2 October 2016

The passenger service charge, or more commonly known as PSC or airport tax, is the talk of the town nowadays as local reports reveal sources to say that new rates for the PSC have been approved by the Cabinet.

Reformulating the PSC: Yay or nay?
Reformulating the PSC: Yay or nay?

As rates paid by departing passengers, the PSC is collected by the airlines upon purchase of tickets and is only paid to Malaysia Airport Holdings Bhd (MAHB) upon completion of the flight. Passengers who do not travel on the flight for which they have purchased the tickets are eligible for full refund for the PSC.

Therefore, passengers are advised to obtain the PSC refund from the respective airlines concerned.

Most recently, Transport Minister Datuk Seri Liow Tiong Lai made a statement saying that changes will only be implemented on January 1, 2017 in all airports nationwide, adding that details were still being discussed.

Details of the revised PSC will be officially announced by the Malaysian Aviation Commission (MAVCOM).

Liow said the new rate to be announced by the Malaysian Aviation Commission (MAVCOM) was still reasonable compared to other airport charges in the region.

“Our airport charges are much lower than other countries and can be considered moderate even after the raise.

“All are these under MAVCOM. I leave it to them to forward their views and and we have seen the details,” he told reporters last week.

Malaysia has a very clear policy on there having no discrimination against service charges at both terminals in the Kuala Lumpur International Airport and klia2, he added.

Value as yet unconfirmed

While the Transport Minister’s statement implies imminent PSC revision, analysts observed that the quantum of revision to PSCs is by no mean firm at this juncture.

Maybank Investment Bank Bhd (Maybank IB Research) in a sector analysis affirmed that the current domestic PSC of RM9 at the main terminal of the Kuala Lumpur International Airport (KLIA) and RM6 at the low-cost klia2 are “not feasible, and verily, only international airports are profitable in Malaysia.”

“This is something to think about. The government has been on a drive to remove subsidies from the system (petrol, rice, flour and sugar), and we think domestic PSC should be next on the cards,” it opined in the September 19 report.

Maybank IB Research went on to call for higher PSC for premium passengers, as well as terminal fees for transit passengers.

“The PSC for economy and premium passengers are the same in Malaysia. This is despite premium passengers having dedicated check-in counters, segregated security checks (only at KLIA), and separate immigration clearance (only at KLIA). It is only fair that they should be charged more for the additional services rendered,” it said.

“Also, many international airports have started to charge a terminal fee for transiting passengers. For example, Changi Airport charges S$6 per pax and Hong Kong International Airport (HKIA) charges HK$70 per pax.

“There is no transit fee for passengers transiting at any Malaysian airport. We think this policy is outdated and Malaysia should start charging.”

The research house roughly estimated about 0.5 million passengers transiting at Malaysian airports annually, and thus could provide a healthy income for Malaysian airports.

“The implementation of a transit fee could also solve a fundamental problem plaguing KLIA currently. There is no direct connection between KLIA and klia2 via the airside.

“There is a direct rail connection on the terminal side, but this is cumbersome as it requires passengers to check-out and check-in again. The solution is to have a bus transit on the airside of both terminals, but as there is no transit fee allocation, MAHB seems reluctant to do so.

“Many airports, such as HKIA, Manila, London Heathrow, and New York JFK Airport have a higher PSC for premium passengers. A higher PSC will provide nice incremental revenue for the airports without jeopardising demand. Typically, premium passengers make up three to five per cent of total passengers.”

Probable timeline of new charges

Notably, Maybank IB Research said the DCA is going to table a motion in the next Parliament sitting in October to become corporatised and turn into the Civil Aviation Authority of Malaysia (CAAM).

“We believe the motion will be passed as it is a common structure for a developed nation to have a corporatised agency to oversee the aviation sector,” it said.

“Furthermore, there has never been any rejections of a government agency seeking to be corporatised.

“Therefore, the CAAM could happen as early as 1Q17 and the fees will be raised from thereon.”

“We think this motion will spearhead the transformation on how the industry formulates its fees,” it added.

The DCA’s case will set the precedence that fees are to cover its operating expenditures, leaving some for capital expenditures.

