Endau Analytics

What’s in store for airlines in 2018?

MH 737 @ CHANGI

How will airlines fare in 2018? Pic/Shukor Yusof

There’s an air of optimism in the Asian airline industry following the International Air Transport Association’s (IATA) proclamation that airlines in this region will make a profit of USD9 billion in 2018.

IATA expects 2018 to be the fourth consecutive year of sustainable profits with a return on invested capital (ROIC) of 9.4%. This figure exceeds the industry’s average cost of capital of 7.4%.

Collective net profit for all airlines is expected to rise to USD38.4 billion in 2018 (from USD34.5 billion projected in 2017). Here’s IATA’s industry economic performance.

According to IATA passenger market conditions vary across Asia Pacific. IATA’s latest figures also corroborate what we have seen – intense competition in the low cost segment that continues to put pressure on profits, assuming some of these LCCs are making money.

One bright spot for the region is in freight. A strong uptick in the cargo markets has provided support for Asia Pacific carriers as they account for almost 40% of global cargo capacity. Anticipated growth in demand of 7% is going to surpass capacity increases of 6.8%.

World’s strongest market

There is no doubt Asia Pacific is the world’s strongest aviation market today and will continue for the foreseeable future. The Association of Asia Pacific Airlines (AAPA) in October noted an 8.3% increase in the number of passengers ferried by Asia Pacific carriers, or a combined total of 26.4 million. Demand in revenue passenger kilometres (RPK) grew almost 10%.

Read the AAPA release here.

While we generally concur with IATA and AAPA on its findings and see 2018 as generally strong for some carriers, many things can go wrong quickly in this business.

Oil remains an unknown next year. Our friends in the energy market say oil prices will probably stay along the same range as they did in 2017, or move at most 3%-5% higher.

We don’t quite believe that. We have a hunch it could get very sticky for those airlines that haven’t had the foresight to hedge (at least 50%) beyond 12 months when jet fuel was trading in the 60s per barrel.

THAI monk blessing

THAI needs more blessings. Pic/Thai Airways

But some are weak in a strong market…

The earnings numbers of some regional flag carriers suggest that while oil prices had stayed relatively low in 2017, many airlines have not quite profited from it.

Thai Airways International (THAI) in November reported a 3Q17 (Jul-Sep) operating profit of THB739 million (USD22.5 million). That’s nice compared to the THB836 million loss for the same period in 2016. But THAI reported a net loss of THB1.8 billion for the 3Q, wider than the THB1.6 billion a year ago. The Bangkok Post has all the details here.

THAI is 51% owned by the government. Like Malaysia Airlines and Garuda Indonesia, political interference and poor management have plagued THAI. Just look at its fleet: many aircraft types that need massive maintenance costs. All 10 of its Airbus A340s are grounded . THAI also flies six A380s, each with 507 seats.

Although the International Civil Aviation Organisation (ICAO) recently dropped its red flag for Thailand, problems at THAI persist, largely due to lack of leadership and ideas. Thailand had been under ICAO’s red alert since 2015 when an audit raised significant safety concerns about Thailand’s oversight of carriers, especially when it comes to the award of air operator certificates (AOC).

That led to the closure of Thailand’s Department of Civil Aviation and gave rise to the new Civil Aviation Authority of Thailand. Read it here.

The lifting of the red flag is good news for THAI and other carriers in Thailand but it also means everyone’s going to start applying for new international routes and competition will heat up and costs will rise.

THAI shares have been trading under THB22 for the past six months, and under THB17 this past week. Airline stock is not necessarily a good gauge of how a carrier is performing and investors are not naturally attracted to airlines.

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A Garuda 737 model at its HQ. Pic/Shukor Yusof

Indonesian flag carrier Garuda is another perennial underperformer. Much of the good work done by ex-CEO Emirsyah Satar appear to have been eroded in the past two years. Garuda lost USD222 million in the 9M17 period, while operating revenue soared to USD3.11 billion (from USD2.9 billion during 9M16).

The huge losses were partly attributed to higher fuel costs (only 20% hedged, the rest bought via spot) and a one-off tax amnesty payment of USD137 million. In 2016 Jakarta launched a nine-month tax amnesty scheme aimed at bringing billions back into the country.

According to Garuda, 3Q forex losses were USD16 million while tax losses were USD53 million. The carrier stressed that 3Q17 saw a net profit of USD19.6 million (down 12% YoY). Much of the revenue came from hajj and umrah pilgrim charter flights that airline officials said will remain a key source of income for Garuda.

New CEO Pahala Mansury’s focus is on cost-cutting and he has deferred deliveries of aircraft until 2019 including Boeing 737 MAX and Airbus 320neos for its low cost subsidiary Citilink. Garuda has a fleet of 199 planes, of which 177 are on lease.

Aircraft utilisation is an area Garuda would need to drastically improve on. The airline’s B737 planes run just over nine hours a day while 18 of its Bombardier CRJ1000s and 12 ATR-72s clock an appalling five to seven hours daily. Likewise, Garuda’s load factor internationally is quite dismal. Load factor to London (via Amsterdam) is just 65%.

