Malaysia Airlines in crisis

IN announcing the Malaysian flag carrier’s performance for FY2011, Malaysia Airlines chairman Tan Sri Md Nor Md Yusuf said: “The company is in (a) crisis.” The airline group posted a loss of RM2.52 billion (US$841 million).

Malaysia Airlines carried 1.3 million more passengers on a total of 17 million passengers last year, contributing to a marginal increase in Group revenue (RM13.90 billion) of 2%. Expenditure however rose 21% from RM13.41 billion to RM16.20 billion, attributed largely to an increase of 33% in fuel cost.

Traffic (RPK) grew by 5% against a capacity (ASK) increase of 7%. Consequently the seat factor fell to 72.5%.

The last quarter (Oct-Dec) of the year dragged down the performance of the preceding nine months, with expenditure exceeding revenue by 35.60% compared to an average of 9.68%. Net loss for Q4 (RM1.28 billion) accounted for half the year’s loss. Traffic (RPK) for that quarter actually fell by 6% against a capacity (ASK) growth of 1%, resulting in a lower seat factor of 72.5%.

To state the obvious that Malaysia Airlines suffers a bad case of over-spending is an understatement. Group chief executive officer Ahmad Jauhari Yahya said the result underscored the urgent need for the airline to adopt strong measures to stop the “bleeding”. These, he announced, would include “staff redeployment, increasing productivity and efficiency, relentless cost control and making further reviews.”

It looks like the whole enchilada. Mr Yahya added: “We are also implementing an aggressive sales and marketing strategy.”

Just what exactly is that strategy? Aware of its ailing state, Malaysia Airlines has previously said it would restructure to focus on the long haul and to set up a new premium regional carrier that will operate the more lucrative short-haul routes as well as domestic services. The plan was to cut capacity by 12% though it had yet to be achieved. Then, before the publication of Q4 numbers, Mr Yahya already recognized the dire straits that Malaysia Airlines was in. He said the airline was in a “very, very deep crisis” and must act quickly – the same message that he was to reiterate after the Q4 results were released.
The proposed restructuring plan also called for cooperation with AirAsia, suggesting that both airlines should not compete directly with each other but rather complement their operations. The budget market was to be largely that of AirAsia. It looks like a national agenda to combat regional competition. In August last year, the two airlines swapped shares that gave AirAsia chief Tony Fernandes a 20% stake in the national flag carrier. AirAsia was the white knight come to rescue Malaysia Airlines in distress. The deal would give Mr Fernandes a bigger say in how the aviation landscape would shape up in Malaysia and beyond for both carriers.

Yet how far that cooperation would go and, more importantly, produce positive results is yet to be seen. It was a narrow view to think that reducing the competition between the two airlines would invariably enlarge their individual market shares by redistributing the pie from one to the other since they are not operating in a duopoly. A combined net loss can happen, not discounting how other players too stand to gain from the reduced competition.

Besides, AirAsia has its own basket of challenges in the near term. Although its full-year result showed improved operating profit by 12% to M$1.2 billion compared to M$1.0 billion the previous year – despite a 36% increase in fuel costs – Q4’s profit fell 56% decline from M$311.1 million a year ago to M$135.7 million. The performance of its Thai joint venture was flat and that of its Indonesian offshoot disappointing. AirAsia had earlier announced it was terminating flights to Europe and India because of high fuel process and weak demand.

Following Qantas’ announcement to launch a regional premium carrier (RedQ) based in Asia, AirAsia made a similar announcement to set up Caterham Jet. There was no indication that this would be in cooperation with Malaysia Airlines. Qantas’ plan was somewhat scuttled by labour action at home as Australian were concerned about the loss of jobs that shift overseas. Subsequently Qantas said it was looking for a partner to establish the regional carrier, which was likely to be based in either Singapore or Kuala Lumpur. At the same time, Mr Yahya said Malaysia Airlines was exploring the possibility of partnerships for its own regional premium proposal, and speculation was rife that the two airlines were talking.

One would have thought it would make sense for Qantas and Malaysia Airlines – both airlines looking to extend its reach in the lucrative Asian market – to join forces to take on the competition posed by more successful rivals such as Singapore Airlines and Cathay Pacific Airways. All the more so, as it would also interest the Malaysia aviation authorities to anchor Qantas at Kuala Lumpur International Airport to boost the airport’s growth. But talks have broken down. Qantas said the two sides could not agree on commercial terms. And Malaysia Airlines has decided to go it alone. It should not come as a surprise as both airlines appear to be ideologically different right from the start even as Malaysia Airlines has decided to join the OneWorld alliance. Their only common ground is their desperation to get back into the black. In the end, it is a lose-lose outcome for both airlines.

It would be interesting to know what else Malaysia Airlines would do to get out of the crisis. More specifically, the airline plans to retire and return to lessors 58 aircraft from now through 2014. This will result in capacity reduction which should in turn improve the break even factor if the airline’s load does not slip. On the flipside is the issue of growth, which though always desirable in a competitive market, may not figure in the near term as the soaring fuel price is likely to continue to hurt its pocket.

For ailing Malaysia Airlines, it is not just regional competition that it must be concerned about, but also the internal discipline to better manage its costs and improve productivity.

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About David Leo
David Leo has more than 30 years of aviation experience, having served in senior management in one of the world's best airlines and airports. He continues to maintain a keen interest in the business, writes freelance and provides consultancy services in the field.

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