This is similar to other agencies with a dual role as a regulator and service provider such as Bursa Malaysia, the Sdecurities Commission as well as the Malaysian COmmunication and Multimedia Commission. With this framework, the DCA will flourish when the whole industry performa well.

The MAVCOM will present to the Ministry ofr Transport on their recommendations of fee reforms by the end of 2016.

The Ministry will then review , table it to the Cabinet and Parliament for the motion to be approved. The main contention will be the existing operating agreement between MAHB and the government.

“Therefore, any amendments tabled must be at least equal if not better than the current operating agreement. We think this could come to pass by the end of 1Q17, or early 2Q17.”

TEAM YAY: Malaysia Airports, Malaysian Airlines

Two players outspokenly approving of the PSC charge hike are Malaysia Airport Holdings Bhd (MAHB) as well as Malaysia Airlines Bhd (MAS).

Early in August, MAS chief executive officer Peter Bellew called on the government to standardise the airport charges at KLIA and klia2 “to provide a healthy competition.”

Malaysia Airlines
Malaysia Airlines

He said the move was crucial for MAS to become profitable again as it needed a “competitive set of charges at our home base” that would protect workers’ jobs and enable new jobs to be created in the future.

This was parallel to sentiments shared by MAHB Chief Badlisham Ghazali who had said that the airport operator had invested RM4 billion in klia2, but there had been no corresponding increase in the PSC.

Badlisham said a rate hike for PSC was long overdue at both KLIA and klia2, and also a review of the air terminal charges.

MAHB said it wanted a hike and the newly-formed Malaysian Aviation Commission said it would review it.

Analysts were not surprised by the positivity shown by MAHB as it said the airport handler would be the biggest beneficiary from the increase.

Kenanga Investment Bank Bhd (Kenanga Research) said currently, besides PSC revenue generated from departing passengers, MAHB enjoys additional revenue on top of existing PSC only if the current PSC is lower than the benchmark rates stipulated in the Operating Agreement 2009 which is currently in its second tariff cycle.

“This additional revenue – more commonly known as MARCS PSC is a subsidy by the government and the amount subsidised is the difference between the benchmark rates and PSC.

“We are positively surprised by the suggested new PSC rates as this would indicate circa 10 per cent higher PSC revenue for MAHB’s Malaysian operations.

“This falls back to the point that most of the new rates are higher-than-existing benchmark rates, and despite new Asean routes indicating lower PSC of RM35 instead of previous RM65 in KLIA Main along with the other four international airports, MAHB will be subsidised by MARCS PSC for the difference in current benchmark rate of RM71.

TA Securities Holdings Bhd (TA Research) also believed the PSC structure will benefit MAHB as the increase in airport tax would boost its future earnings.

“In our discounted casl flow (DCF) model, we assume the next hike to take place from 2019 onwards.

“As such, our DCF valuation will likely be adjusted higher as the hike is expected to take place in January 2017.”


AirAsia Bhd (AirAsia) is one of the frontrunners in speaking out against the proposed hike in the PSC, stating that it will submit an appeal to the government to rescind the proposed increase.

In a statement last week, the low cost airline said it had received numerous enquiries on an article published by a local news portal on the impending increase in the airport tax, but that the low-cost carrier had not received any official notification from MAVCOM.


Chief executive officer Aireen Omar said the higher tax would be a direct burden on the people, making air travel more expensive and reducing overall demand for services offered by all airlines operating in Malaysia, crimping tourism, threatening jobs and hurting the economy.

“We hope that our fears and concerns of our guests are unfounded, but if it turns out to be true we will on behalf of our guests and the people, submit appeals to the Government of Malaysia to remove such increase in the tax,” she said in the statement.

This increase in tax will be a direct burden to be shouldered by the people, Aireen noted, making air travel more expensive and reducing overall demand for services offered by all airlines operating in Malaysia, crimping tourism, threatening jobs and hurting the economy.

Malaysia will also lose its competitiveness as a regional low cost hub, she added.

“We are confident that the Malaysian Government and MAVCOM will put the nation’s long term interests, the rakyat and their jobs first, in line with the government’s plans towards a stronger and more prosperous Malaysia.”

Aireen believed that air travel is no longer a luxury reserved for privileged Malaysians but has now become a necessity for the general population.

