MAVCOM and PSC
Pre-pandemic approach
Current recommended approach
Comment
The Malaysian Aviation Commission (MAVCOM) recently published a paper titled "Regulation of Aviation Service Charges – First Consultation Paper" wherein the regulator has set out its proposals for the rates of key aviation service charges in the next few years. MAVCOM's current recommendations display a marked difference with its pre-pandemic plans for the aviation sector.
MAVCOM, the nation's economic aviation regulator, was established in 2016 pursuant to the Malaysian Aviation Commission Act 2015. One of MAVCOM's key functions is to set charges for aviation services,(1) which include:
- landing charges;
- parking charges;
- security charges; and
- passenger service charges (PSC).
The PSC is a charge levied on departing air passengers and paid to airport operators. In practice, the PSC is collected by airlines from its passengers upon the purchase of a ticket and thereafter is remitted to airport operators following the completion of the flight.
The prescribed rate for PSC is important for any country's aviation industry because not only does it directly affect the price of flight tickets for passengers, but it also serves as a key factor for international airlines when deciding which routes to operate.
Since 2018, MAVCOM has standardised the PSC rates in Malaysia across all local airports, irrespective of the level of services or facilities provided:(2)
- PSC for domestic flights – 11 ringgit;
- PSC for flights within the Association of Southeast Asian Nations – 35 ringgit; and
- PSC for long-haul flights – 73 ringgit.
However, these standardised rates were initially meant to only be temporary. Between 2018 and 2019, before the onset of the covid-19 pandemic, MAVCOM published various papers wherein it detailed its proposals to move towards a cost-based framework for aeronautical charges.(3) In brief, this meant that charges such as the PSC would no longer be standardised but instead would be directly linked with the level of facilities and services provided at each airport. MAVCOM stated that this cost-based approach would facilitate more commercial and service-mindedness by the airport operator, more robust capex planning and more efficient operations.
The covid-19 pandemic and its huge effect on the aviation industry eventually scuttled MAVCOM's plans to implement its proposed cost-based framework.
In its recent consultation paper, MAVCOM has highlighted that air travel in Malaysia dropped from over 100 million passengers in 2019 to around 10 million passengers in 2021. As a result, MAVCOM has stated that its cost-based approach to aviation charges is currently neither suitable nor practical. With such relatively low levels of demand compared with pre-pandemic times, a cost-based approach could result in a sharp rise in average flight costs, which would further dampen demand and stifle the aviation sector's recovery. Indeed, MAVCOM's analysis is that PSC rates under a cost-based framework would likely be two-to-three times higher than the current PSC rates.
As such, with a view to encouraging air travel, supporting the recovery of the aviation sector and promoting certainty in the industry, MAVCOM's current proposal is to maintain the present PSC charges between 2023 and 2025 (known as "regulatory period one"), with only some relatively minor restructuring of airport charges based on feedback from stakeholders.
However, MAVCOM recognises that its proposal will likely lead to costs outweighing revenue for airport operators during regulatory period one, thereby leading to significant losses for such operators. To counter this, MAVCOM states that it is considering whether to introduce a loss capitalisation mechanism that would keep track of efficient losses made during regulatory period one and enable such losses (or a portion thereof) to be recovered by airport operators through prices in the future.
MAVCOM's plan to maintain the status quo for key aviation charges rather than to implement its previously proposed widescale changes is prudent given that Malaysia's aviation industry is still gradually recovering from the significant effects of the covid-19 pandemic.
The regulator's aim of promoting certainty in the local aviation sector has been assisted by the Court of Appeal's recent upholding of the High Court case Malaysia Airports (Sepang) Sdn Bhd v AirAsia X Bhd,(4) which determined, among other things, that the PSC rates gazetted by MAVCOM are fixed rates that are not subject to negotiation and must be collected by airlines.
For further information on this topic please contact Shannon Rajan or Eric Gabriel Gomez at SKRINE by telephone (+603 2081 3999) or email ([email protected] or [email protected]). The SKRINE website can be accessed at www.skrine.com.
Endnotes
(1) Section 46, Malaysian Aviation Commission Act 2015.
(2) All prices are inclusive of the passenger service security charge.
(3) See "Aeronautical Charges Framework – Consultation Paper" dated 19 August 2018 and "Aeronautical Charges Framework – Second Consultation Paper" dated 18 June 2019.