Whither MAS (Malaysia Airlines) in a Political Blame Game


July 18, 2017

Whither MAS (Malaysia Airlines) in a Political Blame Game

by P. Gunasegaram@www.malaysiakini.com

But the way it is going, it may be that Malaysia Airlines may eventually become somewhere between a low-cost and full-service airline, neither here nor there, floundering between small profits and losses – an inconsequential airline in other words. What a comedown for a once proud brand!–P. Gunasegaram

During electioneering, it is common to make political capital out of everything. Malaysia Airlines Bhd was not spared when Prime Minister Najib Abdul Razak blamed one of his “predecessors” at a Hari Raya open house earlier this month for “horrendous decisions”.

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Malaysia Airlines (MAS)An Inconsequential  National Carrier

He was very obviously referring to former Prime Minister Dr Mahathir Mohamad, although he did not name him. But to be fair, Mahathir was not responsible for the latest disaster at Malaysia Airlines. Paradoxically this happened largely during Najib’s time.

This latest disaster which resulted in losses of billions of ringgit and required a RM6 billion injection of capital and privatisation in 2014 by Khazanah Nasional Bhd, the previous major shareholder and now sole shareholder, resulted after Malaysia Airlines was turned around in 2007.

What Najib was referring to was the previous disastrous privatisation of Malaysia Airlines, to a Mahathir-Daim crony Tajudin Ramli who bought a controlling near 30% stake in the airline in 1994 for RM1.8 billion. After mismanaging the airline into the ground, he sold back his stake in the airline to the government – at the same price – in 2000. The market price was less than half that.

Turned around in 2007

Najib’s immediate predecessor Abdullah Ahmad Badawi brought in Idris Jala from Shell to turn around Malaysia Airlines in 2005, the same Idris who would head the Performance Management and Delivery Unit or Pemandu at the PM’s Department in 2009 and join the cabinet.

Two years later, in 2007, Malaysia Airlines had turned around. In Idris’ first year on the job, he reduced the losses to RM133 million and turned the company back into the black with a record profit of RM853 million in 2007, according to this letter written by a former investor relations manager at Malaysia Airlines, Song Eu Jin, to Malaysiakini.

“The profit in 2007 was the highest in MAS’ corporate history and was earned through a massive operational cost reduction of RM745 million as well as on the back of record revenues of RM9.4 billion. The profit numbers were real as reflected in the cash balance at that time of RM5.3 billion which had grown from RM1.5 billion at the end of 2005, when Idris joined MAS (Malaysia Airline’s forerunner),” the letter said.

But in 2009, Idris left Malaysia Airlines to join Najib’s cabinet and head Pemandu. A succession of CEOs after him proved to be incapable and sent the airline down back into losses of billions of ringgit yet again. And no mistake about it, this happened during Najib’s time.

Horrendous decisions but by whom?

This is what Najib said at the open house: “The history of MAS was fraught with, I would say, horrendous decisions in the past. I’m not going down that road but that was a nightmare that was inflicted upon MAS that was done by one of my predecessors.

“But I will put it right. I will make sure MAS recovers and becomes one of the leading airlines in the world,” said Najib to applause from thousands in the audience present at the event. How ironic that is when the latest problems occurred during his time entirely.

I have followed the Malaysia Airlines saga over the years – from the 80s onwards and read up its history before that. Idris did turn the airline around solidly although it incurred a huge hedging loss of RM557 million in 2009 on fuel when fuel prices fell. The contracts had to be marked to market.

The way he did this was to focus on two things – yield and load factor. Yield represents the unit amount that the airline got from selling tickets and load factor is a measure of how much aircraft are filled. The right pricing of seats results in the best combination in terms of unit revenues from seats sold and load factor to maximise revenue.

In practice, this revenue management system is extremely complicated and uses sophisticated computer modelling which critically requires right inputs. That focus helped Malaysia Airlines increase revenues, helped along by an important fact – the airlines’ services were among the best in the world, as measured by Skytrax, the industry standard by which airlines are measured. Skytrax gave five-star status to Malaysia Airlines, with less than two handfuls among hundreds of airlines in the world qualifying.

Meantime, on the cost side, Malaysia Airlines’ was among the lowest in the world for full-service carriers but still advances were made here as well. The combined reduction in costs with an accompanying increase in revenues was what turned Malaysia Airlines around under Idris.

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AirAsia–The Award Winning Low Cost Carrier 9x in a row and Global Brand

Subsequent CEOs lost focus. They thought budget carrier AirAsia was the competition when Malaysia Airlines was a full-service, five-star airline. Yield dropped, load factors went up too much but still revenues were not enough. Fuel prices continued to climb, exerting further pressure. Revenue management deteriorated. And then came the two unfortunate crashes of 2014 (MH 370 and MH 17) which depressed revenues even further.

When Khazanah Nasional came in with their recovery programme during and post privatisation in 2014, I was flummoxed – nothing about revenue management, it was about cutting costs. But with unit costs for Malaysia Airlines still among the lowest in the full-service industry, revenue management was the key.