“AirAsia is the pioneer of low fares in Malaysia and also served as the catalyst of change in the ASEAN aviation and tourism industry. We never waver in our pursuit of making air travel affordable for Malaysians of all ages and all walks of life.”

Nevertheless, Aireen was pleased that the Malaysian government has acknowledged the distinctions between low cost carriers and full service carriers which would be a factor in considering the applicable PSC.

“The facilities at klia2 are far inferior to those in KLIA as there is no aerotrain, there is a lack of walkalators, long walking distances, smaller gates with poor boarding efficiency, just to name a few. The differences between the two terminals alone are obvious reasons why the PSC should not be the same.”

Some analysts believe the move is a setback for AirAsia as it impedes on the LCC’s main strategy: cost competitiveness.

“As far as AirAsia is concerned, the unconfirmed level playing fee structure for KLIA and kli2 will be a setback for the company as it will lose one of its cost competitiveness to its rival full-services airlines,” highlighted TA Research.

“The new PSC structure will lead to higher ticket price for budget airline and the percentage of increase will be much higher than full service airline.

“This is especially true for flights to Asean countries, which the airport tax for budget airlines travelers will be adjusted higher by RM3 and the tax for full service airlines passengers will be reduced by RM30.”

Other analysts across the board believe the impact to AirAsia would be relatively limited, given majority of Malaysia flights are concentrated on Asean and domestic routes.

“The impact on AirAsia X will be greater, as its flights are non-Asean and will subsequently affect AirAsia’s connecting flights,” outlined Hong Leong Investment Bank Bhd in a separate note.

“However, we believe the impact to be relatively limited, given the rate increment of RM41 is relatively trivial to total expenses for international travels.”

CIMB Investment Bank Bhd (CIMB Research) affirmed its estimation that AirAsia X will be the airline that would be most disadvantaged by the new PSC tariffs.

“All of its flights are to medium- to long-haul destinations. Hence, its passengers will have to pay an extra RM41 more per trip, from RM32 to RM73. In contrast, its competitors MAS and Malindo that are based in KLIA MTB will see a PSC hike of only RM8.

“We reiterate our reduce call on AirAsia X with a target price of RM0.21. De-rating catalysts include potentially higher PSC tariffs, and rising competition from both MAS and Malindo.

“We had anticipated a much larger increase in PSC to take place at klia2. But if the reports are true, domestic passengers will only have to pay RM5 more, and Asean travellers only RM3 more. ASEAN traffic accounts for 69 per cent of AirAsia’s international traffic, hence the impact of the PSC hikes would be small to AirAsia overall.”

Hike or not, industry outlook still promising

Regardless of the quantum, timing and justification of a PSC hike, analysts continue to peg the sector as maturing sensibly so far this year.

Malaysia’s long-term air traffic cumulative annual growth rate between 2004 to 2013 remained at nine per cent per annum, but the 2014 triple disasters have brought it down to two per cent during 2014 to 2016 (forecasted).

“We forecast four to five per cent as the ‘new normal’ growth rate going forward due to slowing population growth, skewed demographics towards a less travelling age group, and rising costs as the government is moving towards making the industry self-sustainable,” Maybank IB Research noted.

In many ways, it said Malaysia’s air travel industry is getting close to becoming a mature market akin to the US and Europe.

“The maturation of the market for air travel in Malaysia is a natural evolution and reflects the fact that there are hardly any new submarkets remaining to exploit, leaving the industry closer to consolidation as the last remaining option to drive profit growth.

“We initially thought there were many years of robust growth ahead, but the 2014 events seem to have quantum leaped the transition. Historical observations suggest thatthe industry will enjoy less erratic earnings volatility with more stable profit margin. Consumers however, will be forced to pay higher fares.”

Smart growth policy needed more than ever

The research house noted that high traffic growth years seen between 2004 to 2013 were driven by airlines competing for market share and expanding into new markets.

“But airlines are more rational now and more focused on growing profits; capturing market share or traffic growth is no longer a primary objective. It is up to the regulators to introduce compelling incentives and new policies to spur traffic growth.

