Cruising through changes in aviation

2018 is marked with changes across various sectors as the new government shifts into place and enforces new regulations and policies that are in line with its manifesto.

Malaysia’s aviation space has also sees some changes within the last few months as aviation players question the need for standardising the passenger services charge (PSC) rate, and other matters which has caused the changes in top management for certain organisations involved in the aviation industry.

On the other hand, local and international industry experts and analysts are still bullish about Malaysia’s tourism sector which they expect will continue to flourish, leading to an increase of inbound visitors that will benefit the aviation sector.

Air travels and passenger traffic are also expected to remain solid this year, driven by the opening of new destinations at more competitive prices as well as the usual seasonal factors such as school holidays and festivities.

“These are good times for the global air transport industry. Safety performance is solid. We have a clear strategy that is delivering results on environmental performance.

“More people than ever are traveling. The demand for air cargo is at its strongest level in over a decade. Employment is growing. More routes are being opened.

“Airlines are achieving sustainable levels of profitability,” said the International Air Transport Association (IATA) director general and chief executive officer Alexandre de Juniac.

However, he noted that it is still a tough business as challenges such as rising fuel cost, labour and infrastructure expenses still plague the industry worldwide.

Growing number of passengers

For Malaysia’s aviation industry, the Malaysian Aviation Commission (Mavcom) expected a strong industry performance to continue in 2018 as it believed passenger traffic could breach 100 million.

SOURCE: Tourism Malaysia

In 2017, it noted that Malaysia enjoyed a net increase of eight international destinations which it is connected to and a net increase of approximately 360,000 seats, thereby strengthening the country’s degree of international air connectivity.

“In 2018, the overall low growth in seats capacity for Malaysian carriers is expected to further improve load factors as traffic growth is expected to exceed the capacity expansion.

“Malaysian carriers will be deploying their capacities on routes to and from North Asia, India, and the Asean Member States. These regions are expected to report strong economic growth in 2018, which will in turn, boost demand for air travel,” it said.

Projected growth in tourism

On Malaysia’s tourist arrival and passenger traffic thus far, the research team at AmInvestment Bank Bhd’s (AmInvestment) noted that Tourism Malaysia has projected Malaysia’s tourist arrivals to surge by a whopping 28 per cent to 33.1 million in 2018 from 25.9 million in 2017, and will hit 36 million in 2020 in conjunction with the Visit Malaysia Year 2020 campaign.

While it viewed the projection as “a tad optimistic” given that the numbers had stagnated at about 26 million over the last three years, it pointed out that the tourist arrivals in coming years has been on the upward trend, as Malaysia is slated to host a series of high-profile international events including the Commonwealth Heads of Government Meeting (CHOGM), the APEC Summit and World Congress of Information Technology (WCIT).

Aside from that, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) highlighted that on the ground, inbound travel agents (ITA) are experiencing brisk business due to the ‘tax holiday’ from June 1 to August 31, 2018.

“As there is currently nil GST on accommodation, food and beverage, airfares, entrance fees and transportation, the ITAs that we spoke to gather that Malaysia is at its most cost competitive in years.

“While the Sales & Services Tax (SST) will be imposed on the tourism sector come September 1, 2018, ITAs are cajoling price-sensitive visitors to visit Malaysia before September 1, 2018 and thereby, creating a window of opportunity from June 1 to August 31, 2018,” it added.

After August 31, MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) believed that the re-introduction of SST would have a neutral impact to the sector.

It explained: “This stemmed from our understanding that the tax rate on services will remain unchanged at six per cent.”

It pointed out that domestic and international passengers however, are still required to pay the tax on their PSC at airports.

All in, it expected robust demand in the air travel industry leading up to Visit Malaysia 2020 year.

With that, BizHive Weekly explores what airlines are up to and how airports in Malaysia are fairing against this expected rise in demand, and issues that continue to trail the aviation industry here.

AirAsia: An eventful year ahead

2018 has been a year of change for AirAsia Bhd (AirAsia).

Aside from the change in its top management – with Riad Asmat as its new chief executive officer starting this year – AirAsia’s structure has also seen a slew of internal changes which subsequently led to the formation of AirAsia Group Bhd.

The move aims to simplify and streamline AirAsia’s operations across the Asean region into one group structure.

“We believe that this new group structure will improve efficiency and transparency, which in time to come, will help us achieve the fair valuation that reflects the true value of AirAsia,” AirAsia Group chief executive officer Tan Sri Tony Fernandes said.

The formation of AirAsia Group was approved in January and thereafter, AirAsia Group began trading in April this year.

This development has been viewed positively by analysts as Kenanga Investment Bank Bhd’s research arm (Kenanga Research) pointed out that with the formation of AirAsia Group, AirAsia plans to further consolidate their remaining associates namely Thai, India and Japan into their books (currently, it has consolidated Malaysia, Indonesia and Philippines).