Garuda is struggling financially. Income is growing at 6% but costs are up 21%. Productivity is low, and on some domestic routes it competes with its own unit, Citilink. Pahala has made Garuda integration with Citilink a priority in 2018 but intense competition with Lion Air, which controls 55% of the local market, means it has to continue to dump fares.

What lies ahead?

It’s never easy to guess what the year ahead holds for airlines. Crude prices will, as always, determine the plight of many carriers. Intense competition among airlines, especially within Southeast Asia, will continue to dampen airfares. Full service carriers have little choice but to compete head-on with LCCs, resulting in many different types of fares being offered.

Asia Pacific will see up to 3% rise in 2018 pricing. As IATA has stated, domestic demand in India and China will rise. Weakness in airport infrastructure in Indonesia and Vietnam will become more apparent as growth in both markets exceeds 5% in the next 2-3 years.

Having seen failures in Europe in 2017 (AirBerlin, Monarch), it’s possible one or even two Asian carriers could end up in a similar fate in 2018, mainly due to very intense competition, lack of funds, higher fuel prices, safety issues or a combination of all factors.

The last Asian airline to fold was Taiwan’s TransAsia Airways in November 2016.

 

 

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Being John Leahy

Leahy 2006

is he indispensable? airbus coo-customers john leahy. pic/shukor yusof

Eleven or so years ago John Leahy took a 13-hour flight from London to Singapore, arrived on schedule and was briefed over breakfast by the local Airbus team. Before lunch he had met the media and proceeded after that to his main mission – a critical meeting with the Singapore Airlines (SIA) chief executive. By midnight Leahy was on a plane back to Europe, mission accomplished.

He successfully reassured SIA over delays in the delivery of the A380 (the airline was the aircraft’s launch customer) and even convinced it to add another nine to the 10 superjumbos already on order. According to people who were privy to the negotiations, Leahy made an offer SIA couldn’t refuse.

Leahy is Airbus’ Chief Operating Officer – Customers, and the European consortium credits him for raising the company’s market share from 18% in 1995, to over 50% by the new millennium. It is no small feat, not least for an average-sized American in a fiercely Gallic and Teutonic environment.

The 67-year-old Leahy has said he wants to retire by end-2017, ending 32 years of association with Toulouse-based Airbus. Those who know him, even if just peripherally, will appreciate his guile and wit, likely a result of his liberal arts background at university.

He has a wicked sense of humour and revels in taunting his countrymen, “our friends in Seattle” he likes to say, preferring not to name his rivals at Boeing.

It’s unclear who will replace Leahy as chief salesman. His own choice, Kiran Rao, has ruled himself out of the running, sensing (perhaps rightly) that it’s too hot a seat, especially in a year where Boeing has comprehensively and conclusively beaten Airbus, notably at the Paris Airshow in the summer and most recently in Dubai.

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leahy holds court at an airbus event. pic/shukor yusof

Leahy is a very hard, almost impossible, act to follow. He can be explicitly colourful with his language in informal settings, as some of us found out when we were invited to his swanky hotel suite overlooking the Chao Phraya many years ago, after a long day debating the merits of purchasing either an Airbus or a Boeing widebody.

There are reports that Christian Scherer and Eric Schulz, from ATR and Rolls-Royce, respectively, are the leading candidates to replace Leahy. They appear unlikely, in our view, because each seems to lack Leahy’s charisma and the three I-s: imagination, ingenuity and inventiveness.

Asia is the world’s largest aviation market and unless Leahy’s successor is able to cajole, court and woo many of the egotistical owners and chief executives of airlines in this region the way the New Yorker has, then Airbus will struggle to sell its planes.

Whoever Airbus appoints as its new sales head will have to not only feel at home in the 3-Michelin star Fat Duck where Leahy once sealed a mega deal with Emirates over dinner, but similarly at ease with some of the exotic culinary tastes found in Southeast and East Asia.

In the meantime the European manufacturer will hang on to Leahy until end-2017. There are suggestions, however, he might bid adieu after the Singapore Airshow in mid-February 2018 where, it is thought, Leahy will go out in a blaze of glory with a multibillion dollar order from an Asian customer.

 

 

There are some things money can’t buy. For everything else, there’s Qatar Investment Authority.

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a qatar airways boeing 777-200lr. pic/shukor yusof

 

At HKD5,162,266,000 (USD662 million) or HKD12.35 per share, Qatar Airways felt the 378,188,000 shares of Cathay Pacific Airways it bought from Hong Kong-listed Kingboard Chemical Holdings were value for money.

Indeed they were, and the Qataris now own a 9.6% stake in one of Asia’s (if not the world’s) top carriers – for a song.

The Qataris are astute and smart investors, a lot smarter than their Gulf brethren at Etihad who, as part of ex-CEO James Hogan’s ill-thought “equity investment strategy”, bought into now bankrupt Air Berlin and perennially loss-making Alitalia.

Etihad also made other foolish equity investments in Air Serbia, Jet Airways and Air Seychelles.

What’s behind Qatar’s purchase then?

Akbar al-Baker, the airline’s often bellicose and brusque chief executive, is a very clever man with very deep pockets. Deeper in fact than Etihad and Emirates combined, some people in Doha tell us.

There is method to his madness. He sees opportunities in the face of adversities. Politically Qatar is facing a horrendous time from its neighbours, including Saudi Arabia and the UAE (where Emirates and Etihad are based), after the two countries and several others cut off diplomatic relations and imposed a blockade on June 5.

Almost five months on, Qatar and its flag carrier remain very much in business. Nobody has become destitute in that tiny peninsular. Dairy products and other foodstuff are airflown daily from Turkey and Iran.

More importantly, Qatar Airways continues to grow and ever hungry to buy new aircraft and new assets. It has some 200 planes in its fleet with almost 100 on order. The airline flies probably the world’s youngest fleet, with an average age of five years.

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clever guy with deep pockets: qatar airways ceo akbar al-baker. pic/shukor yusof

For Qatar, buying into foreign airlines isn’t so much about return on investment (ROI), more about getting something intangible – influence. That’s what money buys: the ability to exert (soft) power and to go into places where the next phase of growth is located.

China is one of those places. And that is why HKD12.35 a share in Cathay Pacific was a bargain in al-Baker’s arithmetic. The share price is now hovering around HKD13, thanks to Qatar’s move. Expect to see the stock move up at least 5% to 10% by Christmas.

Al-Baker had tried to buy a 10% stake in US carrier American Airlines (AA) back in June, at the height of the blockade, but the Americans rebuffed him. AA’s boss then said he wasn’t particularly “excited about Qatar’s outreach” and found it “puzzling”.

Qatar already had a 10% stake in International Airlines Group (IAG), the holding company of British Airways, Aer Lingus, Iberia and Vueling, when it paid EUR444 million (USD515 million) for another 10% share in August 2016.

The purchase came right after the UK decided on Brexit and stock prices had tanked. The share is trading around GBp620. This acquisition gives Qatar access to the lucrative trans-Atlantic market.

The airline is also part owner of South America’s biggest carrier, the Latam Airlines Group, after buying a 10% stake in December 2016 for just over USD600 million.

As with IAG and Latam, Qatar’s investment in Cathay Pacific is partly to diversify its assets and get a piece of the action on mainland China, given that Air China is also a co-owner of Cathay Pacific with 30%. The Swire Group remains a majority shareholder with 45%.

This purchase of Cathay Pacific equity has to be seen beyond a mere investment in a world class carrier; it’s Qatar Inc, via sovereign wealth fund Qatar Investment Authority (QIA), making a carefully crafted move into the planet’s largest aviation market.

For those who feel this latest Qatari excursion is an alliance fraught with cultural conflicts that could lead to a complex cohabitation, fret not. Qatar is the world’s richest country, now with a direct link to Air China – flag carrier of what will soon be the globe’s largest economy.

As al-Baker will probably tell you – if he’s in a good mood – money can’t buy love, but it improves your bargaining position…

 

 

Does Malaysia need a national airline?

MAS 3 - MAS 777 Landing K61992

gone but not forgotten. a MAS B777-200ER about to land.

Malaysia Airlines (MAS) is once again in the centre of a maelstrom following the departure of Peter Bellew, its second expatriate chief executive in as many years.

The airline has had a chequered past, marked by persistent losses (over MYR20 billion or USD4.8 billion, in two decades), mismanagement and most recently the loss of over 500 lives on board two of its aircraft.

In view of the debate currently raging in Malaysia over the future of MAS, which unfortunately has spilled into the political arena, it is timely to ask if some countries actually need a national airline.

Consider this: Malaysia has injected billions into MAS since the late 1990s, buying aircraft (like the Airbus A380) that didn’t fit into its fleet and network, and serving many unprofitable destinations.

The airline’s sole shareholder, Khazanah Nasional, has dabbled in numerous turnaround plans for MAS, including the latest one costing taxpayers MYR6 billion. Embarrassingly MAS has seen nine CEOs come and go in less than 20 years.

It is evidently clear MAS has failed, and failed miserably.

At a time when low cost carriers are gaining more influence and Malaysia’s AirAsia growing larger, stronger and crucially making money domestically and internationally, what is MAS’ raison d’être?

Much has been argued about its role in serving Malaysia and promoting its interests and brand name globally, but at what price to its taxpayers and for how long?

Is there a case to continue using public money to support a carrier with such a dismal financial record? Why should MAS be treated differently from any other unprofitable companies?

Likewise, where’s the pride in having a national airline that consistently misuses and loses money? In Malaysia, AirAsia is already performing the role of a national carrier – it has a larger fleet and flies to more destinations.

The irony is, despite having Khazanah as its own ATM, MAS still needs cash and that’s the reason it’s now looking for a minority (foreign airline) shareholder.

Many national airlines have gone the way of the dodo, including Greece’s Olympic, Belgium’s Sabena and Ghana Airways. Even the wealthy Swiss have no flag carrier. Germany’s Lufthansa is now the owner of the flag carriers of Austria, Belgium and Switzerland.

Other European flag carriers are in trouble. Korean Air rescued CSA Czech Airlines in 2013 and Italy’s Alitalia is once again on the brink of bankruptcy.

