April 28, 2015
MAS and the Mueller Story
by P Gunasegaram
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: firstname.lastname@example.org.