Enter Mueller

Khazanah Nasional went on a worldwide search for a CEO and found Christoph Mueller, a German, who reputedly turned around Ireland’s Aer Lingus. He joined in May 2015. He continued with extreme cost-cutting, shrunk the airline to a regional one, maintaining one flight to Europe, London. He made a deal with Emirates (the airline) for code sharing, all but killing Malaysia Airlines’ more international routes.

I was not impressed with him – turnaround means making unprofitable routes profitable, not cutting them and keeping only profitable ones – any fool can do that and show a profit, albeit a shrunken one which will never recover to the levels seen before. It meant that Malaysia Airlines’ main competitors would be the low-cost airlines – yes, AirAsia again.

Mueller’s cost-cutting would lose Malaysia Airlines five-star rating, one of its main assets. Because of the drop in level of service as a result of severe cutbacks, Malaysia Airlines asked not to be rated anymore. Insiders maintain to me that he was scathing about that rating, saying that many airlines had better service than Malaysia Airlines.

That and the frequent reference to Malaysia Airlines’ previous two crashes – both of which could not be pinned on the airline itself – made me wonder whether he was the best person to be running Malaysia Airlines. On the one hand, he runs down highly-rated services, on the other he makes frequent references to crashes to show his difficult position, both not in the interests of the airline itself.

Barely a year into his three-year tenure, Mueller announced his intention to resign “for personal reasons” but six months later in September 2016, he joined Emirates as chief digital officer, the same airline with which he negotiated the code-share agreement as CEO of Malaysia Airlines. What a conflict of interest!

On balance, my opinion is that Mueller was bad for Malaysia Airlines and I find it difficult to understand why his hiring did not have stringent conditions attached about joining competitor airlines.

His successor Irishman Peter Bellew, who took over in July 2016, was then chief operations officer at Malaysia Airlines. He was hired from low-cost airline Ryanair and had no experience in a full-service airline before that. However, he has said that Malaysia Airlines is trying to regain its 5-star status.

Recently I travelled to and fro London on Malaysia Airlines and the service and quality of food have indeed improved, a good sign. But it will take more than that to successfully turn around Malaysia Airlines.

An inconsequential airline

A targeted profit only in 2018 is rather late in the day given that most airlines made good profits recently because of the sharp drop in fuel prices. Despite all that cost-cutting and low fuel prices, Malaysia Airlines is bleeding. Why?

The answer lies in revenue management – how come Malaysia Airlines fares can be lower than AirAsia’s which is a low-cost airline. Surely that is indication that prices have been too low, especially since load factors remain high? Malaysia Airlines has got revenue management wrong and it still remains suspect.

And then strategy – how can you expect to succeed regionally as a full-service airline when there are so many low-cost airlines in the space? Surely you must try the longer international routes and make them profitable instead.

The times I have flown to London on the airline, the flights were full on the A380s. Yet Malaysia Airlines has plans to downgrade this route using lower capacity, smaller A350s. This will substantially reduce its competitiveness in terms of comfort relative to other major full-service carriers.

One more thing, since privatisation nobody knows how much money Malaysia Airlines is losing and what are its yields and load factors. Its performance has become rather opaque because the quarterly reports are not anything like what it was before when it was publicly listed. That makes it more difficult to make conclusions.

But the way it is going, it may be that Malaysia Airlines may eventually become somewhere between a low-cost and full-service airline, neither here nor there, floundering between small profits and losses – an inconsequential airline in other words.

What a comedown for a once proud brand!


P GUNASEGARAM says that Malaysia Airlines has been repeatedly grounded by poor management, not by the alleged inefficiency of its staff. E-mail: t.p.guna@gmail.com.

 

12 thoughts on “Whither MAS (Malaysia Airlines) in a Political Blame Game

  1. MAS may take the PROTON route in an attempt to become profitable and 49% be given to another probably foreign party.
    Best option may be to merge MAD with AIR ASIA under the leadership of Fenandez and his team as they have made AA a prfitable company. This also will result its ownership keeping MAS in Malaysian hands but this may not find favor with some with personal interests and who may not be interested in the interest of the country or MAS.

  2. MAS may take the PROTON route in an attempt to become profitable and 49% be given to another probably foreign party.

    Best option may be to merge MAD with AIR ASIA under the leadership of Fenandez and his team as they have made AA a prfitable company. This also will result its ownership keeping MAS in Malaysian hands but this may not find favor with some with personal interests and who may not be interested in the interest of the country or MAS.
    Enough of foreign expertise which has been economically disastrous as they may have come more for personal interest.
    _________________

    gursharan38,

    Why should Tony choose the merger option and create problems for AirAsia? MAS is a jinx. If I were to advise Tony, I would not recommend it. –Din Merican

  3. The problem with Malaysia Airlines lies not with yield and revenue alone but the way it was managed. It has to be managed like any other commercial for profit business not a charity or welfare organization or government department.

