AirAsia played a role in cost overruns, delays

By Jose Barrock

In the third part of our series on delays and cost increases at the new RM4 billion low-cost carrier terminal KLIA2, KiniBiz looks at how AirAsia has been operator Malaysia Airports Holdings Bhd’s harshest critic. Do these criticisms hurled at MAHB hold water or was AirAsia also responsible through its frequent and changing demands on the specifications?   

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Malaysia Airports Holdings Bhd (MAHB)’s harshest critic, AirAsia Bhd, played a significant part in both cost overruns and delays in the construction of the new RM4 billion low-cost carrier terminal, KLIA2,  according to sources familiar with the matter.

MAHB has come under considerable flak as a result of the delay in KLIA2. Managing director  Bashir Ahmad Abdul Majid’s contract which expires on June 7 has yet to be renewed, resulting in speculation that he will take the fall for the delay.

None of the parties involved — MAHB officials or Bashir, UEM Group and partner Bina Puri Holdings Bhd, which won a RM997 million contract for the design, construction, commissioning and maintenance of the main terminal building of KLIA2, a satellite building, sky-bridge and piers and budget airline AirAsia Bhd — came on record for this article.

From news reports AirAsia’s chief executive officer Aireen Omar said that she was “disappointed with the latest delay. We will work closely with MAHB so that the new launch date can be set for KLIA2… It’s not going to be comfortable for passengers as the low-cost carrier terminal (LCCT) copes with overcapacity,” she said after AirAsia’s annual general meeting on Tuesday.

From this statement it seems as though AirAsia is distancing itself from MAHB, and played no role in the delay, which is not the picture painted by others involved in KLIA2.

Another statement by AirAsia that raised eyebrows was when its officials publicly stated that the budget airline will not move into KLIA2 until it is convinced that the new terminal is 100% ready, and will stay put at the current LCCT.

“It seems as though AirAsia is in a very powerful position… can dictate terms, can control MAHB, spell out what MAHB can and cannot do,” an industry observer commented.

The truth is that the bulk of KLIA2’s passengers (Maybank Kim Eng Research says 80%-90% of traffic initially) will come from AirAsia.

But does this mean MAHB should pander to AirAsia’s every whim and fancy?

AirAsia was not decisive?

Airport industry officials reveal that some amount of the blame for the delay, should go to AirAsia, which changed the specifications for some critical aspects of KLIA2.

Some of the changes came about due to AirAsia’s changing business model, which included widebody aircraft for AirAsia X.

Among others, the length of the runway had to be changed from 2.5km to 4km to accommodate widebody jets.

“That is a 60% increase and each runway costs between RM500 million to RM600 million to build… so of course the cost shot up,” an airport official said.

It seems the disputes between AirAsia and MAHB also involved issues such as the number of gates (where passengers get into planes) the airport should have, the transit area, lounge and use of a fully automated baggage handling system.

The initial plan for a two-storey building also had to give way to a three-level nine-storey facility, partly due to regulations on human traffic which require separate floors for arrivals and departures.

“So there were also consequential costs involved… roads which initially catered to a two storey building had to cater for a nine-storey one. There was much more money involved,” the airport official explained.

Documents seen by KiniBiz, show AirAsia founder and group CEO Tony Fernandes changing his mind on the need for a baggage handling system and writing to Bashir, copying Khazanah Nasional managing director Azman Mokhtar, and executive director, investments Mohammed Rashdan Yusof.

Rashdan has since left Khazanah, which is a 40% shareholder in MAHB.

“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.

This letter was received by MAHB on June 24, 2011.

Neither Fernandes nor Aireen have replied to emailed questions from KiniBiz.

No tender for Tune Hotel at KLIA2

Another issue that sprouted up was the award of the budget hotel at KLIA2 to Fernandes’ Tune Hotels, without a tender.

To this Tune Hotels group chief executive officer Mark Lankester said via email, “There were four prime gazetted hotel lots which were made available for tender to interested hotel parties.

“These plots of land were too large for a Tune Hotel and better suited to upscale three to five star hotel properties which require considerably more land area and space. Tune Hotels therefore did not take part in the prime gazetted hotel areas which were tendered out, opting for a space that was gazetted for aero support services instead,” he explained.

