Positioning Malaysia as a Regional Hub

Bowen (2000) highlighted the role of national governments in the development of airline hubs in Southeast Asia. In particular, two factors under the purview of national governments have frequently been used either to reinforce or to overcome prevailing patterns of centrality in regional airline networks and, in turn, to ease the access to hub airports. These two factors are the size and quality of airport infrastructure provided at the hub as well as airline competition policy, including the privatization of national carriers and deregulation on domestic routes, which will be discussed in the following section. As tourism policies also impact air travel, it will also be reviewed in the following section.

A. Investing in Infrastructure Development

Kuala Lumpur International Airport (KLIA) was conceptualized in the early 1990s to be a world-class hub airport for the Asia Pacific region. Its development is part of the country's national development strategy whereby sustained investment in infrastructure is made to ensure the timely and adequate supply of facilities that can meet the development requirements of the country (Malaysia 1991; Malaysia 2001). In turn, this sustained investment in infrastructure has enabled Malaysia to be ranked ahead of most of her ASEAN neighbors and the People's Republic of China, with the exception of Singapore, in terms of the overall quality of infrastructure in the country by the World Economic Forum (as cited in ADB, JBIC, and World Bank 2005).

From 1991 until 2005, Malaysia spent a total of RM63 billion for the development of transport infrastructure in the country (Table 3 [ PDF 30.9KB | 1 page ]). A further RM30.3 billion has been allocated for the period of the Ninth Malaysia Plan (9MP: 2006–2010).4 The amount spent constituted an average of 21% of the total development expenditure of the country from 1991 until 2000. In the last five-year plan, the total expenditure on transport infrastructure amounted to 28% of total development expenditure, while in the current plan, the amount allocated is 15% of total development expenditure.

Out of this total expended on infrastructure development, there are various competing demands. Road development has consistently taken the largest share (60–65%) of the amount spent or allocated for developing the transport infrastructure in the country. Besides government expenditure, the private sector also expended RM15.2, RM7.9 and RM4 billion, respectively, during the Sixth, Seventh and Eighth Malaysia Plans under the privatization program of the country.

The second largest share in the amount expended for the development of transport infrastructure accrued to rail development, with the exception of the Sixth Malaysia Plan (6MP: 1991–95) when the amount spent on airport infrastructure took a slightly bigger share at 15.4% due to the development of KLIA. Port development took the second smallest share in the amount spent on transport infrastructure during the Sixth and Seventh Malaysia Plans (7MP: 1996–2000) while urban transport development had the smallest share. However, during the Eighth Malaysia Plan (8MP: 2001–2005), the amount spent on port development more than doubled from RM1.1 billion to RM2.⁴ billion due to expansion in capacity and upgrading of port and port-related facilities (Malaysia 2001b). The development of rural roads has been increasingly emphasized since the 8MP, with the amount allocated increasing to RM3.6 billion in the 9MP or a share of 12% of the total amount allocated for transport infrastructure development.

B. Airport Development

The development of air transport is viewed as an important foreign exchange earner in the services sector, while the development of a comprehensive network of airports is deemed essential for facilitating trade, tourism, and to accelerate socio-economic development (Ministry of Transport, http://www.mot.gov.my Accessed 29 April 2008). By 2007,⁵ Malaysia had 45 airports, including six international airports, 19 domestic airports and 20 STOLports (Ministry of Transport undated). The six international airports are KLIA, Penang International Airport, Langkawi International Airport, Senai International Airport (in Johor state) in Peninsular Malaysia, Kota Kinabalu International Airport in Sabah, and Kuching International Airport in Sarawak in East Malaysia.

According to former Prime Minister Mahatir Mohamad (1995), the construction of KLIA was needed as Subang International Airport had experienced growth of 14–15% per annum from 1990 to 1995. This resulted in the airport reaching its designated capacity of 5,454 passenger movements per hour by the mid-1990s (Mahatir 1995). Capacity at the old Subang International Airport was expanded while KLIA was being built. With the provision of 10,500 hectares of land, KLIA at a cost of US$2.8 billion is designed to be a world-class airport and a regional hub for the Asia Pacific region. Its development spanned several phases: Its first phase was completed on June 30, 1998, after seven years of conceptualization with a capacity of 25 million passengers per annum and 1.2 million metric tons of cargo (Table 4 [ PDF 27.9KB | 1 page ]).

