Air travel has been one of the hardest-hit industries in the time of the COVID-19 pandemic. Flight cancellations, compounded by travel bans or restrictions on international flights imposed by countries around the world, have caused a staggering impact on the global airline industry, driving airlines into substantial defaults of their contractual obligations, if not technical insolvency.
More than 140 of the 195 countries in the world have taken drastic measures, including imposing full lockdowns, shutting down airports, imposing travel restrictions and completely sealing their borders, in a desperate attempt to "flatten the curve" and to contain the COVID-19 pandemic1.
Airlines have had to ground their flights causing the plummeting of shares2 where airline share prices are experiencing greater decline than during the SARS crisis in 2002/2003.
On 5 March 2020, the International Air Transport Association (IATA) updated3 its analysis of the financial impact of the COVID-19 public health emergency on the global air transport industry. IATA now projects 2020 global revenue losses of between USD63 billion (in a scenario where COVID-19 is contained in current markets with over 100 cases as of 2 March 2020) and USD113 billion (in a scenario with a broader spreading of COVID-19) for the passenger business.
The Movement Control Order in Malaysia
On 16 March 2020, the Malaysian Government decided to implement a nationwide Movement Control Order4 which encompasses, among others, the restriction of movement and assembly nationwide, and a complete travel restriction of foreign visitors and tourists into Malaysia.
The Malaysian Government further issued the Prevention and Control of Infectious Diseases (Declaration of Infected Local Areas) Order 2020 on 17 March 2020 declaring all States and Federal Territories of Malaysia as infected areas of the COVID-19 disease. Following that, the Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020 was issued which formalised the control of movement of its citizens, prohibition of any gatherings, whether for religious, sports, recreational, social or cultural purposes, as well as the imposition of a requirement for Malaysian citizens and permanent residents returning from overseas to undergo health examination upon arrival in Malaysia.
The Movement Control Order which was imposed for an initial 14-day period from 18 to 31 March 2020, was extended for 14 days to 14 April 2020, and again to 28 April 2020.
What does the future look like for the Malaysian Aviation Industry?
On 27 March 2020, the Malaysian Aviation Commission (MAVCOM)5 published its "Waypoint Report: Malaysian Aviation Industry Outlook (March 2020)6" where it revised its 2020 passenger traffic forecast from a growth of between 4.6% and 5.7% Year-on-Year (YoY) to a contraction of between -36.2% and -38.1% YoY, as demand for air travel continues to be severely impacted by the COVID-19 pandemic.
MAVCOM reports a bleak outlook in 2020 for the Malaysian aviation services market where the revenue-at-risk for Malaysian carriers and aerodrome operators is estimated at RM7.2 billion in 2020. MAVCOM foresees that the significant decline in tourist arrivals and receipts, passenger traffic, as well as revenue due to lower air travel demand could be made worse if the pandemic proves hard to contain, leading to prolonged travel restrictions. As of 26 March 2020, MAVCOM reports that 7.3 million seats have already been cancelled, representing 8.6% of total seat capacity for Malaysian carriers in 2020. Foreign carriers operating to and from Malaysia have also reduced seat capacity by 6.7 million (24.5% of total seat capacity for foreign carriers) in 2020.
In Malaysia, the national flag carrier, Malaysia Airlines Berhad (MAS) was reported to have reduced operations due to the COVID-19 pandemic and offered its 13,000 employees (including employees employed by subsidiaries of Malaysia Aviation Group (MAG) such as MAB Kargo, MAB Engineering, Firefly and MASwings) the option of taking three months of unpaid leave or five days of unpaid leave per month for a period of three months beginning in April 20207.
Meanwhile, the AirAsia Group has temporarily hibernated most of its fleet across the network. Its management and senior employees have also volunteered a salary sacrifice, ranging from 100% at the very top to 15%, in their effort to further manage and contain costs8. Despite these efforts, research firm, CGS-CIMB Research has estimated that the low-cost carrier's current cash balance may only support it for less than five months9. AirAsia Group has also encouraged its passengers, whose flights have been cancelled due to the Movement Control Order, to accept credit as an alternative to a refund on their flight tickets.
The other industry players in Malaysia, including Malindo Air, the various charter and cargo airlines, as well as other aviation-related companies, are similarly grappling with a grim outlook on their operations. Some market observers have called on civil aviation regulator, the Civil Aviation Authority of Malaysia (CAAM), to "step up their game and play its role to assist (those) affected"10.
The impact of the COVID-19 pandemic on the aviation industry has been so significant that even the financially strongest of airlines are now looking fragile. Aviation and travel market intelligence provider, Centre for Aviation (CAPA), had warned in mid-March that by the end of May 2020, "most airlines in the world will be bankrupt" and had called on coordinated government and industry intervention, "if catastrophe is to be avoided".
What are the initiatives undertaken by the Malaysian Government to support the aviation industry?