While privatising airlines (as Khazanah has done with MAS) appears a logical move, many have failed or stagnated, such as Air Malawi, Air Jamaica, Air Botswana and Kenya Airways. Air India is also considering privatisation.

One airline privatisation success was British Airways in 1997, although the airline later became part of the International Airlines Group (IAG), which counts wealthy Qatar as one of its major shareholders.

Interestingly the United States, the world’s largest economy and the country with the most number of carriers, has no ‘national airline’. But then the US has seen the demise of some of the industry’s iconic names, including Pan American (PanAm) and Trans World Airlines (TWA).

* This opinion piece first appeared in the Singapore Business Times on October 24, 2017. Click here (for subscribers only)

The French Connection

Airbus Bombardier management

the four musketeers. l-r: pierre baudoin (bombardier chairman), tom enders (airbus president & ceo), alain bellemare (bombardier president & ceo), and fabrice bregier (airbus coo & president commercial aircraft). pic/airbus

Apart from AirAsia, at least two Southeast Asian carriers are believed to have expressed interest in Bombardier’s CSeries planes after Airbus announced it would take 50.01% control of the troubled programme on October 17.

It is understood informal talks have started. Although details are sketchy, the carriers are exploring acquiring between 20 and 30 planes. So far in Asia Pacific, only Korean Air has placed orders, for 10 CS300 aircraft.

In August this year AirAsia co-founder and CEO Tony Fernandes visited Mirabel in Montreal and said his company was keen on both the CS100 and CS300 variants.

In spite of Bombardier’s widely reported funding problems with the CSeries, the aircraft itself has been well received by airlines and those who have flown in it. Among the wow factors include generous seat layout, a very quiet cabin and low fuel burn (at least 30% less than an Airbus or Boeing narrowbody plane, according to Bombardier).

CSeries aircraft are currently in service with Swiss and Air Baltic. Both carriers said the planes have performed better than expected.

Malaysia appears to be a perfect launching pad for the CSeries in Southeast Asia. Other than AirAsia, the CSeries had also attracted interest from smaller startups.

In March 2015 Malaysia’s prime minister witnessed a signing ceremony between Flymojo and Bombardier for up to 40 regional jets. Unfortunately, the planned acquisition did not materialize because of financial issues as well as delays and uncertainty surrounding the CSeries programme.

Regional jets are perfect for Southeast Asia, given its geography and economic growth. The planes, typically between 70- and 160-seaters, offer certain airlines opportunities to operate in sectors that are currently either not served or underserved.

The CS100 is typically configured with 108 to 133 seats while the CS300 comes with 160 seats (in a single configuration) or 130 in a two-class configuration. Endau Analytics understands a couple of airlines are already revving up their interest following Bombardier’s tie-up with Airbus.

What the Airbus acquisition means

The dynamics behind this marriage of convenience are quite obvious for both parties. Airbus pays nothing for a 50.01% interest in C Series Aircraft Limited Partnership (CSALP) while Bombardier and Investissement Quebec (IQ) own some 31% and 19%, respectively.

Airbus clearly sees a demand for the CSeries, even at the expense of its own (not so popular) A318 and A319 models. It also opens up a new dimension for the European manufacturer. For example, there is a possibility of developing a middle of the market (MoM) plane that rival Boeing has been bullish on by stretching the CS300.

For Bombardier, having Airbus as a stakeholder lends not only credibility and better sales and marketing reach, but would critically overcome the 300% import levy imposed by the US after Delta bought 75 CSeries aircraft Boeing alleged at “absurdly low” prices.

Politically, too, the deal seems to be kosher. It ensures 1,000 jobs in Northern Ireland, where the CSeries wings are made, are safe. Airbus already has a factory in Alabama, where future CSeries production will be added, thus circumventing the US imposition of tariffs.

Could this arrangement have been achieved if John Leahy, Airbus’ acerbic American chief salesman, isn’t retiring at the end of 2017? After all he had dismissed the CSeries aircraft as a “cute little airplane.”

Look at the photo above. Check out the bonhomie between Airbus’ Fabrice Bregier and Bombardier’s Alain Bellemare – it isn’t just about broadening business between two aerospace companies – it’s about the bond between two Francophones.

All this leaves Boeing in a not so very nice spot and it should be worried. The pendulum has swung to Toulouse.

Will Boeing try to seduce Brazil’s Embraer – the world’s third biggest aircraft maker – into some sort of partnership? Embraer has a large footprint in the US. In 2012 both companies signed an accord to work together on many areas, including airplane “efficiency, safety and productivity.”

Embraer hasn’t said much, other than saying this latest development underscores big opportunities in the 100-150-seat market. The folks in São Paulo will have to come up with a clever game plan. Soon.

 

The greatest turnaround flop?

Bellew in Manila

read my lips: malaysia is the most wonderful country…

Ravi’s Banana Leaf Restaurant in Mont Kiara, located in a leafy, upmarket suburb in Kuala Lumpur, is about to bid farewell to a loyal customer.

Malaysia Airlines Berhad (MAB) CEO Peter Bellew has done a U-turn. He is leaving his job after just a year as boss of the beleaguered airline and is heading back to Ryanair and to Ireland, his homeland.