During the second phase (1998–2015), a temporary Low Cost Carrier Terminal (LCCT) was constructed on a fast-track basis at the beginning of June 2005 and was fully operational in March 2006, at a cost of RM108 million (www.lcct.com.my May 7, 2007). The LCCT is located about 20 kilometers from the KLIA Main Terminal Building and has the capacity of handling 10 million passengers a year. It is projected that this capacity will be exhausted by 2012. The current facilities will be upgraded to handle up to 15 million passengers per year by 2015, thereby increasing the total capacity at KLIA to 40 million passengers per year.

In 2008, the government announced the construction of a new permanent LCCT in three to four years' time with a capacity of handling 25 million passengers a year, thereby increasing the capacity of KLIA to 50 million passengers per annum (ppa). The new terminal will be located closer to the main terminal than the existing one and an Express Rail Link service will be built to link the new LCCT with the main terminal. It is expected that this new facility will be built together with the second satellite terminal during the forthcoming Tenth Malaysia Plan (2010–2015). The new satellite terminal and new LCCT will probably increase the capacity of KLIA to 75 million ppa. There is, however, sufficient land and capacity to develop facilities to handle up to 100 million passengers and five million metric tons of cargo per annum, including four runways, by 2020.

Malaysia Airports Holdings Berhad (MAHB), a privatized entity, manages and operates all the airports in the country, with the exception of the Senai Airport in Johor and the Kerteh Airport in Terengganu. MAHB was incorporated in 1991 when the Malaysian Parliament passed a bill to separate the Department of Civil Aviation into two entities with different responsibilities. DCA remains the regulatory body for the airports and aviation industry in Malaysia while MAHB focuses on the operation, management, and maintenance of airports. MAHB was subsequently listed on the Kuala Lumpur Stock Exchange in November 1999. The major shareholder is Khazanah National Bhd, a government investment holding company (73%), while the foreign share amounted to 2.6% in 2005 (MAHB Annual Report 2005).

An aggressive marketing strategy was launched for the period 2006–2010 to promote KLIA as part of its 5-Year Transformation Strategy (MAHB Annual Report 2006). This included, among others, the extension of the Airline Incentive Program to the end of 2007 to attract more foreign airlines to fly into KLIA as well as the other four international airports managed by MAHB. Incentives given under the Program include free landing and parking charges for new foreign airlines and existing airlines mounting new destinations and additional frequencies for a minimum period of three years (MOT 12 May 2008 interview). New foreign airlines were also offered free office rental space for six months as well as a marketing support fund for new airlines operating in KLIA. MAHB is currently working on a new set of incentives that will go into effect in 2008.

As part of its promotional strategy, MAHB also attends major aviation-related forums all over the world in its marketing and promotional efforts. In 2006, it participated in no less than 120 meetings with various airlines to present marketing proposals and route analysis (MAHB Annual Report 2006). It will host the 14th World Route Development Forum or Routes KL in October 2008, making it the first Asian country to host this important airline-networking event, which is traditionally held annually in Europe. It is hoped that this event will attract some US airlines to operate from KLIA as there are so far no US airlines operating from it.

Commercial activities were stepped up with the establishment of a Commercial Management Department in September 2006 to oversee business development and to manage the related policies and procedures for MAHB's system of airports. This included, among others, the Retail Optimization Project to enhance the shopping-cum-dining experience of KLIA and other international airports managed by MAHB. MAHB has invested RM50 million in this project, which is slated for completion in July 2009 (New Straits Times, May 21 2008). This project aims to expand the airport's commercial revenue by increasing the average spent per passenger through the maximization of retail space and improvement in retail placement.

