Will Qatar Airways be Malaysia Airlines’ white knight?

Some three to four months after Malaysian prime minister Mahatir Mohamad said ailing Malaysia Airlines (MAS) may shut down or be sold, he revealed he had received four proposals to take over the national flag carrier.

The first known interest came from former AirAsia non-executive chairman Pahamin Ab Rajab and five partners, whose consortium is looking at scooping up a 49 per cent stake in MAS. Whether AirAsia is part of the consortium is not clear, but the budget carrier’s chief Tony Fernandes had said he was not interested as it would be a mistake for a low-cost operator to want to go full-service. (See Can AirAsia save Malaysia Airlines, 8 July 2019)

Qatar Airways now emerged as the second prospective white knight come to the rescue of MAS following a meeting between Dr Mahatir and Qatar Emir Sheikh Tamin Hamad al-Thani. Both Qatar and MAS belong to the OneWorld alliance. At least that’s common ground for a start, unless geopolitical problems Qatar faces with its neighbours that lead to its isolation in the region stand in the way.

But, of course, no doubt Qatar has the funds to shore up the loss-making MAS. There are good competitive reasons for doing so. The tie-up will certainly boost Qatar’s standing in Southeast Asia and the extended Asian region. Dr Mahatir has recognised that MAS suffers from fierce competition, and Qatar’s aggressive strategy in the international arena may well also push the Malaysian carrier in the same direction.

The acquisition will complement Qatar’s investment in Europe, where it is already a major shareholder of the International Airlines Group (IAG) which owns British Airways, Iberia, Vueling and Aer Lingus. With a share of 20.01 per cent, it s IAG’s largest single stakeholder.

It is interesting that of the four proposals received by MAS, Qatar is the only foreign company. It is not known if the other proposals are from industry players apart from the suggestion that Mr Pahamin had an aviation link in a non-executive capacity. That probably explains how many industry experts think MAS’ best bet is AirAsia, once a carrier heavily indebted and now Asia’s leading budget operator.

Qatar’s credentials as the world’s best airline voted by Skytrax respondents are impressive, but national pride to keep the flag carrier in local hands may present a hurdle. Yet one only has to look at Swiss International Air Lines now owned by the Lufthansa Group and the merger between Air France and KLM to appreciate how in business, the desire to survive will dictate the course. Already Dr Mahatir has assured his people MAS will retain its name.

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Can AirAsia save Malaysia Airlines?

Courtesy Reuters

Back in March, AirAsia chief Tony Fernandes said he was not keen on acquiring Malaysia Airlines (MAS).

This came amidst speculation of a likely scenario when Malaysian Prime Minister Mahatir Mohamad mulled over the future of the beleaguered flag carrier, suggesting it might be better off sold if not downsized or expanded as the case may be with a change of management.

Dr Mahatir said: “Although we hired foreign management, MAS still faced losses. Therefore, one of the options is to sell.”

Four turnaround initiatives without success had apparently cost the government MYR250 billion (USD 6.05 billion).

Recent events have led to renewed speculation of AirAsia’s interest. Former AirAsia Group Bhd non-executive chairman Pahamin Rajab is said to have met Dr Mahatir. However, it might well point to Mr Pahamin’s personal interest eyeing the top job at Malaysia Airlines following the resignation of Tan Sri Mohammed Nor Md Yusof as chairman.

But if the acquisition does come about, it would be an interesting case of how a budget carrier came to assimilate a larger national carrier. AirAsia, once itself heavily indebted, had become Asia’s leading budget carrier.

There are clear benefits of such a merger. The two carriers can complement their networks and not compete as rivals on the same routes given AirAsia’s ambition to expand into the long-haul market, unless the products differ substantially in their make-up. This can be modelled after the likes of Singapore Airlines-Scoot and Qantas-Jetstar complement.

The execution is key. The industry has seen one too many examples of assimilation by a legacy carrier of a low-cost operator. For AirAsia, the big question must be one of how its operating culture will mesh with that of MAS, noting in particular that its success lies in the austere budget model although this does not imply it is not inclined to be service-bias.

