Is Badawi Bailing Out his Friends?

Malaysia's cabinet approves a low-cost air terminal to help out a political ally

With barely three months until March when Prime Minister Abdullah Ahmad Badawi is due to relinquish his office, he has approved a project that reeks of an attempt to salvage the profitability of conglomerate Sime Darby and to further buoy the country’s budget airline, AirAsia, which is controlled by a Badawi ally, Tony Fernandes.

Over the objections of listed Malaysia Airports Bhd, which operates the current Kuala Lumpur International Airport in Sepang and 38 other airports around the country, and which is also building a new permanent low-cost carrier terminal to replace its current facility, Sime Darby and AirAsia have been given the green light by the government to construct a new terminal in Labu, Negeri Sembilan, about 50km from Kuala Lumpur, and 10 km from KL International.

The new airport, “KLIA-East@Labu”, which will be part of Sime’s Negeri Sembilan Vision City, is reportedly estimated to cost RM1.6 bil (US$452 mil), excluding land costs, and will span 2,800 hectares in the home state of Khairy Jamaluddin, Badawi’s controversial son-in-law and a member of parliament. There is no indication whether government or public money will be used indirectly for the project, or who will pay for government facilities including highways and connections to the new airport. AirAsia said in a statement on Jan. 8 that the airline is negotiating with international and domestic investors to fund the construction of the proposed facility.

This hardly the first time that a company has been awarded lucrative contracts under the Barisan Nasional, the ruling coalition that has dominated the country for half a century. It is the kind of crony capitalism that had been practiced for two decades by Badawi’s predecessor, Mahathir Mohamad, and that Badawi had vowed to stamp out when he became prime minister in 2003.

It is also the second major airport project linked to Khairy. Last March, Fajarbaru Builder Group Bhd, formerly known as Syarikat Pembenaan Fajar Baru (Rembau) Sdn Bhd, won a RM124 million contract to expand the current low-budget terminal at Sepang. Wee Choo Keong, a parliamentarian for Kuala Lumpur, pointed out in July in parliament that the company is based in the constituency of "someone's son-in-law” and had no experience in building airports.

When Sepang was completed in 1998, then-Prime Minister Mahathir said the facility was designed to last 100 years and would be able to accommodate 125 million passengers a year. Expansion plans forecast two terminals, four satellites and five runways. The airport company was supposed to have completed an extension to the current low-cost carrier terminal at Sepang 16 months ago. However, only the international arrival hall for low-cost carriers is finished. Fernandes has argued that the terminal won’t be ready for his use before 2014, and is too late to keep up with the airline’s passenger growth.

Bernama, the national news agency, reported on January 8 that Fernandes said that “in two years' time, this airline will go bust if we do not have the facility” and that “the key thing is we cannot slow down our growth because we have bought planes.” AirAsia’s third quarter results in September marked core operating losses of RM76 million, mainly due to a fuel hedging policy which gambled that crude oil would hover around US$70 per barrel. Crude is now lingering around US$40 per barrel.

AirAsia has cited the inability of the existing LCCT’s 10 million passengers per year capacity to meet demand as a reason for building the new airport. Passenger traffic was expected to grow by 25 percent by the end of 2008, from 15 million to 19 million, and forecast to grow at the same rate this year, Fernandes told local media. The current low-cost terminal’s increased capacity after expansion to 15 million passengers per year falls short of AirAsia’s requirements, Transport Minister Ong Tee Keat told local media.

After construction, Sime will pass the “whole project including the land” to AirAsia. It’s unclear who will operate the airport and how much additional government funds will be required to operate the Customs, Immigration and Quarantine departments at the airport, among other things.
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When completed in 2011, the proposed new airport will exclusively serve AirAsia. Other low cost carriers will use a RM108 million terminal located about 20km away from KLIA, which was hastily constructed in June 2005 and was operational by March 2006.

KLIA-East@Labu may be the boon that Sime needs to weather the fall in commodity prices. Last month, Sime Darby proposed to buy and privatize the National Heart Centre, which is wholly owned by the Ministry of Finance, but that was met by fierce objections from the public, particularly from bloggers and others who argued that Sime Darby wanted access to the heart center’s cash reserve, estimated at RM250 million.

After Sime Darby’s takeover of plantation giants Golden Hope Plantations Bhd and Kumpulan Guthrie Bhd in Nov 2007, the conglomerate became the world's leading oil palm plantation group with 543,000 hectares of land relying heavily on palm oil, which contributed 47 percent of revenue at that time.

Since then, CPO has dived from about RM3,000 per tonne to about RM1,800. The futures market also suggests a downward trend. The conglomerate announced recently that profits would fall by 46 percent for the current fiscal year and is said by bloggers to be facing oil palm trading losses of RM80 million. According to its first quarter results in September last year, plantation revenue at RM3,491 mil contributed 40 percent of total revenue, and the average CPO selling price was RM3,151 per tonne. Other major revenue-generating arms – construction and cars – are set to crunch under sharply reduced global demand.

All this has caught the eye of the ever vigilant Mahathir, who delivered a caustic critique of the airport project on his widely-read blog, Che Det.

 

“We paid RM8 billion for KLIA Sepang,” Mahathir wrote. “Even a small airport at today's prices would be near to RM2 billion. The distance to Kuala Lumpur would be longer but of course it would be nearer Seremban and other parts in Negri Sembilan,” he wrote on Jan 6 in his blog. “But that's all right as you don't pay any fare for the flights, only for the fares to the airport.”

Currently, a taxi ride from Kuala Lumpur to KL International costs about RM86. From the main station in Kuala Lumpur, KL Sentral, an adult ticket on the Express Rail Link costs RM35 while a ticket to the low-cost terminal costs another RM9.

Despite a glum global economy, Fernandez remains upbeat about AirAsia’s future. By 2013, he told reporters, estimated combined annual traffic of the AirAsia group, which includes AirAsia X, its international fleet, would total 60 million passengers per year, making “only Japan Airlines…bigger than us (them) in terms of passengers” while the group’s fleet would have 184 aircraft, more than Singapore Airlines and Thai Airlines combined and Malaysia Airline’s estimated fleet of 125 aircraft.

AirAsia, says Wikipedia, was originally a debt-ridden airline founded by DRB-Hicom in 1993 and started operations in 1996. It was sold to Fernandez in 2001 for a token sum of RM1 (about US$0.28 in today’s exchange rates). He turned a profit by the next year and the company now has shares in regional affiliated companies, Thai AirAsia and Indonesia AirAsia, and international budget carrier, Air Asia X, in which Richard Branson’s Virgin Group owns 16 percent.

AirAsia’s share price has dived 44 percent year-on-year on Jan 8 from RM1.620 to a low RM0.900.   Its market capitalization is RM2 billion.

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