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06 May 2020
Movement control order
What does future look like for the Malaysian aviation industry?
Government initiatives to support aviation industry
Will the government's initiatives mitigate impact of COVID-19?
Air travel has been one of the hardest-hit industries by the COVID-19 pandemic. Flight cancellations, compounded by travel bans or restrictions on international flights imposed by countries around the world, have had 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 sealing their borders in a desperate attempt to flatten the curve and contain the COVID-19 pandemic.(1)
Airlines have had to ground their flights, causing shares to plummet.(2) As a result, airline share prices are experiencing a greater decline than during the SARS crisis in 2002 and 2003.
On 14 April 2020 the International Air Transport Association (IATA) updated its analysis of the financial impact of the COVID-19 public health emergency on the global air transport industry.(3) The IATA now projects that global airline passenger revenues will drop by $314 billion in 2020, a 55% decline compared to 2019. The IATA has also estimated that airlines in Asia-Pacific will see the largest revenue drop of $113 billion in 2020 compared to 2019 (-$88 billion according to a 24 March 2020 estimate) and a 50% fall in passenger demand in 2020 compared to 2019 (-37% according to a 24 March 2020 estimate).
On 16 March 2020 the government decided to implement a nationwide movement control order, which encompasses, among other things, a restriction of movement and assembly nationwide and a complete travel restriction on foreign visitors and tourists into Malaysia.(4)
On 17 March 2020 the government issued the Prevention and Control of Infectious Diseases (Declaration of Infected Local Areas) Order 2020 declaring all of Malaysia's states and federal territories as COVID-19 infected areas. Subsequently, the Prevention and Control of Infectious Diseases (Measures within the Infected Local Areas) Regulations 2020 was issued, which formalised:
The movement control order imposed initially from 18 March 2020 to 31 March 2020 (first phase) has been extended three times, from 31 March to 14 April (second phase), thereafter to 28 April 2020 (third phase) and finally, to 12 May 2020 (fourth phase). On 1 May 2020 the prime minister announced significant relaxations to the fourth phase of the movement control order. In essence, all businesses have been permitted to operate from 4 May 2020 except those which fall within the list of prohibited activities.
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 to a contraction of between -36.2% and -38.1% year on year, as demand for air travel continues to be severely affected 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 and 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 reported that 7.3 million seats had already been cancelled, representing 8.6% of the 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 the 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 2020.(7)
Meanwhile, the AirAsia Group temporarily hibernated most of its fleet across the network.(8) 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 costs.(9) 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 months.(10) 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 and other aviation-related companies – are similarly grappling with a grim outlook on their operations. Some market observers have called on the Civil Aviation Authority of Malaysia (CAAM) to "step up their game and play its role to assist (those) affected".(11)
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 2020 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".
On 27 February 2020 the government announced a RM20 billion economic stimulus package(12) to mitigate the economic impact of the COVID-19 outbreak. The stimulus package includes the following initiatives to assist the Malaysian aviation services market:
Further to the stimulus package, the government announced its intention to pursue further stimulus measures, which could include measures to aid the aviation services market.
In response, on 27 March 2020 MAVCOM published its Commentary on Government Assistance To The Aviation Industry Amidst the COVID-19 Pandemic,(13) where MAVCOM set out its views and position on the 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:
On 8 April 2020, in aid of the airlines that are currently inundated with an unprecedented volume of consumers wanting to make changes to their bookings or seeking refunds, MAVCOM published a Notice to Airlines Relating to the Malaysian Aviation Consumer Protection Code 2016,(14) which relaxed the requirements imposed on airlines by the Malaysian Aviation Consumer Protection Code 2016 (MACPC):
Malaysian aviation industry players are facing unprecedented challenges arising from the COVID-19 pandemic. As airlines in Malaysia are doing their best to stay afloat in these challenging times, it is hoped that the stimulus package will help to soften the impact on the aviation services market.
Aggressive measures to aid the aviation industry are being proposed and rolled out in countries worldwide. For example, 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".(17)
The CAPA has praised the steps taken by the Singapore government and considers it to have emerged as one of the leaders in supporting airlines.(18) On the other hand, the 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 an 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. The IATA has written to 18 governments in Asia-Pacific (including Japan, Malaysia, South Korea and Thailand) to appeal for emergency support to airlines, proposing options such as direct financial support, loans and loan guarantees and tax relief.(19)
The measures already announced by the Malaysian government will no doubt somewhat alleviate airlines' financial burden. However, the question remains as to what extent will the blow caused by this "single biggest shock" be cushioned by the 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 during 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 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, it is hoped that the government will rise to the occasion to avoid the complete wipe out of airlines in Malaysia.
(5) MAVCOM is an independent entity established under the Malaysian Aviation Commission 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 and the Civil Aviation Authority of Malaysia (CAAM). The ministry is responsible for industry policy making and government-to-government discussions (including to spearhead bilateral or multilateral negotiations on traffic rights), while the CAAM will continue to regulate technical and safety matters for Malaysia's civil aviation industry.
(12) 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 government.
(20) Conrad Clifford, IATA's regional vice president for Asia-Pacific – see www.iata.org/en/pressroom/pr/2020-03-26-01.
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