One can’t help but wonder how and why MAS has failed to change in spite of earlier initiatives at restructuring, so much said about cost-cutting and perhaps not enough focus on the operating culture. So can AirAsia work the magic?

But, of course, only if Mr Fernandes wanted it. He had said: “For low-cost carriers to go full-service… is a mistake.” He had also called Malaysia Airlines “old-fashioned”. For him, the priority is to transform AirAsia into a “travel technology company”. In his words, to be “more than just an airline”.

The real question then is: Is MAS ready for the transformation?

Size matters in the air

Courtesy Getty Images

Ryanair chief Michael O’Leary predicted that “within the next four to five years you are seeing the emergence of four or five large European airline groups.” He even named the airlines, Ryanair among them in a mix of full-service and low-cost operators: Lufthansa, IAG (International Airlines Group which owns British Airways, Iberia, Aer Lingus, Vueling and Level), Air France-KLM and, probably, Easyjet.

This sentiment has been opined before by others at a time when mergers, assimilations and acquisitions across the industry were trending as competition broke barriers of entry and intensified, and so-called safe niche markets became every player’s game.

Air France-KLM as the name suggests is a merger of the two European airlines in 2004. Rival British Airways (BA) viewed it as a step in the expected direction, predicting further consolidation within Europe. And in 2011 IAG came into being when BA and Iberia merged. BA chief executive Willie Walsh said at the time that the merger would enable the airline to compete effectively with low-cost carriers.

So there came a time when budget carriers began to pose a threat to full-service airlines, with Ryanair leading the pack. Many of the legacy airlines today have adopted the budget model of charging for ancillaries, and introducing a basic economy class to keep cost-conscious travellers from switching. However, many low-cost carriers have become victims of the competition – the reason why Mr O’Leary named only one other carrier, EasyJet, as a probable survivor.

EasyJet, founded in 1995 and headquartered in London Luton, UK, is Ryanair’s closest rival which has grown and spread its wings across Europe. It too has made a number of acquisitions which include Swiss TEA-Basle and Go.
Elsewhere around the world, the vibes are not unfamiliar, New in the circuit is Air Canada’s interest in Sunwing and Cathay Pacific’s interest in Air Hong Kong Express, And where acquisitions and mergers are not on the plate, airlines are working to form alliances that are more than mere code-sharing. Qantas did it in 2013 with its tie-up with Emirates, and now Malaysia Airlines and Japan Airlines have applied for waiver of government restrictions to form an alliance that will enable easier connections between the two carriers.

It looks like size matters in the air.

AirAsia completes Asian conquest

Courtesy AirAsia

AirAsia founder Tony Fernandes said the latest agreement to set up a joint venture in China with Everbright Group “closes the loop” in the region. He added that AirAsia China “represents the final piece of the AirAsia puzzle.”

The Chinese joint venture came on the heels of the agreement with Gumin Company Limited, businessman Tran Trong Kien and Hai Au Aviation Joint Stock Company to set up AirAsia Vietnam, which is expected to commence operations in the first half of 2018.

These two ventures add to an impressive list that already includes Thai AirAsia, Indonesia AirAsia, Philippines AirAsia and AirAsia India, giving the Malaysian budget carrier a base in almost every major country in the region from India and across Southeast Asia to China. The exception is Japan when an earlier joint venture with All Nippon Airways – AirAsia Japan – was disbanded just over a year after it commenced operations in August 2012.

Notwithstanding that, AirAsia’s ambition to be the region’s main player remains unthwarted, capitalising on Asia’s growing middle class and its propensity for air travel, particularly in populous China, India and Indonesia. Headquartered in Kulala Lumpur, it is now larger than flag carrier Malaysia Airlines and is Asia’ largest budget carrier.