“They have concluded the listing of their Indonesian associate on IDX and aims to have their Philippines associate listed by the second half of 2018 (2H18).

“We are generally positive on the listing of its associates as this allows their respective associates to tap into their local capital markets to expedite growth,” it added.

Aside from that, the research team noted that AirAsia’s capacity is growing as it plans to expand their aircraft fleet for AirAsia, to 225 planes by end-2018.

“We are positive on the planned capacity increase as we believe AirAsia will be able to maintain healthy load factors of more than 85 per cent while sustaining airfare prices stemming from strong travel demand, coupled with their extensive route options with optimal frequencies, higher digital conversion rates from simpler website navigation, mobile application, targeted marketing, and dynamic pricing strategy,” it said.

Meanwhile, Kenanga Research noted that following the increased market share, as Malaysia Airlines and Malindo are rationalising frequencies to avoid a price war, AirAsia is targeting a higher aircraft utilisation rate of 14 hours (previously circa13 hours) by focusing on shorter domestic routes in the financial year 2018, allowing for shorter turnaround time.

In a separate note, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) noted that under AirAsia’s consolidated air operator certificate (Malaysia, Indonesia and Philippines operations), there were four new routes introduced within the second quarter of this year (2Q18); three in Philippines and one in Malaysia.

It further pointed out that 11 routes saw an increase in frequencies and these include Malaysia (10), and Philippines (one).

“We opine average seat per kilometre (ASK) is expected to expand further in the second half of the financial year 2018 (2HFY18) as AirAsia received deliveries of few more aircrafts to its consolidated AOCs,” it added.

AirAsia X: Going for the long stretch

As for AirAsia’s long-haul operations, AirAsia X Bhd (AAX), its recent confirmation on the purchase of 100 units of A330neo aircraft has opened up the possibilities of the airline flying further to markets such as Europe or US.

Last month, AAX confirmed the purchase of 66 units of the A330neo aircraft, on top of an additional 34 orders placed last month. The orders are expected to be completed and delivered between October 2019 and 2H28.

In a filing on Bursa Malaysia, the airline explained that the rationale of the purchase is to meet its operational growth as well as to replace its current aircraft, which are currently on lease and expected to be returned within the next 10 years.

AAX is now the largest airline customer for the A330neo model, making up a significant portion of the 250 firm orders prior to entry-into-service.

“The new generation aircraft provide many benefits including greater fuel efficiencies, lower operating costs, enhanced customer comfort, and importantly, greater range capability, enabling non-stop services to new international markets, namely Europe and the US.

“The additional delivery of these aircraft also provide opportunities for the company to operate from other hubs in Malaysia such as Penang and Kota Kinabalu,” it explained.

According to MIDF Research, AAX would be the first Asian airlines to operate the model with initial deliveries expected to start in 4Q19.

“Given the long-haul business model adopted by AAX, we believe the deployment of new generation A330 aircrafts as strategic.

“This is taking into account its ability to induce higher cost-saving in comparison with the older AAX’s A330-300 models,” it said, noting that altogether, the model is able to bring significant reduction in fuel consumption by 25 per cent than the older generation aircrafts of similar size.

The research team also calculated that coupled with five per cent saving in maintenance cost, A320neo is able to reduce cost by 11 to 12 per cent.

“Given the potential economic benefit, we see new opportunities emerging for an ultra-long-haul flight by AAX with one could potentially be the Kuala Lumpur-London Gatwick route.

“While the introduction of European route is possible, we incline to believe that ultra-long flight is likely to be shelved at this juncture.

“This is stemming from the unfavourable oil price trend this year which has averaged at US$68.81 per barrel, an increase of 25.7 per cent since the beginning of the year,” it opined.

Overall, MIDF Research said: “We believe that AAX’s commitment to expand its fleet size sends a positive signal to investors, on its confidence for the value based long-haul model. While the company had to weather some bumpy rides previously, the management is optimistic that it will be able to find the right tune in the long-haul market.

“With more new generation aircrafts expected to fill up its fleet, we expect further reduction on cost per ASK across the group.”

Aside from that, it opined that AAX is expected to see further cost reduction following its gradual shift to modern fleet operation.

The research team also believed that AAX is poised to reap the first mover’s advantage in reducing cost and offering more competitive price given its position as the first airline in Asia to operate the A330neo.

MAHB: Riding the strong demand

Structural-wise, Malaysia’s airport industry could see several changes in light of the shift in the political landscape.

However, performance-wise, Malaysia’s main airport operator; Malaysia Airports Holdings Bhd (MAHB), is set to ride the expected increase in travelers and hence; passenger traffic at its airports.

According to industry analysts, despite the MAHB’s CEO’s exit, which has been perceived as part of the new government’s move to restructure top managements of government-linked companies (GLCs), and despite the disputes traded between MAHB and AirAsia as well as the on-going frictions between US and china, they are still positive on the airport operator’s growth, domestically and internationally.

