Endau Analytics

Like the snow leopard, Air Astana is a rarity

Air Astana E190-E2 snow leopard

air astana embraer e190-e2 with a hand painted snow leopard on its nose.


Our plane, a Boeing B767-300ER, passed over the Karakoram mountain range in mid-afternoon as it headed towards Tajikistan, en route to Almaty. The map on the screen in front indicated that K2, the world’s second highest peak, was somewhere below us.

Taking in spectacular views of snow capped mountains and vast steppes is but one of the many highlights when flying on Air Astana, the relatively young (it made its maiden flight in May 2002) flag carrier of Kazakhstan.

In an industry littered by airlines that struggle to excite and enthral, let alone make money, it’s always nice to meet a company that’s doing something different, something daring and make a tidy profit along the way.

Air Astana is the crazy diamond amongst all the airlines in central Asia.

There must be method to the madness in running a four-star (Skytrax) carrier in a country that shares its borders with six other sovereign nations (including Russia and China), with a population of 18 million and having a capital (Astana) that is ranked the world’s second coldest city (after Ulaanbataar).

Make no mistake – the cold is brutal and winter lasts for almost six months. The day we arrived the temperature hovered at -23°C, mild according to the locals given that in January and February it’s not uncommon for the mercury to dip to between -30°C and -35°C.

Astana -23C

But the airline doesn’t let the extreme cold get in the way of Astana or Almaty becoming an international business and leisure transit hub. Air Astana sees the market beyond its own borders; to the east lies western China (with some 20 million people), to the south are the other Stans – Kyrgyzstan, Tajikistan, Uzbekistan, Turkmenistan and to the west the oil rich region bordering the Caspian Sea.

This is an airline with a small but smart and savvy management team. Their strategy isn’t exactly conservative but they don’t bite what they can’t chew. Air Astana operates a fleet of just 34 planes – puny compared to the national carriers in Southeast Asia – but it has been consistently profitable. In 2017 Air Astana posted a profit of USD40 million.

Where Air Astana has succeeded (and many Asian carriers failed) is its ability to be both efficient and productive: this is a premium service carrier with a low cost base. Its operating cost is less than USD0.06 according to Ibrahim Canliel, the carrier’s CFO. “We have never had to go to our shareholders to ask for money,” he said proudly.

That’s not to say all is hunky-dory at Air Astana. Like other airlines around the world it faces similar challenges: swings in the oil market, currency fluctuations and global economic instability. Management is closely watching developments in the on-going trade spat between the US and China. Chinese tourists are important to the airline’s revenue.

Foreign exchange volatility is now more manageable compared to two years ago when the tenge (KZT) lost 82% of its value following a devaluation. It resulted in a loss of USD40 million for the airline in 2016.

As Kazakhstan’s revenue is largely derived from oil and gas, the KZT’s fortune is often linked to the movement of oil prices, which have been on the downside in recent years.

The KZT is more stable now, allowing Air Astana to cut its forex losses by almost 28%, from USD14.4 million in 2016 to USD10.4 million in 2017.

Almaty Airport

almaty airport is the southern gateway into kazakhstan. pic/shukor yusof

The airline operates a network of 65 routes serving 42 international and domestic destinations. Its main long-haul aircraft is the B767-300ER, which connects Astana and Almaty to the Far East (Beijing and Seoul) and to Southeast Asia (Bangkok and Kuala Lumpur).

Apart from the three B767-300ERs in its fleet, the main workhorses are its Airbus A320 family of aircraft (including A320neo and A321neo). Five Boeing B757-200s are slated to be phased out in 2019 and will be replaced by A321neos.

Air Astana complements its fleet by flying regional jets, specifically the Embraer E190, a plane that has been in service since 2011. On Dec. 14 the airline introduced the new iteration of the E190 – the E190-E2 – a plane with better economics and better range, according to CEO Peter Foster. He believes this will give Air Astana more options in terms of new destinations.

The first E190-E2, with a snow leopard painted on its nose, will initially fly domestically between Astana and Almaty. Four more E190-E2s will join the fleet next year.

The role of the E190-E2s is well defined and Air Astana clearly has been pleased with the first generation E190s. The airline could have gone for another aircraft type (possibly for less money), but we get the impression management trusts the Brazilian-made jets and hence, kept faith with them. The E190-E2s are on operating leases from Aercap.

With Embraer CEO JS

embraer ceo john slattery (l) braved the cold, slipping in and out of Astana in less than a day. pic/shukor yusof

And having the snow leopard as the theme of the Embraer fleet is fitting, too. An endangered cat, there are less than 200 in the country. Air Astana donated USD10,000 to the conservation of this animal during the ceremony to welcome the first E190-E2.

Kazakhstan is a unique country and one that will remain exotic in spite of the influx of McDonalds, Starbucks and the herds of Jaguars and Lexuses roaming the cities.

While the weather can be undeniably harsh and unforgiving (it can be extremely cold in winter and extremely hot in summer), Astana forges ahead as a rapidly growing city. Earlier this year it launched the Astana International Financial Centre in a move to make Kazakhstan a financial hub in central Asia.

Some things though haven’t changed much. Or at all.

On the edge of Astana, where the great steppe begins, they still go hunting with eagles and falcons, eat shuzhuk (horsemeat) and occasionally imbibe in a few shots of Snow Queen and kumis (fermented mare’s milk) – a nasty combination, we can assure you – in the evening. Plus ça change, as the Kazakhs don’t say.



Flight Information Regions: what the Malaysian transport minister needs to know


Flight Information Regions in Southeast Asia (Graphic courtesy of The Straits times)


The day before he is to chair the first national aviation council meeting in Putrajaya on Wednesday morning (Dec 5), transport minister Anthony Loke saw it fit to announce Malaysia’s plans to take back control of airspace that Singapore has managed since 1994.

The main contention for this move, according to Loke, was because Singapore had decided to use a new instrument landing system (ILS) at Seletar Airport in January 2019. Malaysia said this would violate its sovereignty.

Singapore responded swiftly and categorically to the transport minister’s remarks. Read it here.

This latest spat comes amidst recent reports that Malaysian low-cost carrier Firefly, a subsidiary of Malaysia Airlines Berhad, had to suspend flights from Seletar to Subang Airport near Kuala Lumpur, ostensibly because Seletar lacked “equipment at the new airport.”

Does the transport minister understand aviation laws?

When Loke said the government was protesting on the grounds that the ILS at Seletar infringes on Malaysia’s sovereignty and airspace at Pasir Gudang, an industrial district in Johor Bahru located less than 2km from the airport, he is not only misinformed but misguided.

But it isn’t the first time that Singapore’s neighbours have voiced unhappiness over the little red dot controlling a large chunk of the airspace over the region.

Some two years ago there were calls in Indonesia for Jakarta to take back management of its airspace over the Riau archipelago from Singapore. But the Indonesians later acknowledged they had limited resources and insufficient funds to do so.

Loke’s comments revealed a lack of understanding of aviation laws and the international structure of flight information systems (FIRs), implemented by the International Civil Aviation Organisation (ICAO) since 1946.

Managing FIRs doesn’t mean one country has taken over certain portions of another country’s sovereignty. Moreover it doesn’t mean a tiny island can’t control a large FIR (see below).

Gulf airspace

Bahrain has a disproportionately large amount of airspace for its size (graphic by international virtual aviation organization)


Loke stressed that Malaysia was merely defending its sovereignty, but this argument is flawed.

ICAO has always maintained that air safety navigation is paramount whenever disputes and discussions on airspace are brought up. It has little or nothing to do with sovereignty.

Singapore’s current FIR comprises its own small airspace along with the airspace over some parts of Indonesia, Malaysia and the South China Sea.

If Malaysia insists on taking back its airspace from Singapore, it has to convince ICAO that Singapore has indeed infringed on its sovereignty (how?) or that air traffic management conducted by Singapore is sub-par (compared to Malaysia?).

People who live in glass houses shouldn’t throw stones…

That is going to be a monumental task given that Singapore’s air traffic control has performed exceedingly well for many decades; there have been no issues or complaints regarding snags or technical disruptions.

Amongst all 10 ASEAN nations, Singapore has invested most heavily in air traffic management (ATM). In 2015 alone the Civil Aviation Authority of Singapore (CAAS) spent SGD200 million to form a centre of excellence for ATM to improve and upgrade safety and more efficient air travel.

Singapore has also invested much on technical equipment and training of air traffic controllers.

Malaysia’s track record in air traffic control, however, leaves a lot of room for improvement.

Following the disappearance of flight MH370 in March 2014, an independent international probe concluded in July this year there were lapses by Malaysia’s air traffic control in Kuala Lumpur.

It led to the resignation of the head of the Civil Aviation Authority of Malaysia.

The safety report itself showed glaring shortcomings not just at the ATC level but also at the national carrier (Malaysia Airlines). Read the entire report here (focus on pages 315-330 where the lapses were highlighted).

When Malaysia’s transport minister proclaimed the protest was done to protect Malaysian airspace, and “the interest of Johoreans”, he displayed a distinct lack of knowledge of international aviation rules as well as the psyche of Johoreans, particularly those living in Johor Bahru.





Pain in airline industry just starting…


A Qatar Airways A350 bound for SIN from DOH with fewer than 100 passengers on board in early October. Pic/shukor yusof


Latest figures from the International Air Transport Association (IATA) for September 2018 indicate a slowdown in the worldwide growth of passengers. Read the entire report here.

Revenue Passenger Kilometre (RPK), which measures passenger demand, grew 5.5% year-on-year but the rate at which demand is rising has slowed considerably. In August the RPK was 6.4%.

One of the factors that have contributed to the slowdown, according to IATA, is weather (including hurricanes and typhoons).

But there are other reasons that will ensure the airline business will stay volatile for the rest of 2018 and into the first quarter of 2019. These are firmer crude oil prices and the on-going trade spat between the US and China.

Overcapacity is also a critical issue.

There are far too many seats, not just in Europe but here in Asia Pacific, too. Both legacy and low-cost carriers are defending their market positions by adding more capacity. At the same time, airfares remain relatively stagnant.

Our research shows that while airlines worldwide generally have shown marked improvements in profitability in recent years, this has not been uniform across the continents.

Carriers in the US have done well for the past five years but profits of airlines in other regions – especially in Asia Pacific – have weakened.

Bottomline: the industry has yet to earn its cost of capital and with several airlines still adamant on acquiring widebody planes, the problem of overcapacity will persist.

When there is overcapacity the airline industry’s return on invested capital (ROIC) is going to be lower than the weighted average cost of capital (WACC) the airlines.