In 2004 the government designated Senai Airport in Johor (and next to Singapore), the only independently operated airport in the country, as the regional air cargo hub in an attempt to overcome the leakage of cargo from Malaysia that is being exported through Singapore. In view of this, RM100 million was approved under the Ninth Malaysia Plan to upgrade the facilities at this airport to facilitate the export of goods that are produced in the southern part of Malaysia that have found it more efficient to export through Singapore instead of KLIA (Interview MOT 12 May 2008).

1. Road Development

Apart from airports, road development is also important as it facilitates the movement of goods and people within the country. The total road network, comprising Federal and state roads, increased from a total of 53,984 in 1990 to 77,673 kilometers in 2005. The total amount spent for road development from 1991–2005 amounted to RM38.4 billion from the government and another RM27.1 billion from the private sector.

Road density has increased from 0.16 in 1990 to 0.24 kilometer of road per square kilometer in 2005, representing a 50% increase in road coverage and accessibility in any given area (Table 4). The road development index also showed improvement from 0.7 in 1990 to 0.85 in 2005 while the road service level improved from 2.96 kilometers per 1,000 population to 3.02 from 1995 to 2005.

Generally, the road infrastructure is better on the west coast of Peninsular Malaysia compared with the east coast and East Malaysia as the major cities and industries are located on the west coast of the peninsular side. A major development during the period under study is the construction of highways and expressways to connect all major cities and towns on the west coast of Peninsular Malaysia. The development of these highways and expressways was guided by the Highway Network Development Plan (1993–2004). Major road networks were privatized following the passage of the Federal Roads (Private Management) Act in 1984 in order to accelerate the construction of major expressways or highways and to reduce the fiscal burden. During the 8MP, (2001–2005), 16 privatized highway projects were undertaken to construct an additional 604.5 kilometers of the national road network, involving a capital expenditure of RM18.0 billion (Malaysia 2006a). Most of these projects were implemented through the Built-Operate-Transfer (BOT) System, which requires the private sector to construct, operate and maintain the facility using its own funds and, in return, collect the toll from the road users during the concession period. At the end of the concession period, the facilities will be transferred at no cost to the government. PLUS Expressways Bhd is the biggest of the highway concessionaires, operating approximately 85% of the country's highways. As of 2006, the total length of these toll highways is 1,238 kilometers. While some of the privatized highways are interstate in nature, quite a few are localized to Kuala Lumpur to ease the traffic congestion in the capital city.

The North–South Expressway, linking the northern tip of Peninsular Malaysia (Kayu Hitam in Kedah state⁶) to the southern tip (Johor Baru), was constructed progressively by sections from 1981 till 1994. It spans 847 kilometers and has reportedly lowered perceived vehicle operating and time saving cost by 25% per trip, after taking into account toll charges (Malaysia 1996). This expressway is also linked to KLIA via the North–South Central Link expressway. It is also part of the Asian Highway Network, which also connects into Thailand and Singapore.

Table 5: Road Development Indicators, 1990–2005 [ PDF 32.7KB | 1 page ]

In the case of Penang, since the state is geographically and administratively divided between the island of Penang and Seberang Perai on the peninsular side, the Penang Bridge was constructed in 1982 and completed in 1985 to link the island with the hinterland. Due to the heavy volume of traffic, the bridge is currently being broadened from the current two lanes to three lanes. Penang is linked to the North–South Expressway on its Seberang Perai side. In 2006, the government announced that a second bridge would be built under the Ninth Malaysia Plan. Johor, the southernmost state in Malaysia, is linked to Singapore via the Johor Causeway and the Malaysia–Singapore Second Crossing. This second link cost RM1.6 billion and was ready in 1997 (Malaysia 1996).

