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Is AirAsia Berhad’s Loss Going To Be Singapore Airlines Ltd’s Gain?

Malaysia’s Department of Civil Aviation (DCA) dropped a bombshell earlier this week on airlines operating out of Malaysia.

According to a local news report, the DCA has a proposal to raise fees for many services and items that are under the purview of the authority. One of the fees involved is the air navigation facility charges (ANFC). The DCA wants to raise the ANFC rate that airlines have to pay by up to 10 times next week.

Previously, airlines were charged a rate of 20 sen per nautical mile for using Malaysia’s airspace. The new proposal could increase the rate to around RM2 per nautical mile. What companies might suffer badly if the new regulation comes to pass?

Malaysia’s domestic airlines – such as AirAsia Berhad (KLSE:5099.KL) – are likely to be the companies most affected by the DCA’s new proposal.

Analysts had estimated that AirAsia might see its operational costs increase by a little over RM130 million per year as a result of the new ruling. In 2015, AirAsia had total operating expenses of RM743 million; the additional RM130 million in cost is thus an 18% increase for AirAsia.

But, as it is a nationwide increase, all airlines that operate within Malaysia’s airspace would also suffer the same fate. Therefore, it is possible that AirAsia and other airlines would attempt to pass the added cost onto travelers. If that is the case, then ticket prices into and out of Malaysia, as well as within the country, would likely increase.

The indirect effect

That might not be good news for Malaysia. For one, Malaysia competes with many other nations as a tourist destination. If the cost of flying to Malaysia is going to be higher, other destinations in the region – such as Singapore or Bangkok – might be more attractive to tourists.

If that is the case, traffic that could have entered Malaysia may be diverted elsewhere to the benefit of other countries and other airlines. It’s worth noting that AirAsia competes with many other airlines in the region, including Singapore’s own Singapore Airlines Ltd (SGX: C6L).

In the end, it is the economy of Malaysia – or at least the tourism industry – that could be the ultimate victim.

On the other hand

But, my analysis may be too dramatic.

A cost increase of RM130 million for AirAsia is merely 2% of its revenue in 2015. Theoretically, the airline can raise its ticket price by 2% and it would be travelers who will help absorb the higher toll. To a traveler, a 2% hike for an air ticket would be hardly noticeable.

In this case, travelers pay 2% more, the Malaysian government gets higher revenue, there is minimal impact to AirAsia’s business, and no significant diversion of traffic away from Malaysia happens. Everything would be just fine.

Foolish Summary

Thing is, which of the two scenarios is more likely to play out? I don’t have a crystal ball – only time will tell.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns shares in AirAsia Berhad.