Negative signs in the marketplace

It’s still early days yet but Singapore Airlines’ foray into the ultra long-haul market may run into severe headwinds if it cannot make money from those flights to the US (New York, Los Angeles and soon Seattle).

A few weeks ago a tweet from prominent German aviation journalist Andreas Spaeth showed the premium economy cabin of an SIA flight to Newark, New York with less than 50% of its seats occupied.

Andreas Spaeth 181018 twitter

Screenshot of tweet from Andreas Spaeth

Other recent SQ travellers to the Big Apple told us similar tales – that there was plenty of real estate in premium economy. SIA has configured its A350ULRs with just 161 seats, comprising 94 in premium economy and 67 in business class.

In contrast the airline has configured its other long-haul A350 planes with 253 seats.

Although SIA may struggle to fill its A350ULRs, the airline is likely to continue to make money. Its financial year runs from 1 April to 31 March. The company’s earnings for 1HFY18/19 will be out soon.

The same can’t be said of Qatar Airways. The Gulf carrier reported a loss of almost USD70 million for the last financial year (31 March) attributing it to the blockade imposed by Saudi Arabia and its allies more than a year ago

There have been several accounts of Qatar Airways’ long-haul flights departing from Doha with less than 100 passengers on its spanking new, widebody A350s and B787s.

We experienced it ourselves when we flew DOH-SIN on an A350 in early October with less than 100 passengers, according to the cabin crew on board.

Qatar’s A350s are configured with 36 business class and 247 economy class seats. Its B787-8s are fitted with 22 business class seats and 232 economy seats.

Elsewhere, the mood is becoming more downbeat. India’s Jet Airways is facing an uphill battle to stay solvent, Thai Airways announced an operating loss of THB3.7 billion (USD111.7 million) and even discount carriers are feeling the pain – with AirAsia X dropping flights to Auckland, Nok Air struggling with cashflow issues and Indonesia’s Lion Air feeling the brunt of the crash of a B737-MAX 8 a fortnight ago.

The airline business has dismal economics, with very high fixed costs. With crude prices rising, most legacy carriers in the region will likely post losses in 2019.

The exception is SIA. While its stock has been an under-performer for the longest time, the airline continues to be profitable. SIA benefits from having a large volume of premium passengers (particularly on long-haul flights to Europe and Oceania) and it has few (if any) competitors within the region that can quite match its products.



Aviation safety is paramount

This is a chronology of accidents and incidents involving PT Lion Mentari Airlines, better known as Lion Air, since 2000.


Jan. 14, 2002

Lion Air flight # 386 involving a Boeing B737-200 crashed on take-off at Pekanbaru Airport (Sultan Syarif Kassim II International Airport). No fatalities.


Nov. 30, 2004

Lion Air flight # 538 involving a McDonnell Douglas MD-82 overran the runway in bad weather and crashed onto a cemetery in Surakarta (Adi Sumarmo International Airport). The captain, a flight attendant and 23 passengers were killed. Investigations concluded hydroplaning caused the accident.


Mar. 4, 2006

Lion Air flight # 8987 involving another MD-82 crashed landed at Surabaya International Airport (Juanda International Airport) with no fatalities but the plane was badly damaged. Reverse thrust was used during landing although the left reverse thrust was said to be out of service.

Dec. 24, 2006

Lion Air flight # 792 involving a Boeing B737-400 landed at Makassar Airport (Sultan Hasanuddin International Airport ) with incorrect flap configuration and was not aligned to the runway. Right main landing gear was detached, part of fuselage wrinkled. No fatalities but plane was written off.


Feb. 23, 2009

Lion Air flight # 972 involving an MD-82 landed minus nose gear at Batam Island airport (Hang Nadim International Airport). No fatalities.

Mar. 9, 2009

Lion Air flight # 973 involving an MD-90-30 ran off the runway at Soekarno-Hatta International Airport in Jakarta (Soekarno–Hatta International Airport). No passengers injured.


Nov. 2, 2010

Lion Air flight # 712 involving a Boeing B737-400 overran the runway at West Kalimantan Pontianak Airport (Supadio International Airport) ended with aircraft belly on tarmac, with damage to nose gear. All 174 passengers and crew evacuated by slides, with minor injuries.


Apr. 13, 2013

Lion Air flight # 904, involving a Boeing B737-800 from Bandung to Bali, crashed into the water at Denpasar (Ngurah Rai International Airport) while attempting to land. All 108 passengers and crew evacuated safely with no major injuries. Investigations concluded the flight crew lost situational awareness and visual references as the plane entered a rain cloud during final approach below minimum descent altitude.

Aug. 6, 2013

Lion Air flight # 892, involving a Boeing B737-800 from Makassar to Gorontalo, collided with a cow at Jalaluddin Airport. All 117 passengers and crew were unhurt.


Feb. 1, 2014

Lion Air flight # 361 involving a Boeing B737-900ER from Balikpapan Sultan Aji Muhammad Sulaiman Airport en route to Bali via Surabaya Juanda Airport landed hard in Surabaya. It bounced four times on the runway causing a tail strike and damage to the aircraft. No casualties but 2 passengers were seriously injured.


