Commentary: Funding Changi Airport Terminal 5? Look at Hong Kong, Incheon airports' expansion

Commentary: Funding Changi Airport Terminal 5? Look at Hong Kong, Incheon airports' expansion

Changi Airport’s regional competitors offer a glimpse into alternative sources of funding, says one observer.

Changi Airport runway pix
A view of Changi Airport. (File photo: Changi Airport Group)

SINGAPORE: In six years’ time, come 2024, it’ll cost passengers S$62.30 to depart from Changi Airport in passenger fees and levies. That’s an 83 per cent spike from the current S$34. To cushion the impact, travellers will start paying S$47.30 this July, a gradual increase.

A chunk of the charges will go to the airport’s development, in particular, the construction of Changi East, a project that’ll consist of the airport’s fifth terminal, to handle 70 million passengers, and its third runway.

All this to keep up with growth and maintain Changi’s regional hub status. The development will be funded by the Ministry of Transport, the Civil Aviation Authority of Singapore, Changi Airport Group (CAG) and users – both airlines and passengers.

The gripe about the funding, of course, comes largely from passengers, some of whom will bear the cost of a terminal they may never get to use, since Terminal 5 is only expected to be operational in 2030. 

A comparison of competing airports in the region shows Changi being one of the most expensive in passenger charges. International passengers flying out of Incheon pay S$34, KLIA, S$26, Dubai, S$37 and Hong Kong, from S$43 to S$58.

The crucial question must be asked - is there a way for Changi to have it all: Increase capacity, maintain service levels and keep fees competitive with others in the region?

RECONSIDER LOWER CHARGES FOR BUDGET TRAVELLERS

With the hike in passenger charges, the people who’ll feel the pinch the most are budget travellers. The airfare for an off-peak flight from Singapore to Kuala Lumpur on AirAsia can cost about S$12. 

Come July, the airport fees combined will be four times the cost of the fare – and rising. Now, not everyone can fly - at least not out of Changi.

Raising passenger fees doesn’t just affect passengers. Airlines, too, and particularly those who’ve made Changi their hub will be on the losing end.

Malaysia-based AirAsia is the region's biggest budget carrier by fleet size
File photo of AirAsia planes. (Photo: AFP/Manan Vatsyayana) 

Right off the bat, Jetstar, the Australian budget airline operating a base out of Changi has announced that it would be reviewing its routes. The additional fees, it says, will bump up fares by 15 per cent to 20 per cent, resulting in a likely drop in demand. Jetstar CEO, Gareth Evans, was quoted as saying: 

Singapore is competing with Hong Kong, China and Middle Eastern hubs. People will change hubs to fly to Europe for a few dollars.

With five terminals at its disposal, Changi would do well to consider reviving the concept of the low-cost carrier terminal (LCCT) – with some tweaks. After all, 30 per cent of the airport’s movement comes from low-cost carriers.

Terminal 4, with its high-tech and low-manpower operations, has been held up as a model for budget terminals, without the low-cost feel. Its end-to-end automated process from check-in to boarding can reduce manpower costs by 20 per cent.

A different cost structure may, therefore, be introduced for passengers of budget airlines to make it viable for the price-sensitive traveller so that airport traffic can continue to grow while cost is managed.

WHAT ABOUT MONETISING NON-AVIATION ASSETS?

Other airports that have also launched mega development projects may have valuable lessons that Changi may glean from.

Like Changi, Korea’s Incheon International Airport has been consistently lauded by travellers and industry players. A crucial gateway for airlines, Incheon boasts a casino, golf course, skating rink and museum, aside from indoor gardens and sleeping rooms.

By 2030, the plan is to have four runways and two terminals to cater to 100 million passengers. It will continue building its cargo hub (it was the third busiest cargo airport in 2017) and have an integrated resort adjacent to the airport. The airport, which recently opened its second terminal and already has three runways, has not raised its charges.

A general view shows the departure lobby at Terminal 2 of Incheon International Airport.
Incheon airport, South Korea's top gateway, on Jan 18, 2018 opened its second terminal, three weeks before the Pyeongchang Olympics. (Photo: AFP/JUNG Yeon-Je)

Part of Incheon’s ability to control costs lies in its forward planning. Incheon’s masterplan, conceived in the 1990s and spanning 40 years, only consists of two mega terminals. Aside from user charges, monetisation also comes from facilities like its golf course, spa, ice skating rink and the upcoming integrated resort.

In fact, the airport had even proposed setting up a cosmetic surgery clinic in the terminal in late 2017 to ride on the country’s reputation as the leading centre for surgical makeovers, before the idea was quashed by medical professionals.

