Mavcom says govt’s aid on airlines should be last resort

More targeted options are readily available for airlines to cope with Covid-19 impact

by RAHIMI YUNUS/ pic by RAZAK GHAZALI

MALAYSIAN Aviation Commission (Mavcom) has warned of a moral hazard and public fund wastage if the government does provide financial aid to ailing airlines hit by the coronavirus pandemic.

The country’s economic and commercial civil aviation regulator said a rigorous cost-benefit analysis is needed and government assistance to the aviation industry should be the last resort.

“Given the pressures on the Malaysian government’s fiscal resources, Mavcom recommends that industry operators must exhaust other options first, including assistance from their respective shareholders, before approaching the government, which should act only as a lender of last resort for the industry,” it said in a recent commentary.

“While assisting industry players provide relief to distressed parties, the measures may also risk moral hazard and wastage of public funds,” the regulator added.

It said a haphazard financial assistance offering may risk prolonging inefficiencies by shielding the industry players from taking difficult but necessary measures.

The Covid-19 outbreak has spelled disaster for businesses across all sectors but aviation is deemed more catastrophic than others.

In Asia Pacific, Moody’s Investors Service Inc has rated the airline industry as high exposure to coronavirus impact due to travel restrictions and sensitivity of consumer demand.

Other industries in the high exposure category are automotive, gaming, retail and hospitality, oil and gas, and global shipping.

Conversely, Mavcom said allowing failing players to collapse will also have negative consequences such as the loss of jobs, reduced international connectivity and disrupted supply chains.

Local passenger airlines employ over 20,000 staff and air cargo accounts about 30% of Malaysia’s international trade value. China, Indonesia and India are key aviation markets for the country, according to Mavcom.

Given this backdrop, Mavcom viewed that any financial assistance should be carefully structured to ensure that it is not treated as windfall gains for airline shareholders.

Mavcom said more targeted options, instead of outright bailouts, are available such as funding measures undertaken by airlines to combat the spread of Covid-19, subsidies and incentives for airlines to retain employees, temporarily waiving government-imposed charges, facilitating public or private loans with subsidised interest rates, and targeted tax exemptions and subsidies for services transporting essential goods and people.

If the government decide to provide financial assistance, Mavcom recommended the government to adhere to good governance principles including non-discriminatory, well-targeted, proportionate with a sunset clause, accountability, transparency and minimising any potential negative effects.

Mavcom also recommended for the government to adopt an ownership liberalisation policy for the aviation industry to allow industry players to access a wide range of funding sources from the local and international capital markets.

The regulator added that the current pandemic may provide further impetus for airlines merger but reminded that any merger transactions are subject to the merger control law.

The International Air Transport Association (IATA) has made an urgent call for governments in the Asia-Pacific region including Malaysia to quickly roll out an aviation-specific relief package to help local carriers survive.

IATA, which represents some 290 airlines comprising 82% of global air traffic, predicted that the Asia-Pacific region will see passenger demand reduced by 37% this year with a revenue loss of US$88 billion (RM383 billion).

IATA had forecast that Malaysia could see passenger demand in 2020 reduced by 39% based on a scenario where severe restrictions on travel are lifted after three months and followed by gradual recovery, a reduction of over 25 million passenger demands, some US$3.3 billion revenue impact.

Australia, New Zealand and Singapore have announced hundreds of billions of rescue packages to support their aviation industry.

The Malaysian Reserve reported that Khazanah Nasional Bhd is doing “the best it can” to support Malaysia Aviation Group which includes Malaysia Airlines Bhd.

AirAsia Group Bhd CEO Tan Sri Tony Fernandes said in a Bloomberg TV interview that the low-cost carrier is in talks with the government for loans, stressing that the airline does not need a “bailout”.