Apr. 4, 2016

Batik Air (a subsidiary of Lion Air) flight # 7703 involving a Boeing B737-800. Whilst taking off from Jakarta’s Halim Perdanakusuma International Airport the plane’s wing tip collided with a towed TransNusa Air Services ATR 42-600 left wing and stabilizer, destroying it. The B737-800 left wing caught fire. No injuries. Investigations revealed poor coordination between Air Traffic Control (ATC), tow truck crew and B737-800 cockpit crew.


Aug. 3, 2017

Lion Air flight # 197 involving a Boeing B737-900ER, clipped the wing of a Wings Air ATR72-500 at Kualanamu International Airport near Medan. The wings of both aircraft were damaged. There were 144 passengers on board the Lion Air plane. No injuries were reported.


Apr. 29, 2018

Lion Air flight # 892 involving a Boeing B737-800, skidded on landing at Jalaluddin Airport in Gorontalo, from Makassar with 177 passengers on board. There were no injuries.

Oct. 29, 2018

Lion Air flight # 610 involving a Boeing B737-800 MAX from Soekarno-Hatta International in Jakarta to Pangkal Pinang (Depati Amir Airport) in the Belitung Islands, crashed into the Java Sea 13 minutes after take-off. All 189 passengers and crew perished.


Indonesia is the world’s largest island country with over 17,000 islands. Air traffic in Indonesia soared from 27 million passengers in 2009 to over 90 million in 2017 (over 300% increase), and continues to rise…

Malaysia’s prescient prime minister

SY with Dr M Sep 2018

malaysian premier tun dr mahathir mohamad with endau analytics


Malaysia’s seventh prime minister Tun Dr Mahathir Mohamad is in the global spotlight this week as world leaders gather for the United Nations General Assembly in New York City.

Read his full speech to the assembly here.

It’s a somewhat surreal turn of events for the 93-year-old, having retired 15 years ago as one of Asia’s longest serving leaders. When Malaysians voted for a new government on May 9, Dr Mahathir was ushered in as the country’s new leader.

In selling the “new Malaysia”, where corruption is not to be condoned, incompetence unacceptable and constructive criticism welcomed, Dr Mahathir is telling the world that Malaysians want a country that “will speak its mind on what is right and what is wrong, without fear or favour”.

However here at home in Malaysia, the reformation is easier said than done. This week there have been fierce criticisms – from both sides of the political divide – over the Federal Court’s judgment allowing the government to sue individuals for defamation.

But we digress…

Aviation aficionado

There have been many not so endearing words in the past four decades that people have used to disparage Dr Mahathir. Amongst them were: cunning, destructive, dictator, maverick, racist, recalcitrant, ruthless… the list goes on.

We’d like to add another (not disparaging) word to this list – aficionado.

More specifically: aviation aficionado.

Before he left for the UK and the US this week, Dr Mahathir invited us and our colleagues and other partners in the industry to his office at Putrajaya to discuss a topic that is close to his heart: the airline industry.

The prime minister is someone who has a very deep and keen interest in aviation, with a commercial and technical understanding of the business that will put some airline CEOs to shame.

We were initially given just half an hour for the meeting, but such was his attentiveness and curiosity and zest for the industry that our conversation lasted 100 minutes – over three times the allotted time!

This was not lost on one of his aides who jokingly pointed out the PM gave the head of a neighbouring country less than 30 minutes.

In a nutshell, Dr Mahathir wanted to know more about Malaysia’s aviation industry and in particular, Malaysia Airlines Berhad (MAB).

We discussed several wide-ranging issues related to the national flag carrier that coincidentally, had posted a MYR812 million loss in financial year 2017. In fact MAB has registered almost MYR2.4 billion losses in the three years since it was restructured (2015-17) at a cost of MYR6 billion to the government.

Not one to mince words, the premier was visibly dismayed and asked for recommendations and suggestions on how to resolve the problems.

This is, after all, a man who not only knew the differences between various types of commercial and private jet aircraft, but surprised us with his intimate knowledge of airline economics.

For example, we talked about the rising cost of fuel and borrowing. He probed about debts, queried about payments for personnel and sought suggestions on what would be the optimum network system or which aircraft would best suit MAB.

He regaled us with his airline experience from the past, how he had helped shaped the national airline into a world-class carrier that spanned all continents (he regrets Latin America and South Africa are no longer on the MAB network). He even knew, at the top of his head, how many crew changes were required on certain intercontinental flights.

Tun M E2 - h

the premier expressing his delight accepting a token of our appreciation in the form of an aircraft model

“MAS can go very wrong”

Needless to say, the prime minister pays very close attention to Malaysia’s aviation industry.

He had been a vocal critic of MAB and its stakeholder Khazanah Nasional for many years. In this 2014 post Dr Mahathir provided a scathing critique of the privatization of the flag carrier and reiterated it again during our conversation.

And in late 2014 the premier, who has an uncanny ability to visualize and anticipate future events, bluntly called Malaysians “stupid” and unable to run an airline (other than to run it to the ground), following MAB’s decision to appoint its first foreign CEO.

chedet on MAS privatisation

excerpts from dr mahathir’s blog post in 2014

During the dialogue the prime minister also encouraged us to look into ways to improve the aviation landscape in Malaysia, by exploring all avenues to upgrade the industry, including airports, maintenance, repair & overhaul (MRO), and to develop ideas that would revive the national airline.

His view of aviation is one that is pivotal to Malaysia’s economy and GDP (about 3.5%) and therefore, always in need of innovation and investments.