The extensive and relatively good road network in Malaysia had two major impacts on air travel: first the completion of the North–South Expressway (NSE) in the 1990s rendered domestic air travel uneconomical as the expressway cut inter-state road travel time by almost half (NST December 5, 2007). While the arrival of Low-Cost Carriers has restored the use of air travel to some extent, the relatively good highways continue to pose a challenge for domestic air travel in Malaysia. Second, the NSE also facilitated the movement of goods from different towns to the six international airports in the country. For example, although most electronic goods from the electronics hub in Penang in the north are exported through the Penang International Airport, some are trucked down to KLIA and even further south to Singapore for export based on the flight availabilities at these airports (Tham et al. 2007). The road network has also been tapped for sea-air transshipment purposes as Malaysia is also well served with good ports such as Port Klang and Port of Tanjung Pelepas (PTP) where it was reported that electronic goods arriving from Shanghai were trucked up to the Advanced Cargo Centre at KLIA. These goods were later flown to Frankfurt (NST August 11, 2008).

C. Airlines Development

1. National Carrier: Malaysian Airlines

Malaysia Airlines (MAS), the national carrier, started as a company when it was incorporated under the Companies Act in 1971 (Khairiah 2008). Although totally owned by the government then, the company was termed as an off-budget agency (OBA) as the day-today running of the company was outside the control of the government. It has its own employment policies and salary scheme and arranged its own funding and had no access to government loans. However, the government did provide support to the company in terms of government guarantees.

It was the first government agency that was privatized in 1985 as it was already a body incorporated under the Companies Act. Upon listing, 30% of its equity was offered to the public while the government retained a 70% share, with a long-term strategy to eventually reduce it to 30% in order to enable the government to appoint directors, including the chairman and the managing director.

Although the government's share did fall over time, the carrier's poor financial performance and costly fleet expansion subsequently slowed the pace of further privatization through public offerings (Bowen and Leinbach 1995). In 1994, 32% of the government's shares in MAS were sold to a single individual, Tajudin Ramli, resulting in the government's share falling to just 10%.

In 2000, six years after the government had privatized its controlling stake to Tajudin Ramli, MAS incurred RM9.5 billion in debt and four consecutive years of losses. Consequently, the government renationalized MAS in 2000 by buying back Tajudin's shares at RM8 each, although the prevailing market price was RM3.62. Some of the losses incurred were attributed to artificially low domestic fares that were imposed by the government. Hence, it continued to suffer losses after re-nationalization until 2002/2003 and 2003/2004. In the year 2005, MAS reported a loss of RM1.3 million due to increasing fuel costs and high operating costs.

A new Chief Operating Officer was appointed in 2005 and MAS launched its Business Turnaround Plan in 2006. The turnaround plan contained a series of specific cost and revenue actions to curtail further losses due to low yields, inefficient networks, and other factors such as poor pricing, rising cost structure, a mismatched fleet, weak operational performance, as well as significant social and political obligations (MAS 2006). Several new initiatives were implemented, including route rationalization, rescheduling all of its flight timing, diversifying its revenues, and changing its mode of operations from point to point services to hub and spoke services.

As part of its domestic route rationalization, MAS initially relinquished 96 of its non-trunk routes to Air Asia, leaving it to operate 22 routes. It has subsequently reinstated some of the routes and now competes with Air Asia on 25 trunk routes (MAS 2007). International routes were also rationalized from 114 to 90. Since it is not a member of any of the global alliances, MAS has embarked on a plan to form a network that resembles an alliance without joining an alliance. For example, Malaysia has code share arrangements with Northwest Alliance and KLM/Air France, which in turn are members of the Sky Team (Mahani et al. 2005). Based on multiple code share agreements, MAS has a global network that comprises 16 domestic and 82 international destinations at the end of 2007. Of the international destinations, 24 are serviced together with other airline partners.

The company subsequently registered profits in 2007, ending a series of losses since 2005. In 2008, the improved profit performance of 2007 is being severely challenged by the huge jump in fuel costs, as in the case of other airlines.

2. Emergence of Low-Cost Carriers: Air Asia and Firefly

In 2001, the government approved the establishment of the first low cost carrier based in Malaysia, namely Air Asia. The airline is not new as a government-owned conglomerate established it in 1993 but it was heavily in debt when it was sold to Tony Fernandes' company Tune Air Sdn. Bhd for the token sum of one ringgit. Fernandes then proceeded to reengineer the airline, turning in a profit in 2002.