Credit, however, should be given to them for pushing the envelope and exploring various sources of revenue to fuel the airport’s development without overburdening users. The sums it has raised through this approach is significant - in its 2016 annual report, the airport announced a topline of S$1.75 billion from its non-aviation sectors, about 65 per cent of total revenue. 

In a similar vein, as much as critics may bemoan Changi’s upcoming mixed development Jewel for being yet another mall in an already saturated market, the joint venture with CapitaLand Malls Asia will be one such asset that will be a source of income for Changi Airport Group through its retail leases, on top of making Changi a destination airport.

But Jewel is but one of the few non-aviation sources of revenue and more options need to be explored to optimise the airport’s resources.

Image 8 Outdoor dining with a difference (Large)
The Canopy Park at Jewel will be about 14,000 sq m, or the size of 11 Olympic-size pools. (Photo: Jewel Changi Airport Development)

RIDE ON CAPITAL MARKETS

Closer to home is another competitor with big plans.

Hong Kong International Airport (HKIA) had earlier in 2016 introduced a price hike to fund its third runway project which will be operational in 2024. The airport will continue to function with its current two terminals with upgrades added along the way.

By 2030, like Incheon, HKIA expects to handle 100 million passengers, 66 per cent of Changi’s future capacity. Whose crystal ball is clearer? Only time will tell.

HKIA’s third runway is being built at a cost of S$24 billion and will be paid for wholly by the airport authority, without taxpayers’ money.

Funds will come from three sources and, clearly mapped out, is the proportion of funding – users (18 per cent), borrowings (49 per cent) and the airport’s surpluses (33 per cent). The transparency in which HKIA has laid out its plans is admirable and makes the public relations exercise of announcing the price increase less onerous.

hong kong international airport
Passengers at Hong Kong International Airport. (Photo: Wikimedia Commons)

The Singapore government has yet to come up with the cost of the development other than it being “tens of billions of dollars” and it has said it’s still exploring funding options.

The Airport Construction Fee in HKIA, which users have started paying, will be fixed for the period of time it takes to repay the borrowings, estimated to be by 2030. Departing passengers will be charged between S$12 and S$30 depending on the class of travel, distance, and point of origination.

In comparison, Changi’s Airport Development Levy will start from S$10.80 in July, and the Passenger Service and Security Fee will increase S$2.50 every year up to 2024, by which time all departing passengers will pay S$62.30 in airport fees.

The Singapore government has rejected tiered charges, citing fairness for all passengers. However, passengers who are paying for a terminal they may never use in the future may bristle at the unfairness of the pre-funding.

Part of HKIA’s borrowings will come from bank loans - S$3 billion to S$5 billion – while S$5 billion to S$7 billion will come from institutional bonds and S$850 million from retail bonds. The financing costs of bonds are cheaper than bank loans.

A "smart departure" self-service machine scans a woman's face to authenticate her id
A smart departure self-service machine scans a woman's face to authenticate her identity using face recognition technology, during a demonstration by the Immigration Department at Hong Kong Airport in Hong Kong, China on Oct 9, 2017. (Photo: REUTERS/Venus Wu)

In his recent Budget speech, Finance Minister Heng Swee Keat encouraged statutory boards and government-linked companies to tap on capital markets to finance critical infrastructure, with the backing of the government. A month later, LTA issued their bonds and saw an overwhelming inflow of S$1.2 billion in half a day.

READ: A commentary on the borrowing plan for infrastructure financing opening up the Singapore Government's fiscal envelope.

The Changi Airport Development Fund, set up in 2015, has received S$4 billion so far from the government. Parliament has mandated part of CAG’s surpluses to be channelled to this Fund, under the Aviation (Miscellaneous Amendments) Bill passed in Parliament on Monday (Mar 19).

Like HKIA and LTA, the airport could look to bonds and, for the added benefit of good public relations, give Singaporeans a stake in an icon they hold dear by issuing retail bonds as well. With Changi’s consistent performance and the government’s guarantee, these investments will likely be oversubscribed.

Ultimately, an airport holds significant economic value to a country as the gateway for the movement of goods and people. Singapore’s geographical position must be optimised by the best facility but at a cost that will not overburden users and taxpayers and reduce the airport’s competitiveness.

Air travel has become a necessity and using an airport may even be seen as a right by citizens. Pricing its services must be a careful and open exercise with all possible funding options explored and explained even further, not just to airlines and passengers, but also to Singapore residents who will be funding the expansion both as taxpayers and users of the airport. 

Karen Lam is the host of Power List Asia and author of the upcoming book Power Talk: Insights from Asia’s Top Entrepreneurs.

Source: CNA/sl

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