AirAsia needs klia2 more than it lets on BY CHAN QUAN MIN Budget airlines are more than glad to move into the new klia2 terminal building. For AirAsia in particular, the new facilities are much needed to cater to a new business model. The budget airline is fast evolving to a network carrier. But AirAsia has been curiously unenthusiastic on the move, presumably in protest of a possible increase in charges. _________________________________ The massive new terminal for budget flights, klia2, began its first day of operations on May 2 without a hitch. But the real test for the terminal will come this Friday, May 9 as AirAsia and its long haul affiliate, AirAsia X, move in. Overnight, klia2 will see passengers numbers explode, from 7,000 to approximately 50,000 per day, according to Malaysia Airports Holdings Bhd (MAHB) estimates. If the numbers at the congested Low-Cost Carrier Terminal (LCCT) for last year are anything to go by, the terminal will operate from Friday at half its design capacity of 45 million passengers per annum. The benefits of the move for the AirAsia group of airlines and its budget competitors are clear. klia2’s larger facilities would improve passenger comfort and allow for expansion of services, aviation analysts say. But the move to klia2 could also sting. MAHB has indicated an increase in the passenger service charge (PSC) could be on the cards, with a CIMB Research report suggesting the airport owner and operator could be seeking to equalise or at least narrow the PSC gap between the full-service KLIA terminal and the ‘hybrid’ terminal, klia2. Any increase will first have to be approved by the Ministry of Transport. MAHB senior general manager of operations Azmi Murad told KiniBiz increasing PSC was the “government’s call.” He added, the PSC is a “regulated charge and never linked to the construction cost.” Deputy transport minister Abdul Aziz Kaprawi confirmed in early April the PSC would stay unchanged for klia2’s first year of operation as a promotional rate. Past that, the actual quantum of increase is anyone’s guess. In February 2014, a PSC increase of approximately 9% for the LCCT was put on hold. Any future increase is likely to be at least as high. An increase in PSC is a cost to business Earlier this month, AirAsia founder and group CEO Tony Fernandes lobbied heavily to cap klia2’s PSC rates during a signing ceremony for a US$1.5 billion (RM4.9 billion) deal between General Electric (GE) and AirAsia X witnessed by Prime Minister Najib Abdul Razak and US President Barack Obama. “We don’t have to raise the PSC. To have more volume, we need to offer affordable fare,” the New Straits Times quoted Fernandes as saying. He claimed Sepang could potentially challenge Dubai as a global aviation hub as long as airport charges remain low. “Only with this can we increase our volume and ensure that capacity at klia2 is utilised.” Instead of a “glamorous” home, “all we wanted was a place where we can still maintain fare affordability,” Fernandes added. His apprehension over an increase in PSC was not unwarranted. The PSC is sometimes referred to as airport tax and is included in air ticket prices. While it is technically a fee charged to the passenger, aviation analysts say it can be partly considered a cost to business. Should the PSC for klia2 increase beyond the current RM6 and RM32 for domestic and international flights respectively, “AirAsia will most likely have to cut its fares to compensate passengers,” CIMB Research analyst Raymond Yap surmised in a report last month. Yap used the example of Singapore-based Tiger Airways, which moved from Changi Airport’s Budget Terminal to the hub airport’s Terminal 2 in September 2012 and only managed to pass through to passengers 60% of the increase in PSC from S$18 to S$34. According to estimates by CIMB Research, Tiger Airways “absorbed the remaining 40% by way of lower fares… causing a deterioration in yields and earnings.” Given the “heightened competitive environment in Malaysia,” Yap opined, AirAsia, like Tiger Airways, would not in a position to pass on an increase in PSC to passengers. Last year saw a three-corner price war take place between rapidly expanding incumbent Malaysia Airlines, the AirAsia group of airlines and new market entrant Malindo Air. The result: lower yields, loss of pricing power and weaker earnings industry-wide. The price war was caused by unusual seat capacity increases lead by Malaysia Airlines. Connecting the dots AirAsia began its life as a no-frills, in industry speak, point-to-point carrier, simply getting passengers from one destination to the next without any fuss. In the years since, the budget airline has seen its business model evolve to that of a network carrier; embracing long haul flights it previously ignored, and helping, instead of discouraging, passengers from booking connecting flights. AirAsia X, a long haul low-cost affiliate of AirAsia operating wide-body aircraft is at the forefront of this evolution. Last year, connecting traffic counted for 43% of AirAsia X passengers, according to Centre for Aviation. And klia2’s larger, well-equipped facilities can certainly help improve that percentage. Azran Osman-Rani, AirAsia X CEO said the move to klia2 will “significantly relieve the congestion we are faced with at LCCT… klia2 has 12 wide-body aircraft bays, as opposed to the current 4 bays we are using at the LCCT.” “We had mounted a lot of flights from the second-half of 2013 to now, on the basis that we were told KLIA2 would be ready by June 2013. As such, our operations were significantly congested and passenger experience was compromised at the LCCT,” Azran told KiniBiz in an reply to emailed questions. “We are also looking to benefit by having more Fly-Thru connecting transfers, with a bigger transfer connection facility at klia2 as compared to LCCT,” he added. While AirAsia’s new ‘network carrier’ business model demands, if not necessitates ‘hybrid’ terminal facilities such as klia2, AirAsia earlier resisted a government directive to move to the new terminal by May 9. Also contradictory is Fernandes’ claim that the terminal is too “glamorous” for the budget airline’s needs. It is not. In fact, some of the fancy equipment installed in klia2 was apparently requested for by Fernandes himself, as detailed in a letter sighted by KiniBiz. “We recognise that our decision to select the most powerful baggage handling system option may have certain impacts on the current work at the PLCCT (permanent low cost carrier terminal). However the evolving nature of our business requires a high level of strategic agility for our continued growth and success,” Fernandes wrote in a letter to MAHB managing director Bashir Ahmad. Given all this, a likely possibly for AirAsia’s ambivalence over the klia2 move is a calculated protest against an increase in PSC, or airport tax, which aviation analysts have established as a cost of business. Both Fernandes and AirAsia CEO Aireen Omar have not replied to questions by KiniBiz. klia2 will pay for itself in 11 years A comparison of construction cost against utilisation by KiniBiz founding editor P Gunasegaram found MAHB to have over-invested in the RM10 billion KLIA main terminal and under-invested in much cheaper to construct LCCT, which exceeded its initial design capacity in just two years. In contrast, the KLIA main terminal took far longer, at least a decade, to come even close to its design capacity. Just as the LCCT was probably more lucrative, given its lower construction cost, than KLIA, the newest terminal, klia2, is also likely to be more lucrative for MAHB than klia2. klia2 can handle almost double the number of passengers while charging half or more in usage fees than KLIA, making for roughly equal revenue-generating ability between the two terminals at full capacity. More importantly, klia2 cost just RM4 billion to build, less than half that of KLIA. Mohshin Aziz of Maybank Research estimated the project to yield a respectable internal rate of return (IRR) of 11.2 % with a payback period of just below 11 years at a final project cost of RM4 billion Thus, it would not be wrong to say klia2 is shaping up to be a win-win for MAHB and its tenants.~ KiniBiz
Posted on: Wed, 07 May 2014 23:54:40 +0000
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