In the first five months of 2018 (5M18), Kenanga Research pointed out that MAHB’s total passenger movement for Malaysia and Turkey registered growth of 4.3 per cent year-on-year (y-o-y), year to date (YTD), an increase of 1.6 per cent for its Malaysian operations and 13 per cent for its operations in Turkey.

It anticipated stronger Malaysian passenger traffic moving forward as AirAsia deploys more capacity into the domestic routes.

“Our eight per cent growth estimate for Malaysia is premised on further international growth from China, India and other Southeast Asian countries due to visa relaxations and increased capacities by local and foreign carriers. All in, we make no changes to our passenger growth estimates.”

Meanwhile, MIDF Research noted that domestic traffic at Malaysia airports recorded growth for the first time since November 2017.

Traffic in KLIA2 grew by 25.2 per cent, outpacing the domestic traffic flow in other airports, including KLIA Main Terminal with only 4.5 per cent y-o-y growth in June.

“We understand that the highest contributors to the traffic were China, Indonesia, India and Taiwan, with the highest recorded by Chinese and Indian nationals.

“Accordingly, this was expected due to the visa relaxation programme catered for Chinese and Indian tourists,” it said.

Overall, MIDF Research opined: “We expect the positive momentum of traffic flow to remain, coming from the long holidays in countries such as China.

“It is worth noting that Chinese tourists represent a significant portion of international traffic which we attribute to the relaxation of visa permit to Malaysia and demographic factors.

“The occurrence of golden week in October is also expected to encourage outbound travel among Chinese tourists. Consequently, revenue from retail segments is expected to benefit given higher footfalls expected in the month of October in airports operated by MAHB.”

Airports to undergo quality check

Beyond its performance, MAHB is set to be subjected to new regulations aimed at ensuring that airports priortise consumer satisfaction and service.

Late last year, the Malaysian Aviation Commission (MAVCOM) announced that it is working on the development of a new regulatory framework to improve the service levels at airports across Malaysia.

The regulation; deemed ‘Airports Quality of Service (Airport QoS), is to enhance passenger comfort at the airport, ensure airport operators prioritise consumer service levels and facilitate improved airport user experience for airlines, ground handlers and other users of airports in Malaysia.

The Airports QoS framework is expected to be gradually implemented in airports in Malaysia, commencing with KLIA and klia2 in the third quarter of 2018 (3Q18).

Analysts believe despite the change in Mavcom’s structure, the anticipated QoS framework will still be implemented by Mavcom in 3Q18 for airports (starting with KLIA1 and 2) with objectives to achieve higher quality of service for passengers.

For any subsection that is deemed not up to par, the airport will face hefty penalties of up to a maximum five per cent of its aeronautical revenue.

“This could pose as downside risks for MAHB’s earnings given that Mavcom has proposed a financial penalty of up to five per cent of aeronautical revenue, which could dent our FY18E core net profit by seven per cent for every one per cent penalty,” Kenanga Research said.

However, it highlighted that in order to mitigate penalties, MAHB has increased their planned capital expenditure (capex) to RM600 million to RM700 million (from a typical RM300 million) in FY18 to FY19 to upgrade their infrastructures such as trains, baggage systems and toilets.

Another change in PSC rate

Beginning January 1, Mavcom announced that the full equalisation of the Passenger Service Charges (PSC) would be implemented across KLIA, klia2 and all other airports in Malaysia.

This should see the PSC rate for international destinations beyond Asean at klia2 to be at RM73, being the same rate as those at other airports in Malaysia. Domestic destinations as well as destinations within the Asean region has been kept unchanged at RM11 for domestic, and RM35 for Asean destination.

According to MAHB, the decision to equalise the PSC rates was to facilitate fairer competition.

MAHB also pointed out that the standardised PSC rates also allows Malaysia to be better aligned to international guidelines, including the International Civil Aviation Organisation (ICAO) principle of non-discriminatory pricing at airports.

However, with the shift in the political landscape, as well as added noises rising from the dissatisfaction of increased cost and prices, the PSC rate could, yet again, undergo another review.

Earlier this month, Mavcom’s newly-appointed executive chairman Dr Nungsari Ahmad Radhi announced that Mavcom is looking into regulating a new PSC rate which will be different for each airport.

“We are reviewing the PSC (rate) and it will be based on the funding models of various airports because not all airports are profitable.

“It has already been equalised … the next stage is to differentiate by service level according to different airports,” he was reported as saying.

Previously, newly-minted Transport Minister Anthony Loke had ordered Mavcom to decide on the new PSC rates by January 2019.

Nungsari said Mavcom would look into the operating agreements between Malaysia Airports Holdings Bhd and the owner.

“The airports are owned by the government, so in order for us to impose differential rates for airports, the government will have to take a stand in terms of how it wants to treat the existing airports and how it wants to fund expansion,” he added.

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