operations, MAHB adopted a phased approach to its reset initiative. Work began in the departure hall before moving on to the contact pier and satellite building of KLIA T1. “Thus, the airport always seems to be a work-in-progress because it is a ‘live’ airport,” says Hani.

She reveals that more than 100 new brands have been added to the airports across Malaysia since the reset.

In 2021, Select Service Partner Malaysia Sdn Bhd (SSP Malaysia) — a joint venture between London-listed F&B concession operator SSP Group plc and India-based travel, food and retail company Travel Food Services Pvt Ltd (TFS) — won the bid to operate 29 F&B units over a five- to seven-year term at MAHB airports, including KLIA and Kuching International Airport. It also took over the operation of six lounges at KLIA T1 and T2 and the domestic lounge at Kuching International Airport as part of the deal.

However, critics have raised concerns about the risk of awarding a large portion of the retail space and airport lounges in KLIA T1 to a single player, as well as the lack of bumiputera participation in the reset.

Hani dismisses concerns about the award of the master concession contract to SSP Malaysia, noting that the master concession model is a common practice among global airports.

She asserts that the airport operator also imposed a condition on SSP Malaysia as the master concessionaire, which is to bring in top Malaysian brands to KLIA and Kuching International Airport. The company has brought in local favourites like Grandmama’s, Jibby Chow, Serai and Petit Cafe Chef Wan as well as international brands such as Hard Rock Café, Taco Bell and Jamie Oliver’s Pizzeria to date.

“During Covid-19, the challenge was that while we had quite a good number of long-term local partners, they were facing financial challenges and banks were reluctant to lend them money to renovate their outlets at the airports as flights were still grounded, people were unable to fly and there was uncertainty on when the borders will be reopened. So, we had to open up the lots to international players, which had money to invest,” says Hani.

She notes that MAHB had to spend RM500 million to help airport retailers weather the impact of the pandemic through rental rebates in 2020 and 2021, and contract extensions to help them settle their rents.

Most of the tenancy agreements were signed with airport retailers in 2021, which lasted up to three years, with the option for renewal for another two years. And if they were to renovate their outlets before passenger traffic recovers to 50% of 2019 levels, they were granted another two-year extension, bringing the total tenancy to seven years.

“SSP Malaysia was able to renovate its outlets because it had the money and it got the two-year extension,” she says.

For Hani, the master concession agreement makes sense for large concessions as these master concessionaires have the financial strength and ability to switch brands if one proved to be not working.

Apart from SSP Malaysia, Swiss travel retailer Avolta AG was awarded a master concession to offer F&B at KLIA while Valiram Group is the master concessionaire for retail, with outlets at KLIA as well as Penang and Langkawi airports.

According to Hani, the award decision comes down to “whoever gives the best offer, the best brand and the best bid”.

“One of the things that I had to do was to look at the whole re-evaluation metrics. In the past, everyone was just looking at who gave the best rent. It doesn’t work that way anymore. It is not about the rent, but if they do better sales, then we earn better royalty,” she says.

“The rental model for retail tenants is either fixed rent or royalties, that is, a percentage of their sales, whichever is higher. So, the more sales they do, the more MAHB earns. For example, a tenant pays me a fixed RM10,000 rent. But if their sales reach RM2 million and they are subject to paying out 10% of their sales in royalty payments, MAHB will get RM200,000. That’s why we are focused on getting the right brands to come, and that is not easy. It involves a lot of convincing and negotiations.

“For example, Din by Din Tai Fung was reluctant to come because it didn’t see operating a restaurant at the airport as a lucrative business. Today, its outlets at KLIA T1 and T2 are doing very well. It has been paying us royalties from day one.”

Hani notes that as part of MAHB’s retail and F&B tender process, a bid submission has to go through three evaluations — technical, commercial and financial — under the procurement department. She also points out that MAHB’s tender packages are divided into two groups: a package deal category and a standard category.

“The package deal allows potential retail partners to operate both at KLIA and other domestic airports. For example, we had a tender package deal to operate coffee outlets across 10 airports, and Berjaya Starbucks Coffee Company Sdn Bhd won,” she says.

“Because of that, a small airport like Alor Setar which never gets good sales performance finally got to increase its commercial revenue. This was part of the tender strategy that allows smaller airports to make money. The reset took a bit of time because we wanted to make sure that we also help the smaller airports to flourish.

“Everyone just wants to operate at KLIA T1 and T2. Nobody wants to go to Kuching and Kota Kinabalu airports. So, before we allow the international players to come to the bigger airports, they have to invest in other airports. For instance, as the master concessionaire, SSP Malaysia had to invest in Kuching airport. The airport was the first to be transformed to be an F&B hub, which eventually progressed so well because we managed to pull in the community to come to the airport. We had brands that were not available in downtown Kuching.”

In the financial year ended Dec 31, 2023 (FY2023), MAHB witnessed a notable 57% year-on-year increase in non-aeronautical revenue to RM1.89 billion. However, it accounted for only 39% of the group’s total revenue of RM4.91 billion. In FY2019, 53% came from aeronautical and 47% from non-aeronautical.

MAHB is aiming to increase the share of non-aeronautical revenue to 50% or more, with the rest being generated from aeronautical services.

“We haven’t gone a full year yet because some of the shops were only open for two to three months. This is also dependent on the recovery of our duty-free business, which previously accounted for 70% of our non-aeronautical revenue. Now, its contribution is only 54%,” says Hani.

The majority of MAHB’s airport business comes from sales of duty-free goods like perfume and cosmetics. While Chinese tourists have returned, their spending has reduced to half that in 2019 with their income squeezed by a weak Chinese economy.

While airlines, including Malaysia Airlines Bhd, Capital A Bhd (KL:CAPITALA) and Batik Air Malaysia, are counting on India for a significant number of travellers post-pandemic, Hani says spending by Indian travellers was insufficient to offset the decline in Chinese spending. Indian travellers spend about RM128 per person, while Chinese tourists spend RM211 per person. 

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