The PM’s parting shot: scrutinise the local airlines, don’t be afraid to speak out, keep him updated and we shall meet again in the near future.



Massive losses at Malaysia Airlines, again


a malaysia airlines a350xwb taking off from toulouse. pic/airbus


Flag carrier Malaysia Airlines Berhad (MAB) has a special gift for Malaysians celebrating Malaysia Day on 16 September; and we’re not talking about this video it has just released.

To all Malaysians out there… drum roll please… MAB lost a staggering MYR812 million (USD196 million) for the financial year 2017 (see below), adding to the MYR439 million and MYR1.13 billion losses in 2016 and 2015, respectively. Yes, Malaysians, that’s your money gone down the drain. Again.

MAB losses 2017

The airline – which received a MYR6 billion bailout from Khazanah Nasional in 2014 – has now accumulated total losses of nearly MYR2.4 billion in the last three years since it was delisted end-2014. It filed its 2017 financial statement only in August.

In an interview with The Edge on 8 September, the airline’s CEO spun a sexy story that MAB doesn’t need more money from the government but he cleverly omitted one key point: the MYR812 million losses in 2017.

He also failed to mention that by 2022, MAB would need to come up with a MYR5 billion payment for a Sukuk bond the company issued in 2012. How will MAB pay for this?

Of course, there’s the possibility that the CEO – who is on a three-year contract – will no longer be around in 2022 and whoever replaces him then (or earlier) will face the daunting task of raising the MYR5 billion.

He said: “I am here to turn around the airline, to make it efficient and hopefully profitable.” Hopefully? Turning an airline around isn’t as simple as turning an aircraft around, Captain… And the national carrier isn’t paying you a couple of million a year to be hopeful.

In July this year MAB’s CEO even had the audacity to say the company was on track to breakeven in 2019 . How can MAB break even in 2019 when it lost MYR812 million in 2017 and with jet fuel prices, intense competition and other prevailing industry factors stacked against it?

In the same article, the CEO claimed Malaysia’s Council of Eminent Persons (CEP) “advised the company to continue with its progress”. If that was really the case, then the CEP doesn’t understand airline economics.

Are three years of consecutive losses at MAB considered “progress”?

If anything, MAB is showing signs of a company deep in distress. Poor management and persistent leakages are part of the losses. MAB’s business model is completely outdated and the carrier is out of its depth competing against low-cost airlines. In short, management is clueless.

But MAB’s penchant for profligacy knows no boundary.

In August the carrier decided it could do with a change of fortune and promptly summoned a fengshui master to alter the luck of the company, starting not surprisingly, with the finance department.

Nobody knows how much the fengshui master was paid but that it was done showed utter recklessness and a complete disregard by management in frittering taxpayers’ money. It is believed the CEO is an ardent follower of fengshui, and had engaged in a similar act during his tenure as chief of MAB subsidiary MASwings.

MAB’s misfortune is largely self-inflicted. The national carrier is on its way to self-destruction.

The airline has to pay GBP2 million (MYR11 million) in 2018 – money it can scarcely afford – to Liverpool Football Club as part of a foolish sponsorship it undertook under a previous expat CEO in 2016.

Safety and technical issues

Whilst the company’s financial situation has worsened, there are other serious issues concerning the airline’s safety and aircraft maintenance.

Aside from the already well-documented recent incident in Brisbane, Australia – where MAB’s crew allegedly failed to follow mandatory pre-departure checks – there had been other technical troubles afflicting the airline recently.

A MAB Airbus A380 was grounded for 11 days at London Heathrow airport from late July to early August due to a fuel quantity indicator issue. MAB said the problem was a faulty fuel tank probe.

But according to sources in MAB the A380 in question – 9M-MNF – had a fuel issue when it flew from KUL to LHR on 25 July. Apparently it started with an indicator problem in Tank 2, which was resolved.

But oddly fuel from Tank 2 allegedly got transferred to Tanks 1 and 3, resulting in a contamination of both tanks, forcing the aircraft to be grounded at Heathrow.

There was a chain effect following the grounding of this A380. Due to the A380 (9M-MNF) being stuck in London, MAB decided to fly another A380 (which had dropped off pilgrims to Jeddah), to London. There wasn’t a problem with that, except for the small matter that MAB forgot to inform London Heathrow that its A380 was heading there!

In August four of the six A380s in MAB’s fleet had technical problems. One A380 (9M-MNB) had to undergo a C3 check, one (9M-MNF) went for tank cleaning, another (9M-MNE) grounded to replace a probe and another (9M-MNC) suffered a pack problem and spares had to be ordered from Airbus in Hamburg.

The grounded A380s not only resulted in costly repairs (estimated over USD10 million) but more importantly, lost income.

MAB now deploys its Airbus A350-900s to LHR and while these are excellent aircraft suitable for the job, they don’t come cheap. Each A350-900 is being leased at a price of USD1.2 million a month (MYR5 million).

Fragile finances

MAB’s financial health is in a critical state, yet the airline has sent out an request for proposal (RFP) to raise money to pay for nine Boeing B737 MAX aircraft due in 2020. The airline is hoping to raise USD800 million.

But the most critical issue facing MAB must surely be the MYR5 billion bond payment due in 2022. In November 2012 MAB raised MYR5.3 billion via an Islamic bond instrument to help pay for the six A380s, one A330-300 and an A330-200F.

