Malaysia Airlines: Waiting for the white knight

Courtesy Reuters

IN July, there was much excitement about Qatar Airways’ interest in acquiring Malaysia Airlines (MAS), being one of four proposals received by the ailing flag carrier of Malaysia. It seems that has as quickly dissipated.

According to sources, apparently only one proposal from local investors Jentayu Danaraksha Sdn Bhd (JDSB) is left on the table. The consulting firm is fronted by former MAS chief executive officer Tan Sri Abdul Azia who retired in 1991.

But MAS’ owner Khazanah does not seem to favour JDSB which in 2014 said it was keen to revive the carrier but was snubbed.

There has been ambiguity as to whether MAS prefers a local or foreign investor. But there is now new excitement about the possibility that Japan Airlines (JAL) might be that white knight. Much has been hyped about JAL being a good fit for MAS since it had only not too long ago pulled through a difficult time of near collapse and would therefore know what’s needed to rescue MAS.

JAL has earlier tied up with MAS to operate joint flights between Japan and Malaysia, and it looks like a natural step forward to take on a bigger role. Besides, both airlines belong to the OneWorld Alliance (and so too Qatar Airways).

And while the powers that be at Khazanah are gushing with excitement about that prospect, JAL president Yuji Asaka said it was too early to consider an equity investment in MAS but future discussions were possible.

Extending its reach internationally may be a strategy for JAL in competing with rival All Nippon Airways. So far it has partnered with airlines which include China Eastern Airlines, Hawaiian Airlines and Garuda Indonesia in commercial agreements. But equity acquisition is so far not on the card. So it may be a long road, so patience may just be what MAS needs right now.

The big challenge of overhauling Malaysia Airlines

Courtesy Heathrow Airports Limited

Courtesy Heathrow Airports Limited

WHATEVER form it takes, change at the beleaguered Malaysia Airlines (MAS) is inevitable. The airline suffered two tragic disasters within four months of each other. The first concerned the mysterious disappearance of MH370 in March, flying from Kuala Lumpur to Beijing, resulting in a loss of 239 lives. The second involved an aircraft brought down by a missile while flying over the war zone in eastern Ukraine – MH17 departing from Amsterdam and heading for Kuala Lumpur. There were no survivors among the 298 people on board.

No lesser a person than Malaysian Prime Minister Najib Razak had said that the twin incidents “will change the way MAS operates.” No doubt the tragedies have hastened the process for change, but the Malaysian carrier has been struggling in the red long enough and without any sign of a recovery. It lost 4.1 billion ringgit (US1.29 billion) between 2011 and 2013. In the second quarter (Apr-Jun) of the current year, it lost 306 million ringgit, adding to a half-year loss of 748 million ringgit. Revenue for the latest quarter not only failed to catch up with capacity increase of 9% but declined by 7% instead.

Mr Razak also said: “We believe our national carrier must be renewed. This means wholesale change… Only through a complete overhaul of the company can we deliver a genuinely strong and sustainable carrier.”

MAS has announced a recovery plan that will cost the airline 6 billion ringgit. As already made known earlier, the airline will be delisted and come under state control with the state investment company Khazanah taking 100% ownership from its current 69%. The plan includes reducing the 20,000 workforce by 6,000 workers and the appointment of a new chief executive. Khazanah promised drastic changes to MAS’s “operations, business model, finances, human capital and regulatory environment.” Khazanah managing director Azman Mokhtar has set an ambitious target for the carrier to return to profitability by 2018.

Observers are generally encouraged by the proposal for change as a way to revive the ailing carrier. Short of knowing the details, the question is whether as stringent as the measures are supposed to be, are they sufficient? Interestingly, former Malaysian Prime Minister Mahatir Mohamad was quick to throw cold water on the proposal. He said: “Khazanah has been in full control of Malaysia Airlines all this time. And all this time Malaysia Airlines has been bleeding profusely. So why should anyone believe that with 100 percent control Khazanah will not keep on losing (money).”

While Khazanah has viewed accountability for use of public funds positively, history is filled with examples of the failure of state-owned companies. This, Mr Mokhtar was quick to recognize. He qualified his optimism of the airline’s revival with the caution that “success is by no means guaranteed.” Much will depend on how the form of the proposed restructuring shapes up. A visionary new man at the helm always promises new beginnings, particularly if he or she is an import who is not weighed down by the diehard baggage of the past, who comes to the table with new perspectives and ideas, and who is unafraid of making the necessary changes. That much MAS can hang its hope on the road to recovery.

In the meantime, MAS has decided to do what most, if not all, companies in dire straits do first: downsize the workforce. It would appear to be an expected albeit painful outcome particularly when the carrier is also considering downsizing its operations for a start. Airlines such as British Airways and Air France/KLM have gone down that path with some measure of success to boost the bottom line. Successful airlines have become increasingly conscious of the need to do more with less, and MAS may do well to benchmark against these airlines in the way that they manage a tighter outfit. According to a BBC report, MAS’s close rival Singapore Airlines (SIA) manages with some 5,000 fewer staff although both airlines operate a similar sized fleet. Yet SIA has enjoyed years of profits compared to the losses incurred by MAS.

MAS attributed its poor performance to the intense competition posed by low-cost carriers. It also cited the high costs of operating unprofitable long haul routes which it has said it would slash. The situation has been aggravated by the sharp decline in bookings following the two air disasters. However, it seems so self-serving that any airline should blame the competition for its woes and not ask why it fails to measure up to it. Competition is the name of the game; how you play it decides whether you win or lose.

In the years that other airlines including low-cost operators such as Malaysian compatriot AirAsia – which even launched long-haul flights to Paris and London – were making strides in the arena, MAS seemed satisfied with cruising, winning or losing. It was among the last few airlines in the region to join a global alliance, but membership has not helped it in any substantial way to regain lost grounds. It also missed the opportunity to collaborate with Qantas to enhance Kuala Lumpur International Airport’s hub status and benefit from that relationship. Qantas subsequently entered into a mega alliance with Emirates and boosted the Dubai hub.

The gripe about competition has to cut deeper and across a wide spectrum of issues, hence the realization by Khazanah and the Malaysian government of the urgent need for an overhaul, not piecemeal changes, to revive MAS. Khazanah had said: “Nothing less will be required in order to revive our national airline to be profitable as a commercial entity and to serve its function as a critical national development entity.” A key phrase to note with enlightened awareness is “commercial entity”, which encapsulates the very essence of doing business, yet at the same time there is the constant reminder of the carrier’s “national development entity”. The relationship may be as complementing as they are conflicting sometimes.

Other airlines have clawed back from mishaps, so there is hope for MAS. The Malaysian carrier whose crew was ranked fifth in the 2014 Skytrax World Airlines survey deserves a second chance. Until more details of the proposed overhaul are made known, opinions are divided but the consensus is one of an uphill task. As the regional competition heightens in a fast shifting environment, the sooner it sets new directions, the better its chances of an early recovery.

This article was first published in Aspire Aviation.