But Mr Fernandes enjoys wrestling with the big boys. AirAsia’s strategy is not confined to the domestic market, which will place it in good stead to compete beyond the borders in time. Not content to be just Asia’s largest budget carrier, AirAsia is once again trying to prove sceptics wrong about the viability of the long haul as it launches flights from Kuala Lumpur to Honolulu in June – this, despite its failure to sustain services to Paris and London five years ago. If success seemed elusive in the past – the same fate that had dealt similar blows to others such as Hong Kong’s Oasis Airlines who dare go where others fear to tread – Mr Fernandes deserves credit at least for trying.

Is Malaysia Airlines now a budget long-haul carrier?

Courtesy GETTY Images

Courtesy GETTY Images

IT is baffling how Malaysia Airlines (MAS) gets entangled in the PR mess when it decided to ban checked baggage on its flights from Kuala Lumpur to Europe. Economy class passengers were allowed only one cabin bag of up to 7 kg and first/business class passengers double that allowance.

MAS cited “strong headwinds” as the reason.

Public reaction pointed to the ludicrousness of the decision. Considering that such flights are long-hauls and the northern winter, it was an affront verging on what some travellers would consider as unreasonable.

Apparently, for safety reasons MAS is taking a longer air route to reach European destinations, having suffered a fatal loss when one of its planes was shot down over war-torn Ukraine in July last year. Taking the longer route means using more fuel, so that would increase operating costs.

Has MAS become a budget long-haul, as it undergoes massive restructuring under the leadership of ex-Aer Lingus chief Christoph Mueller?

Although MAS reverted the ill-conceived decision after two days of negative public reaction, the damage has been done. Didn’t Mr Mueller see what was coming?

Can Emirates tie-up save Malaysia Airlines?

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

Malaysia Airlines (MAS) has signed a mega codeshare deal with Emirates Airlines. The commercial partnership will allow the former access to more than 90 locations in the United States, Europe, the Middle-East and Africa via Emirates’ Dubai hub. MAS will terminate its own direct flights to Paris and Amsterdam along with codeshare agreements with existing partners. In exchange, Emirates passengers can connect MAS flights within the Asia Pacific region.

Sounds familiar? Indeed, this looks like new man Christoph Mueller at the helm of the loss-making Malaysian flag carrier doing what Qantas chief Alan Joyce did in 2013 when a mega alliance with Emirates allows Qantas passengers similar extensive access to a host of destinations out of Dubai. Hired to makeover and turn MAS around, Mr Mueller said of the Emirates tie-up: “Our network architecture is largely complete with this move. It’s a very, very big and important piece in our puzzle.”

But can the tie-up replicate the success of Qantas and contribute immensely to saving MAS? Lest we be too hasty here, it should be noted that though the move is similar, the circumstances aren’t exactly the same.

Mr Mueller’s task is focused largely on cutting costs for a tighter ship, and he has since becoming chief executive in March this year cut thousands of jobs. Another measure involves cutting back on unprofitable routes, and the carrier has so far trimmed capacity by 30 per cent. Mr Mueller was set to shift the focus from operating long haul routes to beefing up regional routes, literally downsizing the carrier; routes that had been dropped include flights to Istanbul and Frankfurt, a precursor of its withdrawal from continental Europe with the exception to London (as in the case of Qantas). This creates a gap in its network which Mr Mueller hopes will be compensated by its tie-up with Emirates, moving away from what he referred to as the traditional ‘kangaroo-route-centric approach”.

The codeshare makes sense since MAS is not making money on its long haul flights. Cost aside, in truth, MAS is just not able to measure up to the competition of regional rivals that ply the same routes, most notably its closest rival Singapore Airlines (SIA). Kuala Lumpur International Airport (KLIA) where MAS is based and Singapore Changi Airport are less than an hour apart, but Changi outperforms KLIA in attracting hub traffic. Here lies the difference between Qantas and MAS. The Australian flag carrier’s move involves a critical shift of its kangaroo route hub from Changi to Dubai, advantaging the latter in the hub competition. Unlike Qantas, MAS does not enjoy a similar base market out of KLIA. Qantas’ shift is also an attempt to lure more traffic away from its rival SIA to connect through Dubai. It is unlikely that MAS will be able to lure hub traffic away from Changi to fly out of KLIA and connect onward from Dubai. MAS’ tie-up with Emirates is best seen as a necessary cost-cutting measure.

