Is klia2 too expensive?

By Chan Quan Min

Depending on who is answering the question, klia2, the RM4 billion new terminal for budget flights, has either massively blown its budget or is even cheaper to construct on a per square metre basis than the corrugated iron shed LCCT, despite its full-service facilities and appearance. So how expensive really is klia2? KiniBiz investigates the multiple angles.

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In the frantic years and months leading up to the May 2 opening of klia2, a huge new terminal dedicated to budget flights, airport owner and operator Malaysia Airports Holdings Bhd (MAHB) was dogged with allegations of cost overruns. It certainly did not help that klia2 was delayed on five occasions for a total of two-and-a-half years.

Initially estimated to cost just RM1.7 billion, but now with a final price tag closer to RM4 billion and counting, is klia2 too expensive?

Critics claim the airport operator could not satisfactorily explain why costs ballooned to more than double the initial amount. This is in fact untrue, as this article will later explain.

Delays in obtaining a CCC (Certificate of Completion and Compliance) and rumours of construction flaws so close to the sixth scheduled opening date led a leading aviation analyst to claim the launch date as a “pie in the sky.”

Even when the new terminal was nearing completion, with a shrinking possibility of further delays, what would easily be its largest tenant, AirAsia, refused to move from the old low-cost carrier terminal, claiming klia2 was not ready.

AirAsia would later retract their demand after Prime Minister Najib Abdul Razak said a deadline of May 9 to move operations to the new terminal would stay.

The government were determined to avoid a public relations disaster in the wake of the MH370 tragedy, said an industry analyst.

Days ago, MAHB hit back at fresh accusations of klia2 being too expensive. A poster at the newly opened terminal, which welcomed its first flight, Malindo Air OD1027 from Kota Kinabalu just past midnight on Friday last week, advertised the terminal construction cost of klia2 to be 23% cheaper per sq. metre than the low-cost carrier terminal (LCCT).

A terminal construction cost of RM1.1 billion was used — far less than the RM4 billion project cost — presumably after stripping out the cost of the control tower, runway and Gateway@klia2 shopping mall.

While the poster could be seen to be misleading, the comparison was plausible given that klia2 is a vastly different project to the LCCT, the main differences being that that the klia2 construction package includes the world’s tallest control tower and a new runway, the third for the country’s largest international airport.

More like KLIA than the LCCT

klia2 was the LCCT replacement turned ‘hybrid’ terminal, a fact that was immediately obvious to the Malaysian public who arrived in droves to gawk at the new terminal building. The experience was decidedly full-service at klia2, not low-cost.

According to MAHB, the response from the public on the open day held several days before the May 2 launch was “overwhelming” with 78,000 visitors, more than triple the 20,000 expected.

KiniBiz had the privilege of a tour of the facilities, and in no way was klia2 the corrugated iron shed of the LCCT.

In fact, the new terminal can be considered an airport in its own right, aviation analysts said, as it has its own control tower and its own runway. As far as budget terminals go, klia2’s facilities matches that of full-service terminals anywhere in the world.

Put side by side, klia2 is about half the floor area of the first terminal, KLIA, which opened in 1998. However, it has almost double the handing capacity, 45 million passengers per annum against KLIA’s 25 million passengers per annum, making for a slightly more crowded travel experience.

On every other comparison metric klia2 is decidedly closer to a full-service terminal than a low-cost terminal. Like KLIA and unlike the LCCT, klia2 boasts aerobridges, an automated check-in and baggage system as well as multiple levels to separate departing, arriving and transit travellers.

If for instance, klia2’s project cost of RM4 billion is compared to KLIA’s RM10 billion, instead of to the LCCT’s RM334 million, then klia2 would turn out to be more bang for the buck, especially in terms passenger capacity.

Strictly speaking, either comparison is flawed because of fundamental differences in each of the three terminals of KLIA.

How the escalation in cost began

In 2011, MAHB managing director Bashir Ahmad Abdul Majid said the new terminal would cost between RM3.6 billion to RM3.9 billion, up from the original RM2 billion estimate in 2009, and would be delayed up to April 2013.

The huge increase in cost was allegedly due to changes to the design of the terminal building. Changes include a larger floor area, additional levels, and a longer runway. The design changes would increase the handling capacity from 30 to 45 million passengers per annum, Bashir told reporters in a press conference.

On the higher costs, Bashir clarified, “it is not cost overrun but additional costs,” as quoted by The Sun Daily.

Bashir did not fully reveal the motivation behind the changes. In a conversation with KiniBiz last year, Bashir hinted that many of the changes did not come from MAHB’s board of directors, or even its parent company, Khazanah Nasional.

Eleventh hour changes

The changes, which came after construction of the building structure had begun, was to have a direct result on the cost and follow on effect on the delays.

KiniBiz first revealed the dynamics of a complex relationship between MAHB and its largest tenant, AirAsia in a June 2013 article. It was discovered that part of the cost escalation and delay was down to AirAsia’s demands.

Some of the changes came about due to AirAsia’s changing business model, such as going from a point-to-point carrier to a hub-and-spoke network and the addition of widebody aircraft to AirAsia’s long-haul affiliate, AirAsia X.

As a result, the runway needed to be lengthened and the terminal building expanded to accommodate transit passengers.

Another expensive major design change to klia2, according to a letter sighted by KiniBiz, was a demand by AirAsia group CEO Tony Fernandes for the “most powerful baggage handling system.”

The MAHB perspective

While MAHB has given an assurance that the passenger service charge (PSC) for klia2 will not be increased for the first year of operations, reports point to a likelihood that the PSC will need to be upped to make up for the escalating cost of construction.

However, senior general manager of operations Azmi Murad has denied the reports. “PSC is regulated charge and never linked to the construction cost,” he told KiniBiz in a text message today.

An increase in klia2’s PSC to close the gap with KLIA’s higher charges would remove some of the cost benefits AirAsia has over full-service airlines operating at KLIA’s full service terminal.

Tomorrow, the discussion on the expense of klia2 turns to the impact on budget airlines of operating in a ‘hybrid’ terminal versus a low-cost terminal. The most immediate blow to cost would come in the form of higher PSC, but this is just one of many factors to consider.

Tomorrow: Impact of the klia2 move on budget carriers