Failure to pay would result in a default, which would be financially disastrous for the airline.

That said, there are a couple of bright spots…

A memorandum of understanding (MoU) signed between MAB and Boeing during a visit by ex-premier Najib Razak to Washington – for eight B787 Dreamliners – has lapsed.

And MAB has hedged 78% of its jet fuel needs for 2018 at USD70 per barrel. Not bad.

Additionally MAB has reserves of MYR3.1 billion – a tidy sum but one that could dwindle fast given the weakness of the ringgit and rising fuel prices.

What’s more worrying, however, is the CEO confirming the airline has issued a request for information (RFI) for widebody, twin-aisle aircraft to add to the six A380s, six A350s and 17 A330s it already operates.

Does MAB need more widebodies when its network has shrunk to just regional routes? The furthest it flies to is Auckland in New Zealand.

And how does Khazanah via Malaysia Airlines Group (MAG) justify subsidising MASwings to the tune of MYR70 million a year when just MYR40 million would suffice to run the airline? That’s not all. Aside that generous MYR70 million, MAG pays USD175,000 a month (MYR717,500) in lease rentals for each of MASwings’ 10 ATR72-500 aircraft!

Contrary to the CEO’s remarks that MASwings and low-cost carrier Firefly “play good supporting roles in MAG”, the reverse is true: both are bleeding and dragging the parent company deeper into the abyss.

According to him, Firefly’s revenue “improved by 50% YoY in 1H18” – after reducing capacity (from 18 planes to 12) and cutting its network. This is only possible because Firefly is cannibalising on MAB’s capacity via code-sharing. Firefly lost MYR37 million in 2017.

But here’s the real deal: MAB is only a small part of the bigger picture. Khazanah has spent years – failing miserably – trying to prop up the airline to make it look good by shifting all the airline’s aircraft, including the hugely loss-making six Airbus A380s, into separate holding companies called MAB Leasing and MAB Pesawat under the MAG umbrella.

However slick anyone spins it, the fact is: MAG is perennially losing money. Lots of money.




Solid revenue growth but many airlines are struggling

MAS 737-800

A Malaysia Airlines B737-800 taking off from KLIA


Airlines globally saw strong revenue growth in July although this won’t last in the coming months, according to the latest Air Passenger Market Analysis report from the International Air Transport Association (IATA). Read the entire report here.

Total revenue passenger kilometres (RPKs) for IATA’s member airlines rose 6.2% year-on-year (YoY) in July. But this was down from the 8.1% seen in June. Capacity rose 5.5% and load factors were up 0.6 percentage points for a record high of 85.2% in July.

That said, IATA revealed global passenger demand was up just 5.3% YoY compared to 8.2% in June.

For many Southeast Asia legacy airlines, there’s no reason to celebrate.

Method to MAB’s madness or just mad?

Take Malaysia Airlines Berhad (MAB) for example.

In a statement to the media on 30 August (a day before Malaysia’s 61st birthday), MAB said its revenue available seat kilometre (RASK) stayed constant at 2% YoY but that jet fuel prices had risen 37% YoY.

MAB went on to say industry-wide overcapacity resulted in demand and yield pressures as well as shortage of pilots. The airline’s CEO described its 2Q18 earnings as a “stable performance”.

In reality, MAB’s performance is anything but stable.

It has come to our attention the airline has yet to file its 2017 financial statement to the Companies Commission of Malaysia (CCM) as is required for all private limited companies.

It is unclear why MAB hasn’t done so as it had complied with the 2015 and 2016 financial statements. See here.

In 2015, the year after the old Malaysia Airlines (MAS) was completely shuttered, the new MAB posted a net loss of MYR1.13 billion (USD275 million) and the following year (2016) the losses narrowed to MYR439 million.

Recall that sovereign wealth fund Khazanah Nasional had injected MYR6 billion into MAB as part of the MAS Recovery Plan (MRP). Some 6,000 MAS workers were retrenched and the airline’s fleet and network shrunk significantly.

We understand that MAB’s financial situation is now critical and that Khazanah Nasional had, over the past few months injected a further MYR300 million to the airline to help with its cashflow.

Its financial health is deteriorating so fast that MAB was believed to have recently brought in a fengshui master to its finance department, hoping to generate better fortune for the airline. It’s not clear how much the airline was charged for it.

Despite its perilous fiscal condition, MAB has sent out a request for proposal (RFP) to borrow money from the debt market to pay for nine Boeing B737 MAX planes with a list price of USD1 billion. And it has an MoU with Boeing for eight B787 Dreamliners.

Crazy but true.

The carrier is feeling the brunt of intense competition from low-cost carriers at home and within the region as well as strengthening jet fuel prices. It’s unclear to what extent MAB has hedged its fuel needs, at which price and for how long.

What is evidently clear is that the airline continues to struggle to make ends meet. MAB remains committed to paying GBP1 million (MYR5.3 million) this year to Liverpool Football Club as part of a sponsorship it undertook in 2016.

It’s uncertain why MAB chose to sponsor Liverpool FC: the club has not won the English league title in 28 years. MAB has had poor judgment in soccer sponsorships. Not too long ago it sponsored Queens Park Rangers, a London club owned by Tony Fernandes, the founder and owner of AirAsia (a competitor of MAB). QPR were relegated shortly after and now languish third from the bottom of the English Championship.

