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?

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Malaysia Airlines flip-flops, its future uncertain

THE powers that be at Malaysia Airlines seem to be not quite sure about what they want. The apparent lack of conviction in their commitment to right a tilting ship has left the airline directionless and without a palpable vision.

In August last year, the ailing airline made a share swap with white knight AirAsia in a move aimed at checking Malaysia Airlines’ plunge further into the red. This would result in AirAsia chief Tony Fernandes owning a 20.5 per cent stake in the national flag carrier, in exchange for a 10 per cent stake in the budget carrier. Today, that deal is off as both airlines agree to unwind the share swap, reportedly “on a willing-buyer, willing-seller basis” but not discounting political pressure and that from Malaysia Airline staff and their union. This will also see the exit of both Fernandes and his deputy Kamaruddin Meranun from the Malaysia Airlines board of directors.

Scuttled along with the abortive deal is of course the master plan to restructure the Malaysian competition that would divide the market between the compatriots and their subsidiaries. It was a national agenda. Malaysia Airlines would focus on the long haul, leaving the budget market to AirAsia, which owns AirAsia X that operates the budget long haul. Malaysia Airlines already has a budget offshoot called Firefly that operates within the country and to nearby destinations in the region.

Both Malaysia Airlines and AirAsia airlines also talked about setting up a regional premium airline, although it was not known if that would be separate entities or a collaborated effort. The rumour then was that Qantas was keen to team up with Malaysia Airlines to realize its own plan to set up a regional premium carrier to be based in Asia, but agreement could not be reached between the two parties.

That did not come as a surprise. The Australian flag carrier, faced with objection from staff unions at home, had sought a compromised solution in a joint venture that would also reduce its capital outlay, but if it were Malaysia Airlines that it had wooed, it might have found the enthusiasm not quite at the level it had expected although it attributed the breakdown in negotiations to disagreement on commercial terms.

Clearly Malaysia Airlines has its own bag of woes. The airline posted a loss of RM2.52 billion (US$841 million) in 2011, prompting its chairman Tan Sri Md Nor Md Yusof to declare that “the company is in crisis.” At the time of announcing the result in March, Group chief executive Ahmad Jauhari Yahya also recognized the dire straits that the carrier was in, calling for the airline to urgently adopt strong measures to stop the “bleeding”. Such measures would include “staff redeployment, increasing productivity and efficiency, relentless cost control and making further reviews.”

Undoubtedly there was heightened awareness of the airline’s ailing state – and it had verbalized its ambition to be back on the leader board. Mr Yahya had said Malaysia Airlines was exploring the possibility of partnerships for its regional premium proposal, but it that was not forthcoming, it would go it alone. As part of the airline’s restructuring or perhaps, more aptly, transformation, he had said: “We are also implementing an aggressive sales and marketing strategy.”

The real problem could be one of inertia or the lack of conviction. It may be a case of the spirit is willing but the flesh is weak. Of course, it is always easier said and done, noting how the business is invariably punctuated with risks and uncertainties in the throes of the rising fuel price. Despite that, what Malaysia Airlines needed is a clearly delineated strategy that calls for specific and concrete action – so much about improving staff productivity and efficiency, and reducing cost.

To be fair to Malaysia Airlines, it may well surprise with something up its sleeve. The airline is expected to announce a plan at the end of the month on how it would raise funds and strengthen its balance sheet. The share swap flip-flop may be nothing more than a corporate, structural change of names that is a normal business practice, and the result of an enlightened review. In retrospection, its termination may even ward off any potential conflicts between the two parties and their subsidiaries, even as they have decided to carve up the market, a move that may benefit more the budget carrier than the full-service airline in the run up to Asean Open Skies by 2015.

However, both airlines have pledged to continue their cooperation. They have entered into new agreements of collaboration to explore the setting up of a joint-venture company to provide aircraft component maintenance support and repair services, and to establish procurement synergies through a “special purpose vehicle” that would bring about the economies of scale for Malaysia Airlines, AirAsia and AirAsia X.

No big deal. One key word is “explore”. Malaysia Airlines may be mindful of how “the heights by great men reached and kept, were not attained by sudden flight, but they, while their companions slept, were toiling upward in the night.” (Henry Wadsworth Longfellow) Waiting for the right time to act may mean missing the boat when opportunities arise.

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.