Quite clearly Mr Mueller who is often credited as the man who turned around Aer Lingus before joining MAS understands the criticality of the beleaguered carrier recovering strength before competing. He is building a strong regional network which can at the same time feed the longer routes. But the competition in this arena is just as tough. Besides legacy airline competitors such as SIA and Cathay Pacific, there is also an array of budget carriers that are becoming a real threat to full-service airlines. On home ground, MAS faces challenges from AirAsia, which is Asia’s largest budget carrier. The competition will intensify as Asean moves towards a more liberal open skies policy. (See The Elusive Asean Open Skies Dream. Dec 17, 2015).

When Qantas and Emirates inked their agreement, some sceptics cast doubt about its benefits to the former and in fact believed that the latter would gain more by it. But it was Qantas that needed it more as it introduced a transformation program to turn round its bleeding international arm, which Mr Joyce had said in subsequent reports of the airline’s financial performance that the arrangement has boosted the flying kangaroo’s bottom line.

If the Emirates tie-up was a lifeline thrown to Qantas, surely it is all the more so to MAS. In exchange for allowing MAS access to 38 destinations in Europe, 15 in the US and 38 in the Gulf region, Africa and Indian Ocean, Emirates will gain access to some 300 daily MAS flights in its Asian network. The question is: Does Emirates really need it? Perhaps selectively, to tap into the growing markets in countries such as China and Vietnam.

In the bigger picture, Emirates has been forging codeshare agreements around the world. In Asia, besides MAS it already has arrangements with Bangkok Airways, Japan Airlines, Jet Airways, Jetstar Asia, Korean Air and Thai Airways International. Outside that region, it has entered into codeshare agreements with Air Malta, Air Mauritius, Alaska Airlines (pending government approval), Flybe, Jetblue Airways, Jetstar Airways, Oman Air, Qantas, South African Airways and TAP Portugal. Although there appears to be a low count of codesharing with European carriers, Emirates being strong in the competition provides good connections to the region. While the withdrawal of airlines of Qantas and MAS from Europe may be welcome news as seeming reduced competition for European carriers (and other international carriers as well), the feed from those partner airlines into Emirates will actually further strengthen Emirates’ position.

As far as MAS is concerned, riding on the back of another strong carrier may yet be its best bet for recovery.

This is a version of an article that was first published in Aspire Aviation.

The hangman cometh at Malaysia Airlines

mas logo2IF Christoph Mueller, the new man appointed to head Malaysia Airlines (MAS) – to be renamed on 1 September as a new airline – appears to be a hangman at the onset, it is understandable since termination letters have been sent to all employees ahead of the airline’s re-launch .  It is estimated that at least 6,000 employees will be axed and others offered to join the new airline. Some may be offered short-term contracts.

The staff cuts should not come as a surprise. It is an inevitable path that struggling companies undergoing restructuring are apt to take, and in almost all cases when a new helmsman comes on board. Mueller himself is an experienced hand in that respect. When he joined Sabena in 1999 as CEO, he axed several jobs as a way to keep the Belgian airline competitive, but unfortunately it went into bankruptcy in 2001.

Mueller was best known for his success at turning around loss-making Aer Lingus when he was appointed CEO of the Irish airline in 2009. He implemented a slew of cost cutting measures that include axing more than 600 jobs. After six years, he left Aer Lingus to join MAS, which some observers consider to be a bigger challenge.