Although it was initially established as a domestic carrier, it has since spread its wings to the international arena, with its first international inaugural flight to Bangkok (Table 6 [ PDF 28.3KB | 1 page ]). With the rapid expansion of domestic and international routes, the number of passengers traveling by Air Asia has grown strongly from 5.1 million in 2006 to 7.7 million to 2007 (Ministry of Transport 2007 unpublished data). It has received several awards since its establishment, notably Asia's Best Budget Airline under the Best in Travel Poll 2007 by SmartTravel Asia.com and the Best Low Cost Airlines in Asia in 2007 by SkyTrax.⁷

Firefly, a wholly owned subsidiary of MAS, was established in 2007 as a community airline⁸ to compete with Air Asia and to develop additional business streams to increase profit. With hubs in Penang and Subang, this airline flies to a few destinations in Malaysia, Indonesia, and Thailand. The carrier is targeted to complement MAS by flying to destinations that are not financially viable for MAS so that both operations can match the needs of full service passenger and budget travelers.

3. Increasing Competition between MAS and Air Asia

As in the case of other countries, the introduction of second tier airlines such as SilkAir, Eva Airways, Japan Asia Airways, All Nippon Airways, Asiana, Sempati and DragonAir has injected competition for established national carriers, some of which have long operated as a monopoly in their home countries (Chin 1997). Although Air Asia started out as an LCC in the domestic sector, it has since ventured beyond Malaysian shores and has started to include long-haul services from 2007 onwards. Since then, competition has heightened between the full service carrier (FSC) and the low cost carrier (LCC). First, in February 2008, the virtual monopoly of MAS and SIA on the Kuala Lumpur–Singapore route was ended with entry of three budget carriers on this route. This lucrative route was served by 180 flights a week by MAS and SIA and 14 flights by Japan Airlines under Fifth Freedom rights prior to 2008. Air Asia from Malaysia, and Tiger Airways⁹ and Jetstar Asia from Singapore have been allowed limited flights on this route. MAS and Singapore Airlines (SIA) will terminate the 30-year-old Shuttle Agreement¹⁰ (which lets MAS and SIA fix fares) as of June 2008 (NST Biz News Saturday 17 May 2008). This route may be underserved considering the strong bilateral economic ties between Malaysia and Singapore and as compared to the 375 weekly Singapore–Jakarta flights as well as 307 bilateral weekly flights between Singapore– Bangkok. The opening is viewed as a significant development in the history of ASEAN airline industry and an important first step toward the liberalization of air services in the ASEAN region.

Second, in May the same year, MAS became the first FCC to offer “free seats” or seats that charge only surcharges such as fuel, insurance, airport tax, and administration fee for all domestic destinations. MAS subsequently extended this offer to all destinations within ASEAN countries, with the exception of Yangon. Its subsidiary is also offering zero fares for all its routes. Since the zero fare strategy is usually a model used only by LCCs, the new strategy of MAS to sell its unsold seats in the domestic and ASEAN routes has triggered a new fare scheme from Air Asia to better the offer of MAS.

D. Specific Policies

In the case of Malaysia, besides investing in infrastructure and controlling airline competition, the government also implemented some specific policies to promote KLIA as a regional hub. For example, the KLIA Hubbing Development Committee was set up in December 2000 (Malaysia 2001). This committee is made up of one representative from MAHB, two representatives from the Ministry of Transport, and one representative from the Ministry of Finance. The committee meets once a year to examine three areas for the development of KLIA: traffic facilities, connectivity through MAS service, and marketing (WTTC 2001). It also sets performance and services standards for KLIA based on world best practices. The KLIA Hubbing Unit was subsequently set up within the Aviation Department in the Ministry of Transport to liaise between the Committee and MAHB in the implementation of the plans proposed by the Committee. This unit oversees the utilization of the Trust Fund that was set up to attract airlines to KLIA. A budget of US$131,579 over a three-year period was provided for promotional activities and incentives for new airlines introducing passenger or freighter services (Ahmad Husni 2004).