Meanwhile, MAB is facing intense safety scrutiny after the Australian Transport Safety Bureau (ATSB) released its findings, and Australian media suggested the failure and incompetence of the airline’s flight crew endangered the lives of its passengers during a flight from Brisbane to Kuala Lumpur on 18 July.

Read the damning full ATSB report here. MAB, however, defended its pilots, saying they were “highly experienced”.

This is the second serious incident involving a MAB aircraft in Australia in 2018. In January this year a flight from Sydney to Kuala Lumpur was forced to divert to Alice Springs when the A330 plane experienced technical difficulties.

THAI 010906

thai airways is trying, but not hard enough

Other carriers feeling the pain, too

Garuda Indonesia and Thai Airways International are also struggling.

The Indonesian flag carrier is shutting its 3x a week non-stop flights from Jakarta to London Heathrow from 28 October, a sector that has been in operation from April 2017. The airline is using a Boeing B777-300ER for these flights.

Garuda reported a USD116 million loss for the first half of 2018, compared to a USD282 million loss in 2017. It blamed stronger fuel prices and rupiah (IDR) depreciation for the losses. The airline is delaying taking delivery of new aircraft in 2018 but will take three Airbus A330neos in 2019 and five Boeing B737 MAX in 2020.

Garuda has also shelved plans for a global USD500 million bond issue.

Over in Bangkok, Thai Airways International last month reported a USD93 million loss for 2Q18, citing higher jet fuel prices, low demand and intense competition as the reasons. Load factor fell from 78.5% in the same period last year, to 75.8%.

The carrier is undergoing structural changes, although nobody (not even the management) is quite sure when it will end.

THAI is looking at new leadership, with a new CEO supposedly to be installed sometime this year. The airline, whose cashflow isn’t in the best of shape, has plans to spend USD3 billion on 23 new aircraft.

Crazy but true.



No appetite for Turkey

Sabiha Gokcen airport

istanbul sabiha gökçen international airport sale may be stalled amidst turkish turmoil


As the financial time bomb ticks away in Turkey, the focus is now on countries that have significant exposure to the country and its currency, the lira (TRY).

To recap, President Donald Trump is attacking Turkey. He has authorised a doubling of tariffs on steel (50%) and aluminum (20%). The result: the Turkish lira slumped 20%. In Jan. this year USD1 bought TRY3.7; on Aug. 10, USD1 bought nearly TRY7, meaning the Turkish currency has lost about 44% of its value versus the greenback this year. The TRY has experienced 12 straight days of decline.

How much is Turkey a risk to the markets?

The fear of a financial contagion is real. Many European banks are exposed to Turkey and that will have an impact on the EUR. Meanwhile, the yield on 10-year Turkish debt has soared 20%. That means Turkey will have to pay a lot more to borrow money.

Another risk is a further downgrade of the country; Standard & Poor’s has already cut Turkey’s sovereign rating to BB- (from BB) on May 1. That’s junk bond territory.

Where and how does Malaysia fit into all this Turkish turmoil?

According to this Turkish government site the foreign direct investment of Malaysia in Turkey as of 2015 was around USD2.5 billion (MYR10.2 billion).

Trade relations between Malaysia and Turkey are so good that a Malaysia-Turkey business club was formed in 2016, with the aim of fostering even closer networking between companies from both countries.

In the same year Malaysia’s exports to Turkey were worth almost MYR4 billion while imports were worth MYR1.9 billion. Malaysia’s exports were mostly palm oil and palm-based products, chemicals and chemical products, metal and rubber products.

Khazanah loves Turkey

Malaysian sovereign wealth fund Khazanah is a big believer in Turkey, having spent USD1.4 billion since 2008. Read what Khazanah had to say about its investments in Turkey here.

Khazanah exposure in Turkey

khazanah’s global investments – 5.7% in turkey

The Malaysian GLCs under Khazanah that invested in Turkey are Malaysia Airports Holding Berhad (MAHB), IHH Healthcare Berhad and Tenaga. Khazanah opened its regional Turkish office in Istanbul on Oct. 31, 2013.

MAHB owns 80% of Istanbul Sabiha Gökçen International Airport (ISGIA), Turkey’s second largest airport. IHH acquired a 75% stake in Turkey’s largest private healthcare provider Acibadem and utility company Tenaga owns 30% of Gama Enerji, Turkey’s power company.

Khazanah isn’t the only big believer in Turkey’s future. Former Malaysian premier Najib Razak in April 2014 gave a speech in Ankara in which he argued why Malaysia must forge stronger links with Turkey.

Lately, however, both MAHB and Tenaga have shown interest in flogging their stakes in Turkey.

Tenaga is reportedly exploring parting with its 30% stake in Gama Enerji, while MAHB is reportedly looking to sell its stake in ISGIA to Turkish Airlines.

Why is MAHB selling ISGIA?

MAHB was a 20% technical partner in ISGIA from 2009 to 2013 and raised its stake to 40% by end-2013. The following year it bought another 40% of the Turkish company. In total MAHB paid some EUR500 million for the 80% shareholding. A Reuters report said the price for ISGIA is USD1.2 billion.

That means MAHB’s initial EUR500 million investment has doubled within five years and that’s probably why the Khazanah-owned company feels it should cash out.