But what made Bellew’s departure intriguing was this: apparently his employer was unaware of it until news of his move was made official by Ryanair via the London Stock Exchange. To say the MAB board and stakeholder were left with red faces is an understatement.

MAB Bellew statement

Barely a month ago Bellew was at pains to convince the Malaysian media that he had no intention whatsoever of leaving MAB and Malaysia. He described Malaysia as “the most wonderful country…” and that he was “perfectly happy” as chief of the airline. Read here.

Maybe Ryanair CEO Michael O’Leary made Bellew a deal he can’t refuse. Maybe Bellew missed the Irish/UK rugby scene, and its affiliated attractions: having a pint or two of Guinness with mates after a hard fought game. Or could it be something simpler… maybe at heart he felt MAB was a lost cause?

He declared publicly that helping MAB to turn around would be “the greatest achievement of my life”. Indeed, Bellew’s ego was boosted by the hacks touting him as the one to finally rejuvenate the troubled carrier. He was said to have the “Irish touch”.

Malaysia’s national airline is in a deep rut. Not only did it lose two B777-200 aircraft and over 500 lives in 2014, the carrier subsequently lost its first foreign CEO when Christoph Mueller departed in mid-2016 after just a year on the job. Now it has lost its second CEO in as many years. Has the airline also lost its credibility?

The short answer is yes.

Malaysians would be remiss if they do not question why their national airline, bailed out using MYR6 billion (USD1.42 billion) of taxpayers’ hard-earned money in 2014, is in such a sorry state of affairs, notwithstanding the prime minister’s gallant effort to “rehabilitate MAS now” and to “save MAS now“.

In our view the airline is beyond rehabilitation and saving until and unless certain hard-nosed decisions are made. That means the immediate removal of those who are incompetent and inept.

That’s just a start. Ironically MAB is in no better position today despite having been “transformed” by Malaysia’s sovereign wealth fund, the airline’s owner. Is the sovereign wealth fund prescribing the wrong medication? Is the sovereign wealth fund the problem?

Bellew has spoken – almost as frequently and as fervently as when he dines at his favourite Indian joint – about how great the airline’s load factor is. But as most astute airline CEOs know, load factors are meaningless if yields aren’t positive.

Unfortunately for MAB, when the CEO leaves in December, its reputation is yet again in tatters and its future uncertain. What is certain is the arrival of eight Boeing Dreamliners, six Airbus A350s and six A330-200s. And it would seem nobody is quite sure what to do with all those planes.

For Bellew though, the experience in MAB and living in Malaysia appeared to have been a thoroughly enjoyable one, banana leaf meals included. He traveled extensively since becoming CEO and probably visited more places in the past year than he ever did in his decade with Ryanair.

The next CEO…

Is likely to be someone close to either the sovereign wealth fund or the powers that be in MAB.

The government-owned New Straits Times has its own take. Read it here. Both men have something in common: they have good pals in the sovereign wealth fund.

Oddly, however, there was no mention of one Capt Izham Ismail, a veteran at the company with almost 36 years experience as cockpit crew and in management (briefly with MAB subsidiary MASWings). He is currently the airline’s Chief Operations Officer, the position Bellew held before becoming CEO.

In 2016 Capt Izham completed an Advanced Management Programme at Harvard Business School, a hint perhaps of what’s in store for him? More importantly, he is said to be well-liked by MAB’s influential chairman.

Whoever is eventually chosen by the stakeholder and board of directors to replace Bellew will make little (if any) difference.

It’s akin to watching a sandiwara, or as the Brazilians call it, a telenovela. The plots and themes are predictable. And many of the characters are unsavoury, repugnant rodents.

As long as MAB continues to be funded by the government, and the government is unwilling to let it be run by responsible, trustworthy professionals who truly understand the business, then the airline is bankrupt of ideas. It is no longer relevant or viable. It lives, but only just.

 

 

Big Data

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Discussing big data. l-r: Stephen Leung (Lazada), Venky Pazhyanur (UNISYS), Endau Analytics, Luqman Azmi (MASkargo) & didier Lenormand (Phoenix aero Consult)

 

What’s big data analytics and how can this be used to drive profits in the aviation industry?

That was the big question posed in one of the sessions at the Payload Asia Conference on Oct 12 in Singapore. Endau Analytics was invited by the organiser, Payload Asia (a publication focusing on the global airfreight industry), to moderate the discussion on big data.

According to Google big data is a “buzzword to describe a massive volume of both structured and unstructured data that’s so large it’s difficult to process using traditional database an software techniques.”

Big data itself essentially is a high volume of data stream that originates from multiple sources and in a variety of forms. Analysing and interpreting it can be extremely tough due to the many factors involved, but it’s too important to ignore and neglect.

The panellists came from diverse sectors of the industry:

  1. Luqman Azmi, CEO of MASkargo;
  2. Venky Pazhyanur, Senior Director Freight Solutions at UNISYS;
  3. Didier Lenormand, Founder of Phoenix Aero Consult;
  4. Stephen Leung, SVP – Crossborder, Lazada eLogistics
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maskargo ceo luqman azmi sharing with the audience how his company is embracing big data

Actionable knowledge

In a nutshell the panellists agreed businesses linked to the airline industry, such as logistics and software solutions, can now better understand their customers and how to communicate better using big data analytics.

