The Malaysian Aviation Commission (“MAVCOM”) has recently published a paper titled “Regulation of Aviation Service Charges – First Consultation Paper” (“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 our aviation sector.
 
MAVCOM and Passenger Service Charges
 
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, which include amongst others landing charges, parking charges, security charges and, perhaps most notably, passenger service charges (“PSC”).¹
 
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.
 
MAVCOM’s Pre-Pandemic Approach
 
Since 2018, MAVCOM has standardised the PSC rates in Malaysia across all local airports, irrespective of the level of services or facilities provided. In particular, the PSC for domestic flights is RM11, for flights within ASEAN is RM35 and for long-haul flights is RM73.²
 
However, these standardised rates were initially meant to only be temporary. Between 2018 to 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.
 
MAVCOM’s Current Recommended Approach
 
In its recent Consultation Paper, MAVCOM has highlighted that air travel in Malaysia has 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 neither suitable nor practical at the present time. This is because, with such relatively low levels of demand compared to 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 to 2025 (“Regulatory Period 1”), 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 1, thereby leading to significant losses for such operators. To counter this, MAVCOM states that it is considering whether to introduce a loss capitalisation mechanism which would keep track of efficient losses made during Regulatory Period 1 and enable such losses (or a portion thereof) to be recovered by airport operators through prices in the future.
 
MAVCOM has welcomed feedback on its proposals by 30 August 2022.
 
Comment
 
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 [2020] 11 MLJ 709, which determined inter alia that the PSC rates gazetted by MAVCOM are fixed rates which are not subject to negotiation and must be collected by airlines.
 
This Alert is prepared by Shannon Rajan (Partner) and Eric Gabriel Gomez (Senior Associate) of the Aviation Practice Group of Skrine. 

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