On 27 February 2020, the Malaysian Government announced a RM20 billion 2020 Economic Stimulus Package ("Stimulus Package")11 to mitigate the economic impact of the COVID-19 outbreak. The Stimulus Package includes the following initiatives to assist the Malaysian aviation services market:
- The temporary deferment of monthly income tax instalment payments for businesses in the tourism sector (for six months from April to September 2020)
- The allocation of RM500 million to provide a temporary 15% discount (for six months from April to September 2020) on electricity bills to those in the tourism sector and tourism-dependent retail industry, including hotels, travel agencies, airlines, shopping malls, conventions and exhibition centres
- The temporary exemption of hotels and travel related companies from Human Resource Development Fund levies (for a period of six months from April to September 2020)
- Financial relief from all banks in the form of payment moratorium comprising restructuring and rescheduling of loans for affected businesses and individuals
- Rebates on rental of premises at airports as well as landing and parking charges to be given by Malaysia Airports Holdings Berhad
- Personal income tax relief of up to RM1,000 on expenditure related to domestic tourism, and digital vouchers for domestic tourism of up to RM100 per person for domestic flights, rails and hotel accommodations for all Malaysians
Further to the Stimulus Package, the Malaysian Government announced its intention to pursue further stimulus measures, which could include measures to aid the aviation services market.
In response to that, on 27 March 2020, MAVCOM published its "Commentary on Government Assistance To The Aviation Industry Amidst the COVID-19 Pandemic"12, where MAVCOM set out its views and position on the Malaysian Government's possible future assistance to the aviation industry during the COVID-19 pandemic and resulting imposition of the nationwide Movement Control Order. MAVCOM's views and recommendations are summarised as follows:
- Malaysian Government's assistance should be the
MAVCOM is of the view that the Malaysian Government should act as the lender of last resort to the aviation industry players. Industry operators should exhaust all other alternatives before seeking government assistance. Instead of outright bailouts and to ensure that the measures are focused on policy objectives of protecting employees and consumers, as well as maintaining essential air transport services, MAVCOM recommends a carefully structured financial assistance with more targeted options, which provides for:
- funding measures undertaken by airlines to combat the spread of COVID-19, including flight disinfection, and medical and hygiene equipment
- subsidies and incentives for airlines to retain employees on their payroll
- temporarily waiving government-imposed charges such as air traffic control charges, airport departure levies, and industry development levies
- facilitating public or private loans with subsidised interest rates
- targeted tax exemptions and subsidies for services transporting essential goods and people
- Malaysian Government to adhere to the principles of
In deciding the form of financial assistance, the Malaysian Government must focus on its primary policy objectives. MAVCOM suggests that the Malaysian Government prioritise measures that mitigate the loss of employment, minimise consumer losses, and support the continuation of essential air connectivity.
- Principles of good governance to be strictly imposed on
and adhered to:
To prevent the misuse of public funds, the Malaysian Government's assistance measures should be based on, among others, the following principles:
- non-discrimination - the assistance should be made available to all domestic players regardless of their ownership status
- well-targeted to effectively remedy the identified problem - financial assistance must have a clear purpose, scope, considerations, and limits
- proportionate with a sunset clause to ensure that the financial assistance is not beyond what is required
- subject to accountability with the financial assistance having clear governance structure and recipients being audited by independent auditors
- transparent with the details of the financial assistance made public
- any potential negative effects should be minimised, including distortions to the competition process in the market
- Malaysian Government to consider non-fiscal
MAVCOM recommends that the Malaysian Government considers liberalising policies on ownership for the aviation sector to allow industry players to access a wider range of funding sources from the local and international capital markets. Such ownership liberalisation must however be accompanied by effective regulatory oversight to ensure industry players are not abusing their liberalisation rights.
- Merger of airlines may be considered but
will continue to be subject to merger control
Any anticipated merger transactions will continue to be subject to the merger control law as incorporated into the MAVCOM Act 2015 to safeguard industry and consumer interests. Such proposed mergers must be submitted to MAVCOM for approval. MAVCOM will consider if the immediate relief from such consolidation is balanced against any risks to the long-term health and competitiveness of the aviation services market.
On 8 April 2020, in aid of the airlines that are currently inundated with an unprecedented huge volume of consumers wanting to make changes to their bookings or seeking credit refunds, MAVCOM had published a "Notice to Airlines Relating to the Malaysian Aviation Consumer Protection Code 2016"13 where it had relaxed the requirements imposed on airlines by the Malaysian Aviation Consumer Protection Code 2016 (MACPC):
- Extended timeline for resolution of complaints and
remittance of refunds
Airlines are now given an extended timeline of 60 days (from 30 days14) to resolve complaints and remittance of refunds from the date of receipt of the complaint and claim of refund. This is applicable to all complaints and refund requests received from 1 February 2020 to 30 September 2020. Notwithstanding the extension of the timeline, the airlines are required to endeavour, on a best effort basis, to resolve all complaints and remit refunds as soon as practicable.
- Communication of change in flight status
MAVCOM has waived the requirements for airlines to communicate to the passengers and give public information about any change of flight status15. This is applicable to all affected flights from the period of 1 February 2020 to 30 September 2020. Airlines shall however endeavour to notify the consumers as soon as the airlines become aware of any flight change.
