Will airlines in Malaysia absorb 6 per cent GST for local tickets?

Will airlines in Malaysia absorb 6 per cent GST for local tickets?

KUALA LUMPUR - Air tickets are likely to cost about 6 per cent more for local destinations if airlines do not absorb the extra cost with the implementation of Goods and Services Tax (GST) next year.

As for international tickets operated by local airlines, they will cost only 1 per cent more under the new tax regime.

"Domestic flights will be most affected as ticket prices will be subject to the GST standard rate, whereas international flights are zero-rated," Maybank Investment Bank Research said in a report.

"It will be a challenge for the airlines to fully pass on the GST to consumers as a 6 per cent higher 'all-in' ticket price is drastic and will have an impact on demand.

"Secondly, passenger service charge (PSC) for both domestic and international flights are subject to GST as well."

It said there was a high probability that the PSC would be raised to reflect the statutory rate under Malaysia Airports Holdings Bhd's (MAHB) operating agreement with the Government.

It added that the Government was supposed to grant an increase in PSC on Feb 12, but chose not to.

"Therefore, MAHB imposes marginal cost support on the difference between actual versus statutory rate against the Government's portion of revenue share. This is part of the compensation measure framework under the operating agreement," Maybank IB noted.

MAHB's PSC for departing international passengers currently stands at RM32 (S$12.50) for KLIA2 and RM65 for international airports.

Maybank IB said it was unclear why the Government chose to keep the PSC at the old rate but believed it was just a matter of time before it is raised.

It said the Government had committed to reduce subsidies and boost its revenue base.

"This is an easy avenue to do so as air travel caters primarily to the economically well-off and we suspect there will be little or no resistance from the general population."

Maybank IB said there had been an intense lobby by MAHB, International Air Transport Association (IATA) and some full-service carriers to revise the PSC at KLIA2.

Deputy Transport Minister Datuk Aziz Kaprawi has stated that the rates will be reviewed on the first anniversary on May 2, 2015. There was no mention of the new rate, but we forecast it will be RM50 for international and RM8 for domestic," it said.

It added that the impact would be most severe to AirAsia Bhd as the international PSC increase represented 5 per cent-7 per cent of the "all-in" ticket price to passengers while the impact to AirAsia X Bhd would be less severe as the international PSC increase constituted 2 per cent of "all-in" ticket prices.

On the bright side, Maybank IB noted that jet fuel price had been trending down since mid-2014 and the consensus was for further decline into 2015 due to ample global supply, modest global GDP growth and a lower risk premium.

"We have revised our jet fuel average price assumption to US$120 (S$153) per barrel, down by US$5 a barrel from our original US$125 per barrel assumption.

"This alone should provide 1.5 per cent to 2 per cent unit cost reduction for the airlines," Maybank IB said, adding that the upcoming staff layoff at Malaysia Airlines (MAS) will provide ample manpower to the market.

Maybank IB said it expected 2015 to be "a very complex year" and that yields would rise along with cost and other passenger-related tariffs.

It said domestic flights would be significantly more expensive, by 7 per cent to 9 per cent, due to the GST and PSC revision while international flights would be less affected due to the many tax exemptions.

"Next year will be most challenging to AirAsia because 60 per cent of its traffic is domestic. AirAsia X on the other hand is the least affected as all its flights are international. MAS is in the middle as domestic passengers constitute only 37 per cent of its total passengers," it said.

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