But the true value of big data is, in our view, not fully exploited yet. For instance, airlines and MRO (maintenance, repair & overhaul) are not always sharing the data with their partners.

In any case, not everything in big data is of value. The intrinsic value is in the ability to extract relevant information and then analysing that to help in making accurate decisions.

What does the future hold for big data? Clearly there are challenges, such as filtering the huge amount of data and translating it to make the right decisions. Data analytics on the weather, for example, can be transformed into actionable knowledge.

There’s massive potential when big data is mined by specialists. Hence, having the right talent is critical in enabling information to be used accurately and responsibly to increase revenue and improve safety in the aviation industry.

 

 

 

It’s “engagement” more than “investment”, says Malaysian minister of Boeing plane purchase

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Mustapa Mohamed: Criticisms of Boeing deal misplaced, misinformed. Pic/shukor yusof

A month after Malaysia’s prime minister stunned the world by revealing his country, whose GDP is many times smaller than that of California, was buying Boeing planes to help strengthen the US economy, a minister who accompanied him on that trip has said the main purpose was actually to “engage with the Americans”.

During a networking dinner with Malaysian professionals held at the Malaysian embassy in Singapore on Oct 11, we asked Mustapa Mohamed, Malaysia’s trade minister: the premier said Malaysia Airlines was buying Boeing planes to help prop up the US economy but the airline’s CEO has clarified the planes will be leased, not purchased, thus it wasn’t an investment. So who’s telling the truth?

“Well, let me put the record straight… it’s all very technical,” the minister replied. “First of all, we have a big trade surplus with the US, some USD25 billion. Second, we’re a small country, so we need to invest overseas. Third, Malaysia Airlines’ planes are old and the airline needs to improve its bottomline.”

The minister is 67 years old. But he looked sprightly and although we doubt if he could dance, he waltzed around our question for about 6-7 minutes with such relative ease and composure (without actually answering) it was almost impossible not to like him. “There’s controversy surrounding the US trip, especially on social media, and the criticisms were misplaced, misinformed.”

And with that he deftly disarmed the pesky prober by moving on to his favourite topic: politics, a subject he clearly was more adept at than aviation. “Elections are just around the corner,” he teased, “and we’ve had an exceptionally strong economic growth in 2017.”

Go figure.

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malaysians “engaging” with Americans in Washington DC on Sep 12. Malaysia’s trade minister is standing, second from left.

AirAsia to buy GE engines?

The trade minister also confirmed something interesting: that AirAsia was buying four GE engines over the next decade and that this was part of a package for maintenance, repair and overhaul (MRO) purportedly worth USD15 billion. See here.

There’s just one problem: this is 12-year old news and it’s USD1.5 billion over a 20-year period. AirAsia inked the deal with GE, which has a joint venture with France’s Safran, to make CFM engines used by the airline’s A320 fleet. Read it here.

Here’s confirmation AirAsia uses CFM engines and Rolls Royce engines for its A330 planes deployed by AirAsia X.

 

Yes, Prime Minister

Bellew with Najib & Boeing

can you pick out who is and who isn’t a “shrinking violet”?

 

When Peter Bellew first took the job of Group CEO of Malaysia Airlines (MH) on July 1, 2016 he said: “The goal will be to fly customers safely to places they want to go with great value fares and superior service on clean modern aircraft.” Read the statement here.

A year later this mission seemed to have changed. From flying customers to destinations they’d like to go to, Bellew now sings a different tune. The Star quoted him as saying: “If the stakeholders feel we should fly into the US, Europe or even Africa, then we will do that.” Read the whole article here.

Isn’t that remarkable? MH’s highest paid employee has succinctly revealed one of his KPIs (key performance indicators) is akin to that of a postman – to deliver what his paymaster wants.

In just one sentence Bellew has opened himself up to further scrutiny; now his detractors may have a reason to label him as a yes-man, a lackey, a stooge, rather than a commercially astute airline boss.

Anyone who has closely analysed or reported on MH would know the company was largely unprofitable in the past precisely because stakeholders meddled in its affairs, like telling management what aircraft to buy and where they should go.

MAS 1997-98

blast from the past – handout from mh’s analyst briefing in 1998. pic/shukor yusof

History of horrendous decisions

In May 2010 MH’s then CEO said he was thrilled the airline was starting twice-weekly flights to Dammam in Saudi Arabia, via Dubai. Less than three years later Dammam was axed, along with several other Middle Eastern cities.

Sadly, Bellew has fallen into the same quagmire.

If only he had studied the airline’s history he would have discovered one of MH’s perennial issues in the past was that it was often manipulated, misguided and misled by the whims and fancies of its stakeholders.

Indeed, the current prime minister himself confirmed the airline’s stakeholders had done the company in. “The history of Malaysia Airlines is fraught with horrendous decisions, and it was a nightmare inflicted on the airline by one of my predecessors,” he said.