Will the initiatives of the Malaysian Government suffice to mitigate the deep impact of the COVID-19?
The Malaysian aviation industry players are facing unprecedented challenges arising from the COVID-19 pandemic. As the airlines in Malaysia are doing their best to stay afloat in these challenging times, it is hoped that the Stimulus Package will help soften the impact on the aviation services market.
Aggressive measures to aid the aviation industry are being proposed and rolled out in countries worldwide. Across the causeway, the Singapore Government has set aside more than SGD1 billion for sectors such as aviation and tourism that have been hardest hit by the pandemic, which was described as the "single biggest shock that air hubs and airlines around the world had ever experienced"16. More than USD750 million will go to schemes aimed at supporting Singapore's aviation sector, as follows17:
- More than SGD400 million of that money will go to an enhanced job support scheme introduced to help businesses in the aviation sector retain local workers, including licensed hotels, travel agencies, tourist attractions, cruise terminals and operators, where the Singapore Government will pay up to 75% of the first SGD4,600 of a worker's monthly wages
- The other SGD350 million will be used for an enhanced aviation support package introduced to fund measures such as rebates on landing and parking charges, and rental relief for airlines, ground handlers and cargo agents, and aimed at providing relief to businesses in the aviation sector
The Civil Aviation Authority of Singapore (CAAS) also announced that it will allow Singapore carriers and the airport operator to defer the payment of certain fees by up to one year, as an additional support measure for the sector.
CAPA has praised the steps taken by the Singapore Government and considers it to have emerged as one of the leaders in supporting airlines18. On the other hand, CAPA commented that in most cases the steps taken by governments across the Asia-Pacific region had been "timid and, so far, inadequate".
Most Governments have introduced packages based on waivers of fees and charges, and state-backed loans for airlines. Depending on the financial strength of the airline, some may be able to survive for a longer period.
Aviation industry groups have also been pressing Asia-Pacific governments to take further steps in support of airlines. IATA has written to 18 governments in Asia-Pacific (including Japan, Malaysia, Republic of Korea and Thailand) to appeal for emergency support to airlines, proposing options such as direct financial support, loans and loan guarantees, and tax relief19.
The measures already announced by the Malaysian Government will no doubt somewhat alleviate the airlines' financial burden. However, the question remains, to what extent will the blow caused by this "single biggest shock" be cushioned by the Malaysian Government's Stimulus Package?
It appears that a major factor in determining the survival of the airlines is the Government's will and financial capability to provide a lifeline of financial support to tide them over the crisis. Not only are the millions of jobs supported by the aviation industry at stake, the aviation sector plays a vital role to "support the economic recovery of the country, connect manufacturing hubs and support tourism when we get through the COVID-19 crisis"20.
The aviation sector in Malaysia has been waiting for and anticipating urgent substantial support from the Malaysian Government. Sadly, the measures undertaken by the Government have been dismal and considered less than adequate. If the "curve" does not "flatten" soon and the spread of the virus continues exponentially, the airlines in Malaysia will be in dire need for further government support to stay afloat.
For the sake of the Malaysian aviation industry, we hope that the Malaysian Government will rise to the occasion, to avoid the complete wipe-out of the airlines in Malaysia.
3. https://www.iata.org/en/pressroom/pr/2020-03-05-01/; IATA's previous analysis (issued on 20 February 2020) put lost revenues at USD29.3 billion based on a scenario that would see the impact of COVID-19 largely confined to markets associated with China. Since that time, the virus has spread to over 80 countries and forward bookings have been severely impacted on routes beyond China.
5. MAVCOM is an independent entity established under the Malaysian Aviation Commission Act 2015 (MAVCOM Act 2015) to regulate economic and commercial matters related to civil aviation in Malaysia. The role of MAVCOM differs from those of the Ministry of Transport (MOT) and the Civil Aviation Authority of Malaysia (CAAM). The MOT is responsible for industry policy-making and government-to-government discussions (including to spearhead bilateral or multilateral negotiations on traffic rights), while the CAAM shall continue to regulate technical and safety matters for Malaysia's civil aviation industry.
11. On 27 March 2020, the Malaysian Government announced the Prihatin Rakyat Economic Stimulus Package (PRIHATIN), a relief and economic stimulus package to assist individuals and businesses to weather the economic challenges brought about by the COVID-19 outbreak, in addition to the packages announced on 27 February 2020 and 23 March 2020. The PRIHATIN package, valued at RM250 billion, is reportedly the largest aid package ever introduced by the Malaysian Government.
14. Pursuant to paragraphs 7A(4) and 17(4) of the MAPC
15. As prescribed under paragraph 8 of the MACPC
17. https://www.malaymail.com/news/money/2020/03/27/singapore-govt-to-provide-75pc-wage-offsets-for-aviation-firms-wide-ranging/1850641; https://www.channelnewsasia.com/news/singapore/covid-19-budget-parliament-aviation-tourism-heng-swee-keat-12578976
20. Conrad Clifford, IATA's Regional Vice President for Asia Pacific - see https://www.iata.org/en/pressroom/pr/2020-03-26-01/
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