Sime Darby's proposed Low-Cost Terminal -Musa Hitam And The Board Have Much To Explain

Malaysian plantation-to-property conglomerate Sime Darby (SIME.KL: Quote, Profile, Research, Stock Buzz) said on Monday it had obtained the government's approval to build a private low-cost carrier terminal (LCCT).

The terminal will be built on Sime Darby's land in the southern state of Negeri Sembilan.

"The proposed LCCT project is an integral part of the company's development plan for its Negeri Sembilan Vision City," Sime Darby said in a filing to the stock exchange
(http://www.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUSKLR37928920090105)

The terminal will service AirAsia only:

The key thing is that we cannot slow down our growth because we have bought aircraft and we need a bigger terminal. We are building for 30 million passengers and we should be supported,” he said.

By having a dedicated terminal, (Tony) Fernandes said the airline could bring down its cost by 20% and this would be translated to lower fares.

Asked if other airlines would be able to use the KLIA East airport, Fernandes said “the idea is not to go into (the) airport business but to serve our business.’’
(http://biz.thestar.com.my/news/story.asp?file=/2009/1/9/business/2976639&sec=business)

So, in short Sime Darby is going to build an airport for AirAsia.
Now, how would Sime Darby make money out of this?

First and foremost, airport operators/owners make money on landing charges. Hence the need to entice as many airlines as possible to use one’s airport. Here however, that is not to be the case. Sime Darby will wholly and solely rely on AirAsia as it source of revenue.


This raises a basic question (not an imponderable, like Sime chairman Tun Musa Hitam) , ie how does any business justify spending billions of dollars on the promise of an income stream form just one customer?

Airport operators also seek revenue from the rental of retail space and parking and the provision of services to incoming and outbound passengers . However the question here for anyone wanting to provide any sort of service (including Sime ) is again ; would anyone want to risk capital on a business dependent on one customer? Put another way, why bet your shop on customers from just AirAsia, when you could set-up shop at KLIA and rely on passengers from many different airlines?

There is of course the usual “plopety develepment” (Malaysian slang for property development) argument. But honestly, why would anyone want to live under a flight path? Is an airport really the best way to attract people to any property development?

Then, one comes to the numbers.
Sime’s return on average assets for in 2008 was 10.85% , while Malaysian Airport’s return on average assets for the same period was only 6.58%
Sime return on equity for the same period was 18%, while Malaysian Airport’s was only 9.94%.
(See http://finance.google.com/finance?q=KUL:SIME AND http://finance.google.com/finance?q=KUL:AIRPORT)

So how does Sime justify entering a business that is likely to see its returns dragged down?

Readers should note here that given the far greater risk of running a single customer business, Sime will have to show a return in excess of MAHB’s 6.58% if it is to justify getting into the airport ownership and management business. Note also that AirAsia has indicated that it will manage the airport, thus depriving Sime of that revenue stream , or alternatively adding to the ongoing cost of the investment.

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