Courtesy Irish Echo

Courtesy Irish Echo

The Malaysian flag carrier has been battling years of financial losses, and it suffered two disastrous airliner incidents last year – the disappearance of MH370 on Match 8 with 239 people on board followed two months later by the shooting down of MH17 over Ukraine, killing all 298 passengers and crew. Added to that, Mueller’s appointment was not one that was politically acceptable in all quarters, including some local businesses. Former Prime Minister of Malaysia, Mahatir bin Mohamad, for one considered it an insult to Malaysians and had reportedly said: “I am worried, if we do not believe in ourselves, one day when we need a prime minister we can get a white man because he is smarter than us.”

However, it being a business appointment, the political invective loaded with sarcasm is unlikely to cost Mueller any sleep. It was not directed personally at him, just so he is an outsider, being the first foreigner to head the Malaysian state-owned company. The test, as he might say, is in the pudding.

On the industrial front, one may also consider Mueller fortunate to have been equipped with the experience of dealing with rather powerful unions at Sabena and Aer Lingus, that he should therefore be well prepared for similar tussles at MAS. In an interview with Cambridge University’s business school, talking about his experience at restructuring a company, he recounted: “The first year of a restructuring is really like a war situation.” For all the angst expressed by affected workers and sympathizers, Mueller is likely to find a more congenial field compared with his previous encounters.

But that does not mean he has an easy plate. In the same Cambridge interview, Mueller said: “My experience is it’s very difficult to create a winning team from existing management.” The issue is more than just trimming bloating staff numbers down the staff ranks. He explained: “There’s nowhere more obfuscation than in the boardroom at the beginning of a turnaround.” Every CEO bent on change knows getting the support at the top and getting them to fly in the same direction are critical in herding the flock whose compliance will then follow naturally.

It is to be expected that Mueller will likely replicate some of the things he did for Aer Lingus at MAS. These include reducing capacity and eliminating unprofitable services. The new MAS will cut back on international routes, and focus on domestic and regional routes. This is not new as the airline has already been abandoning or suspending unprofitable routes, both long haul and regional as it continues to reel from the throes of the global financial crisis. Downsizing will make it more manageable to reconstruct on strengths, then expand and grow on a firm footing from there. Mueller said MAS will maintain its presence internationally through alliances and partnerships.

As an outsider, Mueller is not weighed down by old baggage and biases, even as national pride may be hurt since MAS is the country’s flag carrier and a national icon. He is therefore in a better position to inject fresh ideas and make unprecedented moves although it would be foolhardy of him not to take into cognisance potentially political and cultural sensitivity of some of the measures he may put in place. Dealing with domestic issues even for a local leader may demand more delicate handling than international ones.

There is a stark similarity between Aer Lingus and MAS where the competition is concerned. For the former, there is Ryanair, and for the latter, AirAsia, the rivals in both cases being budget carriers. Mueller has been credited for staying attempts to takeover Aer Lingus by Ryanair, which is Europe’s largest budget carrier and the Irish national airline’s single biggest stakeholder. Regionally MAS has been facing stiff competition from AirAsia, which is Asia’s largest budget carrier. Shifting the focus from international to regional competition, the new and smaller Malaysian national airline’s rivalry with AirAsia can only magnify as it intensifies. It is to be seen if the restructuring will take its toll on two subsidiary budget airlines, namely MASwings and Firefly.

Yet it cannot be assumed that the task for Mueller at MAS is a carbon copy of that at Aer Lingus. In his own words, Mueller described his challenge at MAS as a “hard reset” for the airline. He talked about “a new start in markets where our brand is tarnished” but was careful not to disparage the old name as “we want to be as well-known as the old carrier.” Yet he has made it clear that “the travelling public needs to understand we are not just MAS in a new disguise but truly a start-up.”

It looks like an ambitious overhaul in not so many words, and the “orang puteh” (white man) is working fast to prove the battle is his to win. A month into his job, Mueller is expected to unfold his program, or at least some early measures, by the end of the month. It will add to his credit that he, as a foreigner, when finally succeeding in bringing MAS back into the black, also manages to rebrand the airline that he has promised will still be “Malaysian at heart”.

This article was first published in Aspire Aviation.