    Malaysia Airlines over the years have become bloated with the unemployed and unemployable employees resulting in mediocre performance and low productivity. Secondly the Collective Agreement with its union is sore one sided making it impossible to fire non performing employee and these employees thus acr like government servants but enjoy private sector salaries and benefits. Notice when Mueller came in he fired over 6000 employees and it did not cripple MAS. It clearly showed that MAS had too many redundant employees.

    Cost have never been a serious factor in MAS. Nobody is concerned with managing cost resulting in RM 14 dollars nasi lemak and RM1 egg. VIP”s also took advantage by asking for upgrading and free excess baggage. Imagine the number of Tan Sris, Datuk Seris and Datos all abusing these privileges and have to be accommodated.

    Then theres the view that MAS is the cash cow that should me milked by the cronies e.g. contracts for outsourcing services or vendors to MAS. Instead of enabling MAS to get best prices these programs become a profitable business for cronies. Every item such as gifts and vanity cases for business and first class are common item for abuse. Then theres MAS catering and the MAS Golden Lounge. Even bigger is the purchases for engineering and spares and also undernwing services including aircraft cleaning and toilet dumping.

    There are lots more areas of abuse like aircraft and engine purchase and leasing that have made MAS not profitable. But that will require a book to bevwritten and used as a case study if anyone is interested or allowed to investigate.

    • Those were involved in MAS since the beginning and later during the various ‘bailouts’, and responsible for selecting Human Resources for various positions including Management-Technical-Finance-Accounting-Procurement-IT Professionals may have been without relevant expertise to evaluate the candidates and thus make the right HR selections.
      Those selecting and selected may all have had their own agendas and little importance being given to making MAS successful as they may have been of the view that none may be held liable for the losses which will be borne by taxpayers. [Could be similar to the Financial disasters in USA in the late 1990s and again later when the financial institutions were bailed with hundreds of billions of US$]
      There were regular reports in the media of suspected cases of ‘Mismanagement-Fraud-Corruption-Collusion-Cronyism-Bribery-Kickbacks-Nepotism’ yet there is little information if anyone in position with authority or decision making powers was ever penalized with deterrent penalties. There may also have been cases where there may have been interference from the big bosses who had ‘hire & fire’ authorities.
      If offer is made to Tony and the offer opposed by some parties for reasons best known to themselves or he were to reject it then it may be another confirmation that the whole system may be at fault and needs to be revised.
      i just heard an interview with the Indian Minister of Aviation which was aired on BBC a few minutes ago where the subject was the proposed selling off of AIR INDIA and prevent using taxpayers’ funds to cover its losses and then using the funds for other Projects. The new Projects will create new jobs to replace those which may be lost by Air India disposal and anyway AI is perceived to have excess employees and productivity low which is another common case in Government owned Companies/Organizations where economic viability may be given little consideration.

      THIS MAY BE JUST WISHFUL THINKING.

  4. Yes Semper, instead of flying (or operating E-MAS ) , it will be better to advise them ” GO FLY KITES ” ! ! – As always , in many other areas as well , like playing politics….. ( difficult to define comprehensively, but you have put in precise terms…)

  5. IMHO, MAS should not exist, given that it could be competing in an already crowded space. I don’t believe MAS should fly to any airports in US/Europe, given that there are already so many better managed airlines taking those route. On the other hand, MAS should consider getting into the private jet business for the ‘first class’ datuk/datin only with much smaller plane, and ready to fly to any special routes just because there is some shopping urge. MAS would be a lot more profitable, in that case. Bank on the exclusive new found unequal Welayu wealth, and forget about the national pride of needing to serve the Rakyat. Of the 30million rakyat, only the top 10000 people matter in the land of Welayu. 30 million would be better served, when those top 10,000 richest Welayu pay their share of flying cost, so that the bottom 1,000,000 could have food.

  6. For layman, it appear simple that MAS should go for the premium segment while letting Air Asia focus on budget. Its not that simple, even corporate travel these days are price sensitive. Look around and the premium segment are occupied by giants and bigger ones showing up to the region. To compete MAS need our country to become a major premium global economy and our airports to be competitive – neither of which we are capable anytime soon.

  7. In about a decade or two, Air Asia will far outreach , beyond what E-MAS is capable of achieving. Yes, Air Asia is preparing & working hard for their glory time, when it will ‘take=over ‘ the Malaysia Air supremacy, & render E-MAS REDUNDANT,and auction off its Logo…..
    May be even sooner than expected or predicted….do you not think that AA CEO is not preparing a complete control of the Air Industry , and E=Mas will ‘lemas ‘ ….?

    • Some may not like the success of AA and may take steps to either stop its march towards greater success or take over by back door. Let us wait and see and hope I am wrong.
      Six profitable plantation companies were combined with the result the the new company could not reach the same level of profitability as it expanded to other non-core activities and lost billions of RM, Another example would be UP which sticks to just its core activities and do not expand beyond their ability to manage efficiently and continues to be profitable even in low commodity prices with its price being around RM27.00 whereas another company’s share price is around RM1.70 compared to its issue price of RM4.50 and which is now subject to MACC investigations.

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