The purchase of six A380s for USD1.2 billion (MYR4.9 billion) is a good example. Launching flights to cities with no prospects of profitability is another. Hubris is a word often associated with MH and for good reason.

Around two decades ago, while Bellew was busy establishing Irish Cottage Club in 1998 and later dabbling in online travel management, MH was already flying (at a loss) to, among other destinations: Beirut, Buenos Aires, Cairo, Male and Zagreb.

MAS route & fleet 1998

some of the places mh used to fly to 20 years ago. pic/shukor yusof

If Bellew had pored over MH’s chequered past he’d have found many things; destinations are often chosen and determined (by stakeholders) not for commercial reasons but for political mileage. Zagreb was in the flight schedule because Malaysia was the only country to send a battalion to Bosnia during the Balkan war (1991-2001).

What about Buenos Aires, what’s the value proposition of MH flying to Argentina then? Not much but Argentina is renowned for its horses and Malbec. Apparently some people within the airline’s stakeholders found riding horses on the Pampas therapeutic and well, you know, it’s fun to chill out 16,000km away from home, enjoying the tango and imbibing in a glass of red…

History is about to repeat itself. Allowing stakeholders to dictate where MH ought to fly or what its strategy should be is like giving liquor-laced chocolates to a recovering alcoholic, particularly when the stakeholders have had an atrocious history of interfering in MH’s operations, which partly led to its bankruptcy.

Not a shrinking violet

It makes us Malaysians ponder: did the stakeholders promote Bellew after Christoph Mueller left because of his airline skills or because they think he is malleable, with an uncanny ability to acquiesce? Can we trust him?

After all, this is the same person who bizarrely (and unrepentantly) banned checked-in luggage on flights to Amsterdam and Paris in January 2016. The reason: strong headwinds might cause MH planes to run out of fuel.

But Bellew told a Singapore newspaper he cares not what people, including Malaysians, feel. “If people aren’t happy there’s a foreign CEO, well, boo hoo. I’m a big boy. I should be able to take that. If you can’t, then you shouldn’t be on the job. This is not a normal job and it’s not for shrinking violets.”

His claim of being disinterested in “anybody’s politics”, however, have rung hollow. MH found itself inadvertently embroiled in a high stake, global political gamesmanship when the Malaysian premier assured the US president of an impending aircraft investment worth over USD10 billion within five years, money which would strengthen America’s economy. Or so it seemed.

Within days Bellew had to do some “damage control” – and he gave the game away when he revealed the purported aircraft purchases weren’t exactly that – MH was actually going to lease the planes, not buy them. So boo hoo, Mr Trump…

Project Amal

Here’s another interesting development currently being concocted by MH. Called Project Amal (initially known as Project Hope), the plan is to deploy six of MH’s loss-making A380s for use in transporting Hajj and Umrah pilgrims. A new separate entity (airline) has been formed, with its own management team and its own P&L. The project is slated to launch in 2019.

The initiative is commendable but the project also has another equally important purpose – to remove the A380s from MH’s books. The A380s have been bleeding the carrier since it first arrived, amidst much fanfare, in mid-2012 and are a big red blot on MH’s balance sheet.

Shifting the six A380s to another airline would, in one clean swoop, also mean shifting the burdensome assets to another vehicle. With the six A380s gone, there’s every chance MH could break even or even eke out a profit.

Smart, yes? Not really, because the A380s will remain in Malaysia and will likely continue to incur losses for the new company but who cares as long as MH and its CEO look good, right?

 

What’s going on, Malaysia Airlines?

MH 738 takeoff

an mh b737-800 taking off. pic/boeing

 

On Sep 20 Malaysia Airlines Berhad (MAB) managing director Peter Bellew told The Malaysian Reserve MAB would not pay for the acquisition of 16 Boeing aircraft, but rather leased them. This contradicted a statement made by the Malaysian premier on Sep 12 that “Boeing planes to be purchased by MAS… within five years, the deal will be worth beyond USD10 billion.”

Is this some kind of legerdemain to lull us into thinking Malaysia is making a major investment in the US economy, when all it really is, is Malaysia Airlines (MH) leasing some Boeing planes, plain and simple?

On Sep 15, when the PM arrived home at KLIA he reaffirmed his statement made at the White House and said: “The decision was made by MAS. I merely conveyed the message to US President Donald Trump.”

So what is it, MAB – did the PM not get a full briefing on how the aircraft are to be acquired, did he misunderstood or was it just a case of words being lost in translation?

K66703

boeing 787 dreamliners in mh livery. pic/boeing

Sweet Dreamliners are made of these…

In an email sent out to MAB staff on Sep 15, Bellew explained MAB had inked an MoU with Boeing in Sep 2017, switching eight of a firm order for 25 B737 MAX8 to eight B787-9 Dreamliners. On top of that, MAB also placed “purchase rights for an additional eight B737 MAX8, all while maintaining the total firm order at 25.”

The 737s will be funded through current progress payments along with sale and leasebacks done with international lessors. As for the Dreamliners, Bellew said the carrier plans to buy direct from Boeing and subsequently fund them via sale and leasebacks and operating leases with leasing companies.

