KUCHING (Aug 15): The Malaysian Aviation Commission (Mavcom) has to set a reasonable tariff rate given the urgency for airport expansion and maintenance capital expenditure (capex) in Malaysia to enable Malaysia Airports Holdings Bhd (MAHB) to accumulate the required cash for capex purposes, analysts opine.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) recapped that Mavcom, in its newly released First Consultation Paper on the Long-Term Framework for the Regulation of Aviation Services Charges, proposes to keep tariffs status quo (as in 2021), held constant in real terms by inflating charges each year using CPI to be applied during Regulatory Period 1 (RP1) that is to run from January 1, 2023 to December 31, 2025 which is less favourable as compared with the one proposed back in 2019 with a WACC of 10.88 per cent.
“However, this is just a first consultation framework and not cast in stone as the Commission is also seeking feedback from stakeholders,” Kenanga Research noted.
“Mavcom’s view that cost-based approaches to setting tariffs would be impractical for RP1 when demand is low and uncertain as the sector continues its slow recovery, hence demand over the course of RP1 will continue to be below pre-pandemic trends, meaning that average costs will likely be higher than those seen prior to the pandemic.
“As such, there is a significant risk of understating or overstating MAHB’s average costs. This could result in a significant increase in tariffs.”
The research arm believed the framework is to ensure that the airport operator does not take advantage of its dominant market position to either offer substandard service quality or charge exorbitant tariffs.
“Nevertheless, in our view, Mavcom has to set a reasonable tariff rate given the urgency for airport expansion and maintenance capex in Malaysia to enable MAHB to accumulate the required cash for capex purposes.”
Kenanga Research gathered that in anticipation that MAHB is expected to incur losses following the slow recovery for air travel post pandemic, if tariff remains status quo under RPI, Mavcom proposed two mechanisms.
“Under RP1, a ‘loss accumulation mechanism’ proposes to keep track of the financial losses made by MAHB over the regulatory period and allows for claw back under RP2 (Regulatory Period 2 from January 1, 2026 to December 31, 2028).
“Under RP2 and beyond, MAHB will start recovering losses incurred in RP1 over a ten-year period starting in Year 1 of RP2.”
In the research arm’s view, MAHB’s earnings and cash flows are back-loaded which are needed for airport capex plans.
“As suggested in the consultation paper, Mavcom will bear 90 per cent of the cumulative losses and MAHB the remaining 10 per cent.
“MAHB will be able to recover the 90 per cent of the loss over time starting from Year 1 of RP2.
“Similarly, MAHB will forego 90 per cent of the profits achieved in RP1 which would be returned to customers in the form of lower airport charges in the future, and only retain the remaining 10 per cent.”
On passenger service charges (PSC), Kenanga Research highlighted that presently, the PSC for passengers departing to Asean destinations is RM35 per pax or 52 per cent lower than that for passengers departing to non-Asean destinations at RM73 per pax.
It further highlighted that this differentiation could be removed and the charges equalised.
“For illustration purposes, this might involve an increase in the PSC for Asean destinations and a decrease in the PSC for non-Asean destinations. Note that Asean destinations account for 17 per cent of total passengers.
“Similarly, the PSC for domestic passengers at RM11 per pax is around two-thirds lower than that for Asean passengers, and more than 80 per cent lower than that for non-Asean destinations.
“As the sector recovers, the Commission is expecting domestic traffic to represent a higher share of traffic overall or international traffic to represent a lower share overall.
“To overcome this relative shortfall in international traffic, the domestic PSC could be adjusted relative to the international PSC.”
According to Kenanga Research, with Covid-19, it is likely that demand in RP1 will continue to be possibly below pre-pandemic levels, suggesting that average costs will likely be higher than those seen prior to the pandemic.
“Therefore, a cost-based approach to setting tariffs could very well result in a significant increase in tariffs.
“For illustrative purposes, based on inputs from the Commission’s previous Aeronautical Charges Framework Review of June 2019 (this data is out-of-date but the Commission suggest that it is sufficient for the purposes of this illustrative analysis).
“The date is then compared against a passenger weighted average of current PSC, where the weights were based on passenger forecasts provided by MAHB.
“The analysis indicates that the average PSC under a RAB framework is likely to be two to three times higher than current PSC rising between a weighted average of RM26 to RM30 per pax to RM71 to RM86 per pax between 2023 to 2025.”