A Free Commercial Zone was also set up to facilitate the handling of cargo at KLIA. The FCZ uses the paperless environment concept with value added activities such as trading, break bulking, grading, sorting, re-packing and re-labeling. A one- stop center is also provided to expedite the process of cargo clearance with additional support services such as multi-banking services, clinics, food and beverage and also postal services.

Government-to-government promotional activities are also conducted through air talks with other countries. Joint-promotional activities with MAHB and the Ministry of Tourism are also used to market KLIA. Malaysia has not revised its airport tariffs since 1969 and KLIA has one of the lowest tariffs in the world.

E. Promoting Tourism

Since tourism bears a close relationship with the development of the aviation sector, various incentives are given to encourage the development of the tourism sector in Malaysia. For example, the Promotion of Investment Act of 1986 promotes the establishment and development of industrial, agricultural and other commercial enterprises in Malaysia through tax incentives. For the tourism sector, these incentives are available to hotel accommodation projects and other tourist projects. They include pioneer status, investment tax allowances, industrial building allowances, duty exemptions, income tax exemptions, and reductions in service tax. For example, companies building luxury ships are eligible to apply for pioneer status. In addition, sector specific incentives were also granted (See Appendix 1 [ PDF 24KB | 1 page ] for the list). It was reported that during the period, 1996–2005, 360 hotel projects were granted tax incentives, 30 tourist projects were also granted incentives and 180 budget hotels were also given tax incentives to encourage domestic tourism (Malaysia 2006b).

Numerous tourism products were introduced over the years, such as eco-tourism, agrotourism home-stay programmes, cultural and heritage tourism, thematic events, meetings, incentives, conventions and exhibitions, sports and recreation tourism, education, and health tourism. Malaysia My Second Home was also introduced to encourage foreigners, their spouses and their dependents to select Malaysia as their second home.

Following the relative success of the Visit Thailand Year in 1987, Malaysia also launched its own Visit Malaysia Year (VMY) campaigns. In 2007, Malaysia launched its Third VMY campaign, after two previous campaigns in 1990 and 1994. The current VMY campaign has set as a target more than 20 million visitors and more than RM44 million in revenue. In January 2008, it was reported 20.9 million foreign visitors visited Malaysia in 2007 and the tourism industry generated RM46.1 billion in revenue in the same year (Ministry of Tourism undated).

The number of tourist arrivals more than doubled from 7.5 million in 1995 to 16.4 million in 2005 (Table 7 [ PDF 27.2KB | 1 page ]). Total tourists receipts have grown from RM9.2 billion to RM31.0 billion over the same duration. By 2020, tourist arrivals are expected to reach 24 million while tourist receipts are expected to reach RM59.4 billion (Malaysia 2006b). Employment in this sector has grown from 67,214 in 1995 to 451,000 in 2005. ASEAN, the traditional source of tourist visitors for Malaysia, remained the largest region of origin with a share of 77% in 2005 while the share of Japanese tourists has declined from 4.4%in 1995 to 1.9% in 2005. On the other hand, tourists from the People's Republic of China and West Asia have increased in numbers. The importance of this sector as a source of foreign exchange earnings can be seen in the increase in the net contribution by tourism from RM11.2 billion in 2000 to RM18.1 billion in 2005 (Malaysia 2006a). Spillovers from this sector to other sectors such as hotels can be seen in the increase in the number of hotels and hotel rooms as well as the average occupancy rate over time.

Long-term strategies include the revival of long-haul markets (such as North Asia, Europe, North America and Oceania), maintaining the current focus on fast growing markets such as the People's Republic of China, India and West Asia, and capitalizing the Malaysia Truly Asia campaign (Tengku Adnan 2006). New growth areas such as emerging markets, niche products, and promotion of special events such as F1 Grand Prix will also be promoted. The Ministry is also keen to see that the economic and social benefits from international tourism are dispersed beyond the major cities and tourist regions in the country.

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