So is Tune Hotels being given preferential treatment? Should MAHB as the owner of KLIA2 have been more transparent? But this is not the first time deals between Khazanah and Khazanah companies and AirAsia are raising eyebrows.

AirAsia, Khazanah share swap

In August 2011 Khazanah which has 69.37% in national carrier Malaysian Airline System Bhd (MAS) and privately held Tune Air Sdn Bhd which has about 23% in AirAsia Bhd swapped shares.

With this exercise Tune Air which is controlled by Fernandes and his partners controlled 20.5% of MAS, while Khazanah in turn got 10% of AirAsia and sister-company and long haul budget liner AirAsia X.

There was also an issue of warrants by both companies but this was secondary to the main thrust of the deal — the share swap.

Bursa Malaysia announcements had it that the deal would “strengthen the collaboration and will further align their respective interests in AirAsia and MAS.”

When the deal was announced on Aug 9, AirAsia was trading at RM3.95 a share while MAS was at RM1.60. Reports back then had it that there was an investigation into insider trading, but nothing has come of it as yet.

In the run up to the announcement which involved a share swap, AirAsia’s stock traded at record highs of RM4.14 in July, while MAS’ shares had slumped to a 10-year low of RM1.50.

AirAsia’s stock was at RM2.50 in March but surged in the months prior to the share swap agreement thus valuing AirAsia’s stock much higher than MAS’ shares. In eight months as a result of pressure from MAS unions, the deal was scrapped, or unwound.

While the run up in AirAsia’s share price and fall in MAS’ share price may have seemed unnatural, imagine Fernandes’ plight now, if the deal had not been unwound. MAS is now trading at about 32 sen.

The Fly Asian Xpress fiasco and airport tax

In 2006, Fernandes and his partners Kamarudin Meranun and Raja Mohd Azmi Raja Razali, took over MAS’ rural routes to Sarawak after the government assigned a huge chunk of domestic operations to AirAsia as part of efforts to get Malaysia Airlines to focus on international flights.

Initially there was talk of buying 15 planes down from 20, and the Wall Street Journal had it that Richard Branson’s Virgin Group may buy 20% of Fly Asian Xpress.

However after all the hype Fernandes returned the rural air services to MAS in April 2007. Certain opposition politicians had said that the aircraft returned to MAS were in bad shape, due to lack of maintenance, but details of this are not really known.

For a long time, AirAsia owed also MAHB backdated airport taxes and took their time in settling the debt. Until April 2009, AirAsia owed RM132.1 million in airport taxes to MAHB, received discounts in settling the amount and only partly paid what it owed.

Detractors point to these as the ability of AirAsia to get out of bad deals and its powerful lobbying position, which they allege is being used again, this time against MAHB.

So how bad is the delay?

Maybank Investment Bank’s aviation analyst said that MAHB was overly optimistic in targeting to deliver KLIA2 in three years.

He said that while changes to the original blueprint of an airport are common, for a project of this size, it is less typical for changes to take place when the construction project is already ongoing, as it slows things down.

In defence of the delay, he said. “The first and main KLIA construction project took five years to complete (1993-98), and this excludes the one and half years taken for the planning and preparatory works.

“Suvarnabhumi airport in Bangkok took 4.5 years to complete, and Heathrow T5 took 5.5 years to complete,” the analyst said.

He added that KLIA2 is by far MAHB’s biggest job, having been only involved in terminal expansion and airport renovation previously.

The analyst added that MAHB’s statement is that KLIA2 was 92% complete as of end-May 2013, and contractors are working around the clock to get the job done.

Bina Puri has come on record to state that the physical completion of KLIA2 is likely to be in September or October this year.

But still the question remains as to why MAHB accommodated so many of the changes that AirAsia wanted and to what extent the delays were caused by this. But still, the responsibility for the delays would be MAHB’s and the contractors with AirAsia not being a party to the contracts between the former two.

That’s actually quite a nice place to be for AirAsia — let the airport operator and the contractors fight it out over who was responsible for the delays, at least partly caused by the changes that AirAsia itself wanted, and benefit from what could be the best low-cost carrier airport anywhere in the world when it is finished.

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Tomorrow: What now for MAHB?

Yesterday: What really happened at KLIA2