Thursday, December 01, 2011

Low Cost KLIA2 Turned High Cost

Malaysia Airports Holdings Berhad (MAB) had confirmed fears that the cost of KLIA2 has effectively doubled from less than RM2 billion to a massive RM3.9 billion and will only be completed at the earliest in April 2012, a delay of more than 8 months.

MAHB admitted increases in scope in practically all elements of the airport were increased significantly causing the cost of building the airport to balloon. The KLIA2 airport terminal for example, for increased from the original 2 storeys to the new 9 storey’s building, costing an additional RM420 million. At the same time, the footprint of the airport increased by 130.7% which caused a whopping RM670 million extra. In addition, there was an increase of RM530 million just for the construction of buildings of government agencies.

The biggest question must be, were all these major expansion of scope justified? Underlying MAHB Managing Director, Tan Sri Bahsir Ahmad Abdul Majid’s basis for the cost increase was for the new airport terminal to cater to 45 million passengers, as opposed to the original 30 million. Hence the increase in cost for the airport is just a case of “bring forward the capex”.

The Ministry of Transport must justify the approval for such a massive increase in capacity which involved MAHB raising RM2.5 billion in debt in 2010 when the current passenger traffic at the Low Cost Carrier Terminal (LCCT) is only 15.4 million. What’s more, even the current main KLIA terminal which has a capacity for 25 million passengers received 18.7 million passengers or 74.8% of the capacity. As a gauge, the Dubai airport, which is one of the busiest hub in the world today, served 47 million passengers while Changi Airport served 42 million in 2010.

Essentially, what MAHB is building is a terminal 80% larger than the current main terminal! In addition, the provision for super-scale A380 operations, walkalators, fully automated baggage handing system, substantially larger commercial space including a public shopping mall, provision for 4 hotels excluding an Airside Transit Hotel and a premium lounge gives the impression that KLIA2 is a “replacement” for the KLIA Main Terminal today, instead of being a new Low-cost carrier terminal!

The Ministry of Transport and MAHB appears to have gotten the concept of a “low-cost” terminal completely wrong and have obviously not been able to adapt and cater to the new business model despite demands from the low-cost carriers. Their penchant to spend big money for grandeur has resulted in Malaysia missing a true and rare opportunity to bring about a game-changing transformation for the Malaysian aviation sector.

What is more, shareholders of MAHB, including Khazanah and the Government must question MAHB’s reckless expenditure – for if the passenger tax will not be increased as a result of the massive expansion of cost as asserted by Tan Sri Ahmad Bashir, then effectively, the returns to MAHB would have reduced by nearly half as a result of the doubling of costs. One could also argue that had MAHB not overspent on KLIA2, then there would have been no need for the recent 28% increase in airport taxes from RM25 to RM32 at LCCT and RM41 to RM65 at the main airport terminal, which resulted in lower competitiveness for Malaysia.

What is more important for MAHB is to improve the efficiency, service and other intangible qualities of our airport in the region instead of being obsessed with everything “big”. It is unfortunately that Malaysia today serves fewer passengers today than most of our regional competitors – Indonesia (44 million), Singapore (42 million), Bangkok (43 million) and Hong Kong (50 million) – compared to KLIA’s (Main Terminal and LCCT combined) 34 million.

The Ministry of Transport must give an assurance that there will be no further cost increases and no further delays in the construction and operations of KLIA2 which will further jeopardise our leadership in the increasingly competitive low-cost carrier industry.
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