The fierce business competition between Malaysia and Singapore has in recent months taken on the dimensions of an air and sea battle — fought not with guided missiles or jet fighters but with tempting deals to lure foreign firms into using their airport and seaport facilities.

This week Air Mauritius announced plans to make Kuala Lumpur the regional hub for its operations, while Singapore's Straits Times reported on Tuesday that three airlines — Qantas, British Airways and Lufthansa — have turned down attractive incentives offered by Malaysia for them to move their regional operations from Singapore to the Malaysian capital.

Over the last two decades, Singapore has built itself up as a major regional air-hub and an important transit point for traffic between Asia and Europe. This is now being threatened by an aggressive marketing campaign by Kuala Lumpur.

With the aim of becoming a regional transport hub, Malaysia spent lavishly during the boom years of the early 1990s to build the multi-billion dollar KL International Airport.

Since it opened three years ago, KLIA has been slow to pick up business. But a few months ago, Malaysians moved aggressively to market the airport facilities and have thrown down the gauntlet on Changi with a five-year waiver on landing and parking fees to airlines willing to come to Malaysia or extend existing services.

The battle between the two neighbours is also being fought in their ports.

Malaysia's 1.0 billion US dollar state-of-the-art Tanjung Pelepas port located just half an hour sailing time from the Singapore port, was opened only two years ago. But during the period, the container terminal has seen its volume of traffic reach two million container units, while Singapore's volume has shrunk from 15.9 million to 15.2 million.

Sending shockwaves

Last year, Malaysia's new port lured away Danish shipping firm Maersk Sealand, Singapore's biggest customer, by offering them a 30 percent stake and a dedicated wharf.

Then in April, Taiwan's Evergreen Marine announced that it was going to shift its operations to Tanjung Pelepas, sending shockwaves across Singapore's shipping industry.

Singapore's container port is Asia's second busiest after Hong Kong and it is crucial to the country's economic health, as it brings 1.3 billion US dollars a year in revenue or 3.5 percent of the island republic's GDP (gross domestic product).

To compete with Singapore's well-known high efficiency levels, Malaysians are offering land to foreign shipping companies to build their own wharf, a luxury the land-starved tiny island republic cannot match.

By building their own wharf, shipping companies will save on expensive time in offshore anchorages waiting for berths. This in effect will blunt Singapore's container handling efficiency advantage.

Added political colour

It is in this context that Singapore's land reclamation project is taking on an added political colour.

Last week, the opposition Parti Islam SeMalaysia (PAS) in its annual conference rallied party support against Singapore's land reclamation project close to the waterways leading to the Port of Tanjung Pelepas in the southern state of Johor.

Malaysians claim that the project was designed to obstruct shipping and sabotage the progress of the newly opened port, allegations Singapore has denied.

However, PAS Johor state leader Mazlan Aliman told party members that Singapore's continuation of the reclamation work was a threat to his state and branded Malaysians who sell sand to Singapore for use in this project as traitors.

"The Malaysians who sell sand to Singapore are traitors, just like the Palestinians who sell land to Israelis," he told the delegates.

Already, four Singapore barges have been fined by Malaysian authorities for taking sand from Malaysian waters without a permit.

Meanwhile, apart from Air Mauritius, which has been using Singapore as a regional hub since 1985, Egypt Air also succumbed to the offer. They will move their regional operations from Changi to KLIA next month.

In addition to offering free landing and parking rights, Malaysia is also becoming more flexible in pursuing an ''open skies'' policy in its bid to become the regional airline hub.

Unrestricted services

In negotiating ''open skies'' pacts, they are offering unrestricted services by the airlines of the countries involved, including ''fifth freedom rights'' which allow foreign carriers to pick up passengers while on transit at KLIA. For airlines flying into KLIA for the first time, the Malaysian government is even offering cash incentives over three years to help advertise their services.

These incentives have encouraged a number of airlines to increase their services to Malaysia, among them Austria's Lauda Air, Cathay Pacific, Emirates Airlines, Iran Air, Qatar Airways and China's Xiamen Airlines.

Since early 2000, Singapore has been experiencing its worst recession since separation from Malaysia in 1965, while latter has been experiencing an economic revival.

Malaysians have been unhappy with the lack of assistance from Singapore when they went through a severe economic jolt in 1997-98, and Malaysia's current mood to upstage Singapore in its own game, analysts say, is a reflection of this deep resentment.

"Singaporeans have for long viewed Malaysia as an economic backwater" observes a Malaysian-born lecturer here. "Now the Malaysians are getting their act together and (the country) is becoming a real economic competitor in the region. This is going to have an impact on the Singaporean psyche," the lecturer, who declined to be named, said.

IT sector also targetted

It's not only in port and airport services that Malaysia has decided to take on Singapore. They have also started targeting Singapore's petroleum and information technology (IT) sector.

Malaysia's Multimedia Super Corridor (MSC) is luring companies away from Singapore, offering them various incentives. In March, Royal Dutch Shell group, the world's third largest oil-refining company, said they were moving their global IT hub from Singapore to MSC. This was followed swiftly by news that German luxury car maker BMW would move its regional base from Singapore to Malaysia as well.

Just this week, Malaysia's state-owned Petronas oil company said it was interested in buying British Petroleum's 30 percent share in Singapore Refining Company.

Refined petroleum export is one of Singapore's major foreign exchange earners and Malaysia is planning to build a multi-million dollar petro-chemical complex, a power plant and bunkering facilities in Johor, which industry sources here say may pose a greater long-term threat to Singapore's petro-chemical industry.

The government is putting up a brave face. "We have to compete," Trade and Industry Minister George Yeo told Fortune magazine last month.

"If we can't add value and offer a superior product at a lower cost, we'll lose."