‘Departure levy negative for aviation sector’

> Unclear who will bear the brunt of the impact, says RHB Research analyst

25 Nov 2018 / 19:57 H.

    PETALING JAYA: The proposed airport departure levy announced in Budget 2019 will have a negative impact on the local aviation industry, said RHB Research analyst Stephanie Cheah.

    “What is unclear now is who will bear the brunt of the negative impact, be it Malaysia Airports Holdings Bhd (MAHB) or the airlines. On one end of the spectrum, if airlines decide to absorb the cost and lower airfares, this will translate negatively to airlines’ yields and profitability,” she said in her report last Friday.

    Cheah said if airlines decide to maintain fares, they may still be hit in terms of load factor while MAHB will see its passenger volume growth decline.

    According to her, the airlines are likely to absorb a portion of the departure levy, balancing between the impact on yields and load factors while the airport operator will be negatively affected by lower passenger volumes but to a less extent.

    The departure levy, which comes into effect on June 1, is set at RM20 per passenger for Asean destinations and RM40 for others.

    Meanwhile, Cheah said the establishment of an airport real estate investment trust (REIT) will reduce the capital expenditure burden on MAHB. “But at the same time it could also compete with MAHB in terms of financing choices for its projects, which could limit MAHB’s growth potential under the Regulated Asset Base (RAB) framework.”

    Cheah said the higher cost of funding from the REIT giving rise to higher user fee is not a major red flag for MAHB as the cost will be accounted for in determining the necessary aeronautical tariffs to recoup its fair return under the RAB framework.

    “However, the same cannot be said for the airlines, which will be impacted by resulting higher aeronautical tariffs.”

    Last Thursday, the Malaysian Aviation Commission said in a commentary that the two proposals, if not designed carefully, could materially constrain the development of the RAB framework and the renegotiation of the operating agreement between the government and MAHB.

    The key issues highlighted in relation to the proposed REIT include the complexity of land ownership of the land on which the airports are located and the possible risk of airport charges being subjected to artificial upward pressure by the REIT’s yield requirements. It also said the government risks contravening the International Civil Aviation Organisation guidelines and international good practices with the proposed departure levy, if the proceeds are not ploughed back into the industry and a similar tax is not imposed on other modes of transport.

    TAGS

    email blast