At list prices, the 787s cost USD2.5 billion. Typically an airline receives anything between 20% and 40% discounts, depending on its financial strength and how badly the aircraft maker wants to sell the planes.

Nobody’s disputing the efficiency and economics of the Dreamliner but what’s uncertain is how it fits into MH’s game plan, if MH has one, that is…

Bellew claimed it’s being acquired to “add capacity to our widebody fleet and provide a high level of quality on our most lucrative routes.” From what it looks, the planes, which will start arriving in 3Q19, are being sought for use on routes that are as yet to be determined because MH’s network has shrunk considerably.

The initial Dreamliners are, according to Bellew, for use on Asian sectors; he emphasised that their range capabilities allow for flights from Kuala Lumpur to “any point in Europe” and “cities on the West coast of the USA.” The Dreamliner, he added, offered MH “great flexibility… over the next 20 years.”

Huh? On the one hand Bellew is keen for MH to stay ahead of the competition with new state-of-the-art aircraft. On the other hand, he suggested MH stick with the 787s 20 years down the road? Does anyone in the airline’s management seriously believe MH can make money offering premium seats from KLIA to the US west coast? Or any point in Europe, for that matter?

Why is MH investing heavily in premium products when traditionally strong premium carriers in Asia like Cathay Pacific and Singapore Airlines are struggling with theirs?

MH A350 TLS

MH A350 in Toulouse. Pic/Airbus

Cutting capacity, adding capacity… A330, A350, A380…

The confusion doesn’t stop there. Bellew said in March this year he wants to cut capacity in the single-aisle segment while raising capacity in the twin-aisle fleet. If we understand correctly, he wants to cut capacity and then increase it?

“I need bigger planes. It’s kind of a no-brainer,” Bellew said in that article. What about the six A380s MH has in its fleet, each with almost 500 seats – are those not big enough for you?

As part of Bellew’s grand plan to make MH’s restructuring as the “greatest turnaround” ever, the company is taking no prisoners when it comes to other aircraft acquisition.

Two of six A350s on operating leases are slated to start delivery starting January 2018 (to London), and four more A350s will join the fleet by June 2018 ostensibly when MH reopens flights to Amsterdam, Frankfurt or Paris or maybe all three?

And that’s not all. The MH boss is on a no-holds barred shopping spree. Bloomberg reported he’s also going after Airbus A330neo planes!

MH’s desire to add widebodies is nothing short of mind boggling. It is already running a fleet of 15 A330 aircraft, including three A330-200 freighters and 12 relatively new A330-300s (see table below).

Malaysia Airlines A330 Fleet

Regn Build Year Type Engine Owner Financier
9M-MUA 2011 A330-200F PW4000 MAB
9M-MUB 2011 A330-200F PW4000 MAB
9M-MUD 2012 A330-200F PW4000 MAB
9M-MTA 2011 A330-300 PW4000 Standard Chartered
9M-MTB 2011 A330-300 PW4000 Standard Chartered
9M-MTC 2011 A330-300 PW4000 JSA Int’l Syndicate of banks
9M-MTD 2011 A330-300 PW4000 JSA Int’l Syndicate of banks
9M-MTE 2011 A330-300 PW4000 MAB BNP Paribas
9M-MTF 2012 A330-300 PW4000 FE Novus Fin 1 Ltd NordLB
9M-MTG 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTH 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTI 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTJ 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTK 2013 A330-300 PW4000 MAB
9M-MTL 2013 A330-300 PW4000 MAB DVB Bank
9M-MTM 2013 A330-300 PW4000 MAB DVB Bank
9M-MTN 2013 A330-300 PW4000 Sama Aircraft Fin 1 Ltd BNP Paribas
9M-MTO 2014 A330-300 PW4000 MAB

Data compiled by Endau Analytics

Bellew argued he needed new A330neos and used A330s to replace “older” B737-800s but where will all these planes fly to – China? We know the MH chief is extremely optimistic on Chinese traffic. “I will expect China to move from about 8% to 9% of our business currently to about 20% in the next two to three years,” Bellew told the media on the sidelines of Invest Malaysia 2017 recently.

But even if it does reach 20%, isn’t it unwise to splurge on all these widebodies, especially when MH is still a structurally frail airline? The best way, in our view, to make money from China is not by using widebodies but with A320s or B737s or even regional jets on some sectors between Malaysia and southern China. Don’t believe? Ask Tony Fernandes…

Remember, the airline industry is notoriously cyclical. This cyclicality is due partly to the relative high-income elasticity of demand for air transport services. Demand and revenue-cyclicality on airlines’ financial performances is multiplied many times by their financial leverage. In other words, interest-bearing debts surge. Before MH was delisted, it was paying around USD420 million annually on interest alone.

Airlines typically order aircraft when the going is good and take delivery of them when the economic cycle becomes bearish. Overcapacity will be worsened, resulting in many planes being stored.

In his email to staff, Bellew concluded by saying “management will continue carefully evaluating all options available to us to ensure our purchases make both business and operational sense.”

It’s hard to see how all these acquisitions make sense. Unfortunately for MH, old habits die hard, and this avaricious appetite for widebodies will likely do it more harm than good.

 

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