“The biggest issue clouding the future of the aviation industry in Malaysia is the overlapping objectives among the respective parties. Airlines want a sustainable profit growth environment, which means low cost at all angles.”

This led the team of researchers to call on Malaysian regulators, namely the Department of Civil Aviation (DCA) and Malaysian Aviation Commission (MAVCOM), to be self-financing, which means it needs to raise its fees either to airlines, to passengers or both.

“The government wants more revenues and also higher tourist arrivals. The air travelers want good quality service at an affordable price. To find a balance will be challenging, assuming it is at all possible.

“Malaysia aviation is on an accelerated path to consolidation, we believe.

“Central to this, Malaysia Airlines is reforming its business, much to the benefit of everyone. Given the likelihood of higher fees, airlines will be more cautious and traffic growth will taper.

“Loads and yields will likely stay high and this will support yields. Ironically, this will ensure sustainable industry profitability, much like what happened in the US post the airline consolidation back in 2010 to 2013.

“Because of this, we remain positive on the Malaysia aviation sector due to the benefits from industry maturity, with BUY ratings on AirAsia and MAHB.”

Wish list: Make the sky truly ‘open’

Malaysia has signed an Air Services Agreement (ASA) with 105 countries worldwide, with most ASAs adopting a very liberal and pro-growth approach in nature.

The move was very respectable, but Maybank IB Research believes Malaysia can do more.

“Malaysia should sign a comprehensive Open Skies policy that includes 6th, 7th, 8th and 9th freedoms with strategic neighbours, such as Thailand, Indonesia, Vietnam and the Philippines,” it suggested. “We think Thailand will warm to this idea as its industry is at an advanced stage of evolution and it will be unlikely to spark irrational competition.

“The other countries may have reservations, as they are not at an advanced stage as Malaysia is at the moment, but regardless, may consider joining at some point in the future.

“The reality is industry consolidation will expand to the rest of the Asean region. Therefore, it is advantageous to embrace a liberal policy sooner rather than later.”

Rethink of late-night charges

Maybank IB Research also proposed for a rethink oflate-night charges. For the wee hours of 1am to 5am, the research house proposed charges should be reduced in order to entice airlines to operate. The airport is incurring the cost on electricity, air conditioning, security, and other manpower for the graveyard shift.

“Rather than bear all the cost with no/little revenues, it is better to gain some revenue and make use of the assets,” it justified. “Besides, as regulatory fees are bound to rise, providing a concession window serves as goodwill and also a good defense when accused of profiteering.

“Discounted landing fees, PSC and AFNC could also help prod airlines into launching flights during the lean hours. It could also potentially entice airlines plying the Kangaroo route to do a quick stopover and top-up fuel and make a quick turnaround of its crew.

“Ultra long-haul flights – ones that exceed 12 hours – are very expensive due to double crew requirement, maximum fuel uplift, maximum water uplift and  extra fuel burn due to the extra weight. A quick technical stop will only take 20-30 minutes and provide substantial cost savings for the airlines.”

Regulators hoped to not go overboard

The undesirable part of a mature aviation industry is that regulatory costs soar. This is the case for the US, Maybank IB Research observed, whereby total taxes paid had soared from only seven per cent of total ticket prices in the early 1970’s to 21 per cent by the end of 2015.

“But it’s not stopping there. The US President’s 2017 Budget has proposed further increases that will lift taxes to 26.5 per cent of the overall ticket price,” it added.

“To understand why the regulatory cost has risen by so much, one must look back into the events post the 9/11 terrorist attack. The government concluded that the existing security framework was insufficient and therefore revamped the administration.

“The Transportation Security Administration (TSA) was formed in Nov 2001 to administer security matters pertaining to air travel.

“Previously, the United States Department of Transportation (USDT) via its subsidiary the Federal Aviation Administration (FAA) was in charge of security matters, but it has since been moved to the oversight of the US Department of Homeland Security (DHS).

“The formation and management of these new agencies are not cheap, and the president wishes to raise the charges going forward. The TSA alone employs 55,600 employees with an annual budget of US$7.6 billion.”

Original Source: www.theborneopost.com

Site Search

Did you find what you are looking for? Try out the enhanced Google Search:

(Visited 22 times, 1 visits today)

Categorized in:

Tagged in: