MAS and the Mueller Story


April 28, 2015

MAS  and the Mueller Story

by P Gunasegaram

http://www.malaysiakini.com

QUESTION TIME | Malaysia Airlines Bhd’s first non-Malaysian CEO Christoph Mueller announced he is stepping down last week barely one year at the top seat for “personal” reasons. Why? And, was he good for Malaysia Airlines?

Khazanah Nasional is now pumping in some RM6 billion into the airline for its recovery plan and in addition to the RM17.4 billion pumped in over the last 14 years, the total spent is soon likely to hit a massive RM23.4 billion. Will it be worth it?

Unfortunately statistics from Malaysia Airlines are insufficient to say how good a job Mueller has done. Where there is a paucity of information there are usually problems – why would anyone hide good news?

Mueller, appointed in March last year, will step down in six months as he serves his notice out – one and a half years before his contract ends. He will be a non-executive director after that. That Mueller can stay on for another six months is clear indication that his “personal circumstances” are not urgent, indicating other reasons why he is stepping down.

There are two sides to turnaround – cutting costs and increasing revenue. It is not only about turning to a profit – it is about sustaining a profit which the airline is capable of given its previous track record.

The easy way to turnaround is to shut down unprofitable operations, sell related assets and keep only profitable ones. That mean smaller profits but forever destroying the ability to rake in larger profits. If you want to turn around the entire operations, it’s a lot more work.

Mueller has overseen the cost-cutting quite well, much of the groundwork having already been laid by Khazanah Nasional before he came aboard. Some 6,000, or about 30 percent of workforce, have already been laid off. Routes have been cut drastically – and Malaysia Airlines is now just a regional airline with Emirates providing international connectivity. That may be a major problem.

At the heart of all airline operations is revenue management – the fine-tuning of ticket prices to ensure  the plane is sufficiently filled at a price which will maximise revenue. This is done for every single route.

If this is done right, the yield or amount received per revenue passenger km (RPK – no of paid seats multiplied by km flown) increases while the load factor (the amount by which seats are filled) are optimised to give maximum revenue.

This excellent article titled ‘What’s wrong with Malaysia Airlines’ gives a full explanation of how yields work for those who want a fuller explanation. The bottom line is if your fares are too low, you can have a serious problem.

From the chart, yields at Malaysia Airlines grew sharply after Idris Jala became CEO. By 2006 MAS’ yields were in tandem with some of its regional peers like Cathay Pacific and Thai Airways. The impact of the increasing yields on MAS’ bottom line was quick, and in 2006 losses were reduced to RM100 million from RM1.3 billion previously.

By the end of 2007, Malaysia Airlines’ yields were the highest among the regional airlines, and its net profit among the highest ever historically with some RM900 million. The onset of the global financial crisis resulted in yields tumbling across the board but Malaysia Airlines’ yield was the slowest to recover in the subsequent years and tumbled sharply post 2012, showing a wide gap with the yields of other airlines – the underlying problem for the airline.

Malaysia Airlines actually had a cost advantage over the other regional airlines in terms of costs per available seat kilometre (ASK – available seats multiplied by kilometres flown, a measure of capacity). Thus yield, not costs, was Malaysia Airlines’ core problem.

Khazanah Nasional figures show that Malaysia Airlines yield, measured this time in terms of revenue per available seat km, or Rask, at 20 sen, has a yield gap of 2.7 sen compared to the average of four other regional airlines – Cathay Pacific with a Rask of 24 sen, SIA (22.9) Garuda (22.5), and Thai (21.5). This means among the five, Malaysia Airlines charges the lowest fares relative to its capacity.

This is important – former CEO Ahmad Jauhari Yahya estimated that one sen in Rask accounts for RM500 million in revenue. That implies that 2.7 sen accounts for RM1,350 million. If Malaysia Airlines’ yield improved to industry average, the airline will be easily profitable. Also, Khazanah Nasional figures show that Malaysia Airlines has costs per ASK or Cask of 21.4 sen, below the peer average of 22.2 sen.

A battle Malaysia Airlines will lose

The problem becomes clear – Malaysia Airlines has the lowest unit cost which is good, but it also has the lowest unit revenue which is bad. All it has to do is to increase the unit revenue and its safe home. That however is a complex process undertaken with complex computer simulations and trial and error.

Has Mueller managed to do that? Unfortunately we don’t know because Malaysia Airlines does not provide the necessary figures. All he has said recently is that the airline turned to profit in February and even then did not say how much and how. What he should have shown is the progression of unit costs and revenues relatives to its peers. Then we would have known exactly what he has achieved and what he has not.

The paucity of information means that Mueller probably has things to hide. Anecdotally, there is evidence to indicate yield management is poor. I checked return ticket prices to Bali from Kuala Lumpur three months out for Malaysia Airlines and AirAsia. Guess what, it is about the same price of around RM850.

If a full-service airline is charging low-cost airline prices there really must be something wrong over its pricing especially for Malaysia Airlines, which has been on Skytrax’s list of 5-star airlines many times but recently seems to have dropped out though.

On top of that, there is the silly decision from this year to suspend serving of alcohol on short flights of three hours and less, even on business class and first class, a short-sighted decision that puts it severely at a disadvantage relative to its peers. Even all the major Middle Eastern airlines serve alcohol with no restrictions.

The way Malaysia Airlines is going, it is becoming a ticketing agent for Emirates internationally with the code-share arrangement it signed while it is shrinking its operations to become a regional airline taking on the likes of successful low-cost AirAsia – a battle it will lose. A full service airline cannot compete on cost with a low-cost airline – Khanazah Nasional figures show a huge 6.3 sen cost gap between AirAsia (14.8 sen Cask) and Malaysia Airlines (21.1 sen).

If Malaysia Airlines’ intention is to give up the international routes in favour of Emirates, to which it effectively becomes a ticketing agent, and fight an unwinnable battle regionally on cost with AirAsia – it might as well close shop and save the country billions of ringgit.

The true test of turnaround is not an indiscriminate lopping of loss makers but a carefully considered attempt to turn into profit a substantial portion of an enterprise’s entire operations. Otherwise, we might as well appoint liquidators.


P GUNASEGARAM laments terribly the extreme erosion of the Malaysia Airlines brand name, a reasonably competent and efficient airline whose service is still among the best in the industry, over the last few years. Contact: t.p.guna@gmail.com.


 

8 thoughts on “MAS and the Mueller Story

  1. This is an endless story of money down the drain. MAS has been bankrolled by taxpayers for a long as I can remember. My hats off to Singapore Airlines and Emirates for their management and service. They can do it and we in Malaysia can’t .
    –Din Merican

  2. Methinks it is not that Mueller does not know the economics of running an airline. It is very likely the political masters, the little Napoleans and the institutionalised culture of “Malaysia apapun boleh” that wore him down.

    Until that scum right at the top of the country’s ruling echelon is thrown into jail, anything else is fair game in the entire fabric of Malaysia business, corporate, civil administration … in fact every darn thing. You see ridiculous practices and dubious dealings happening at all levels and people say, “what the heck! If the PM gets away with so much un-explained money in his personal account, what’s wrong with these other dodgy stuff!”

  3. A well written piece by Guna. I share his pessimism about MAS/B’s viability and it’s gonna take a miracle (in which the mythical Arab donors suddenly manifest again) to make it commercially competitive and continue as a Flag Carrier. Jibos was rambling about the wonderful Great Transformation Program the other day, ya? This is what i think:

    ‘National pride notwithstanding, Khazanah ought to close it down and relicense it to a fully Shariah compliant airline called RayaNaik – named after that fantastic “genius” of a Indian Muslim Televangelist, who will soon own 3 islands in Tasik Kenyir.. The handwritten tickets and boarding passes will be strictly in Arabic script, lest the monolingual Monad is displeased. Flight times will depend on prevailing “The Will of God”. No inflight entertainment please, only multilingual lectures by Naik et al.. Prayer rugs available in the on-board surau, that will take over the service galleys – so no food and ‘drink’ – all flights will be less than 3 hours. Women passengers are expected to cover their aurat and the men’s toilet will only have standing stalls.’

    So much for Open Skies with Closed Minds. Who cares about ‘Internationalization’? Profitability? Monumental Tonik Cap Gajah cukup!

  4. Now that Rayani Air is no longer operating, perhaps MAS or MAB should become a fully 100% syariah compliant airline taking over from Rayani Air. I’m sure there are many passengers who would want to fly with a 100% syariah compliant airline. No alcohol, female flight attendants covered up in hijabs and male attendants covering their manly aurat as well. Prayers recitals on take off, in flight and on landing would be excellent to make every passenger feel safe and closer to the Almighty. MAS or MAB will be profitable in no time since it will save on the costs of alcohol, in flight entertainment and uniforms of the flight attendant. MAS or MAB will not face any competition from the other 100% syariah compliant airline Air Brunei since not many people want to fly Air Brunei unless they are forced to do so.

  5. We’ve alot of capable peoples who can manage our Airline. We also have alot of stupidity power behind to destroy it. One way to mayday.

  6. Ha ha CLF. You forgot to mention that when praying on board the Captain has to fly the aircraft facing Mecca. Secondly, the front row seats are reserved for male passengers. The ladies have to ride in the rear and separated by a a screen or barrier.

    Male passengers will be served by male flight attendants and female passengers will be attended to by female flight attendants. No female flight attendants allowed in the male section lest the males get excited and aroused. The sight of any female even in a Burqah can easily arouse these Muslim males.

    Since the Boise is considered ‘aural’, all announcement will be made in a robotic voice neither male nor female.

    The toilets will be equipped with stones to cleanse oneself after pooping. This is in compliance with the practice of the desert dwellers in Sandland.

    Water on board are bottled and labeled Halal. First class passengers will be offered Zam Zam water. Snacks will comprise of dates and Arabic bread accompanied with Hummus, falafel, olives, pickled radish and tabbouli.

    All passengers must say a prayer before each flight to ensure safety. These will be done in the departure hall. Upon arrival all passengers must say a prayer of thanks for a safe flight right before reaching Immigration or Customs.
    _____________
    Orang Malaya,

    All these have to be done on the advice of ulamaks who have no idea that these practices cost money and yet that there is no guarantee that the plane will not crash. No wonder, it is costly to operate MAS. Then there is an arrangement that MAS must leave some seats in business class on domestic flights for our Rulers and VIP politician on every flight whether they turn up or not. This also is an expensive practice. In addition the MAS which is under Badawi’s brother Ibrahim charges exorbitant price for the supply of meals. God alone knows the other leakages.No wonder MAS cannot make money–Din Merican.

  7. not easy to solve financial problems when people want cheap flights. people just dont know how high the cost of operating an airline is. and every bad thing people will relate to the pm n government.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s