Increasing passenger service charges and new tax will hurt budget airlines

THE Malaysian Aviation Commission (Mavcom) was established to “advise” Transport Ministry on economic and commercial matters such as the provision and introduction of taxes.
It needed to be highlighted because it involves ringgit and sen and have an impact on passengers’ pockets. 

Recently Mavcom announced a standardisation of passenger service charge (PSC) in all Malaysian airports. This means, passengers at klia2 will pay the same amount as passengers at KLIA.

Previously, international passengers at klia2 had only have to pay RM32 for each journey. But now, the charge is RM73! 

That is a 128% rise. Meanwhile, the passenger service charge for domestic and Asean destination increased RM5 and RM3 respectively.
Mavcom also introduced a RM1 levy for all domestic and international passengers in all the airports in Malaysia. 

This is to sustain Mavcom’s operations since they do not get any funding from the government. 

Malaysia did not have Mavcom prior to 2016. Suddenly people on the streets had to subsidise their operations! 

We were doing fine but once Mavcom existed, we suffer a 128% increase in PSC and on top of that, had to give them RM1 every time we travel through local airports.

But the absurdity doesn’t stop there. They are planning to revise the landing and parking charges on airline companies. It won’t be surprising if the revision will be upwards instead of downwards.
What is the rationale for these moves? 

Rationale 1

Operational and maintenance costs in klia2 was subsidised by the passengers from other airports. How could this be?

The facilities and amenities provided in klia2 with all its modern layout, including top of the range baggage system, fast immigration system and shopping complexes, are contributing towards the spiralling maintenance and operational costs. 

This will increase over time. 

For the operator, Malaysian airports (MAHB), the yearly operational costs rose 80.9% from RM277.9 million in 2013 to RM502.8 million in 2015 – klia2 was completed in May 2014.

PSC had remained the same since 2014 and was lower than KLIA, and the airports in Kuching, Malacca, Ipoh and Alor Star. 

Therefore, we can assume passengers in other airports had subsidised those using klia2. This is not tenable, Mavcom would have said.

The main problem is not whom is subsidising who. The real problem is klia2. Why was it built as impressive as KLIA if the it will only be used by low-cost airlines who are cost and price sensitive?
A difference of RM1 will make a huge impact in their performance. When PSC was lowered from RM35 to RM25 in 2006, the number of passengers of AirAsia increased by 50.2%. 

That was 4.68 million extra passengers. AirAsia had only previously recorded a 20% to 40% passenger growth.

Was it appropriate to build a highly sophisticated and costly klia2 which in the end, had to be borne by passengers?

If the government had agreed to build a more expensive klia2, then it is the government who should subsidise the excess costs.

Low cost passengers just want cheap tickets. An increase of 128% in PSC will greatly affect not only these passengers, but also low cost airlines.

Rationale 2

“The new PSC charge is still lower than other airports in the world. Hence, it is not wrong to increase it.”

Wrong. A comparatively cheap PSC does not mean it could be revised to become more expensive. 

When PSC is revised, other airports in a much more developed countries has cheaper charges than ours!

Osaka T2 airport, Narita T3, Jakarta, Manila, Bali, Yogyakarta and Brunei, all have lower PSC than klia2.

Moreover, klia2’s PSC are on par with Changi airport, Suwarnabhumi, Hong Kong, Delhi, Incheon and Haneda’s. These airports are direct competitors of klia2.

If klia2 could utilise the cheapest PSC in the world to build a low cost hub in Kuala Lumpur, now things will become more challenging – no thanks to Mavcom.

While Malaysia is increasing the cost to klia2 passengers, Changi airport had announced a package that will reduce the costs borne by airline companies and passengers. 

They are aware lowering of fees will make Changi more competitive.

A subsidy allocation of S$180 million (RM559.5 million) is used to cut PSC by 33%, giving 50% rebates on landing and parking charges and a 15% discount on aerobridge usage.

Why did Changi do that? Isn’t it better to have more money by charging the passengers more? Why would they charge lower? Changi is not even a low cost airport. 

They do this because they have learned there is a direct correlation between PSC and number of passengers, especially among the low cost airline industry. 

That fact Jakarta (T1. T2, T3) London (Heathrow, Gatwick, Stansted) and Tokyo (Narita, Haneda) have different PSC rate for each of their airports shows it is more profitable to segregate each segment since each has its own strategy.

But in Malaysia we seemed to have a policy of “one size fits all”. 

Rationale 3

Mavcom feels standardising PSC will have a marked increment in the number of passengers. Traffic for the first seven months on 2017 have increased 10.4% to the same period in 2016.

However, this data covers traffic in KLIA and klia2 where the passengers of low cost airlines and premium airlines are combined.

But if we look at the traffic at klia2 (since this was where the PSC had increased tremendously), there have been a reduction from 12.7% to 8.9% in traffic within the same period. 

So what have happened? Ticket price became more expensive.

Where have all these low cost passengers gone to? Common sense dictates they have either chosen not to fly to Malaysia anymore or had chosen to fly in premium airlines since the tickets are no longer discernible.

An increase in PSC will only benefit premium airlines. Higher PSC will not affect them because their cost structure had already absorbed the premium charges in KLIA. 

The levelling of playing field had made low cost airlines become more expensive. The standardisation of PSC in KLIA and klia2 will cannibalise the already struggling low cost airline industry.

If this is not corrected, eventually all low cost airlines may not afford to sell cheap tickets. We might as well forget any desires to transform Kuala Lumpur into the Dubai of low cost airlines.

The industry that had contributed RM5.1 billion to the economy will suffer.

The airline with profit margin of 2.5% in 2016 despite lowering on average 3.4% of ticket price since seven years ago will also suffer.

The B40 and M40 groups in Malaysia will now have to pay for more expensive flight tickets.

Ironic really, since one of Mavcom’s objectives is provide a mechanism for protection of consumers. 

Do we want to return to the era where premium airlines have the monopoly on air travel? – October 24, 2017.

* Mat Rodi reads the Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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