People familiar with ISGIA say the airport is profitable, with an expected 34 million passengers this year. The best part is, by concession 80% of the airport’s revenue is in euros. And it manages to achieve all this with just one 3.5km long runway.

So if ISGIA is doing very well, what’s behind MAHB’s decision to offload it? Why kill the goose that lays the golden egg? MAHB has already sold off strategic stakes in other international airports, including Delhi (10%) and Hyderabad (11%). It has exited from its 23% share in Maldives.

The word is that MAHB wants to spend proceeds from ISGIA to expand Terminal 1 (T1) at KLIA as well as upgrade Penang Airport. But what’s the urgency in expanding T1 when Terminal 2 is barely at half its capacity?

There seems more to it than meets the eye…

It appears unrealistic all that cosmetic refurbishing would cost MYR5 billion (the proceeds from ISGIA sale). Especially amidst all these talk of AirAsia wanting to build low-cost carrier terminals (LCCTs) in Kuala Lumpur, Penang and Kota Kinabalu.

Could there possibly be a link between the two?

MAHB’s shares soared spectacularly this past week on talks of the ISGIA sale.

That said, MAHB’s financial standing is nothing to shout about. As of Mar. 31 it had debts of MYR5.53 billion. Revenue in 1QFY18 was MYR1.22 billion. Based on these figures alone, and with the turbulence in Turkey, it’s hard to see the current share price staying at its current level.

Sentiment in Turkey is going to get worse before it improves. President Tayyip Erdogan, in imploring Turks to prop up their currency by exchanging their gold and dollars into lira and blaming an “interest rate lobby”, has further spooked investors and the markets.

Any deals involving any Turkish assets are going to be put under extreme scrutiny. Potential investors that were looking at funding ISGIA or any other big-ticket transactions are unlikely to touch anything Turkish anytime soon.



The Az-man in the arena

Focus M PMB 1

Faces marred with sweat and dust and blood? (L-R) Tengku Azmil Zahruddin, deputy MD Khazanah; Rashdan Yusof, ex-MAS deputy CEO & ex-Khazanah director; Azman Mokhtar, ex-Khazanah MD


In Tan Sri Azman Mokhtar’s world there are only two types of people – those who fight “in the arena” and those who don’t (read: critics and detractors).

The erstwhile managing director of Khazanah Nasional Berhad officially left Malaysia’s sovereign wealth fund (SWF) on July 31, after 14 years and two months at the helm.

Two days later Azman released a five-page long Farewell Note to his ex-colleagues and fellow Malaysians.

In it he lifted the Man in the Arena passage from a speech titled “Citizenship in a Republic” that US President Theodore Roosevelt delivered at the Sorbonne in April 1910. It is a lengthy but stimulating lecture and we encourage Malaysians, especially politicians, to read and digest it.

Azman’s missive was more or less to highlight his achievements during his 170-month tenure (mid-2004 to July 2018). He wants to ensure Malaysians are aware of what he and his team had achieved, from the financial, strategic and societal perspectives.

He reminded us that, like any other SWFs, making and losing money is par for the course, “part and parcel of investment operations”. In other words, it’s a bit like gambling: win some, lose some.

Khazanah made gains of about MYR100 billion (USD24.5 billion) in the last decade and its losses were just a fifth of that; using soccer as an analogy, Azman likened it to a 5-1 triumph.

Tun Dr Mahathir Mohamad created Khazanah in 1994, and the SWF received an initial endowment of just MYR7 billion; today its assets have grown to over MYR157 billion. Kind of like Donald Trump getting a few million bucks from his dad to kick-start his business and then turned it into a multi-billion empire.

We wouldn’t want to take anything away from Azman’s and his colleagues’ achievements, so Malaysians must give credit to Khazanah where it’s due.

However, we feel it is only fair to put some things, as Azman said, into “a sense of perspective”.

We appreciate his candour and honesty in clarifying the MYR1.7 billion losses in UBS and Indian online women’s underwear company Zivame.

But one thing remains puzzling.

Azman took great pains – devoting some 300 words – to explain and justify Khazanah’s 22%, MYR80 million investment in Zivame, yet could muster barely 60 words on our flag carrier Malaysia Airlines (MAS) – whose losses were MYR8.4 billion and where Khazanah is the sole shareholder.

He wrote, briefly: “There were companies where we have failed or not been able to turn it around completely thus far for various reasons including MAS/MAB in particular…”

How was this figure arrived at? Between 2011 and 2013 alone MAS lost over MYR4 billion. And we have yet to take into account the estimated USD1.2 billion (MYR5 billion) “investment” on six Airbus A380s, an aircraft whose residual values are laughable.

Focus M PMB 2

puzzling figures… almost four years on and khazanah has yet to clarify the numbers and media queries

The mystery of PMB’s losses

Since we’re on the subject of aviation, can Azman please explain the MYR2 billion losses at Penerbangan Malaysia Berhad (PMB), the leasing company Khazanah established over a decade ago – see the front-page cover and excerpts from the Focus Malaysia article (above).

That article is almost four years old (Dec. 6, 2014) and Khazanah has never bothered to respond to the questions raised.

That’s not all. What about the MYR6 billion bailout of MAS which Khazanah concocted in 2014 – shouldn’t that be included as losses, too? Or is that money recoverable?

Azman noted Khazanah’s investments in Alibaba made over MYR6 billion gains – that’s the same amount that was dumped to save our national airline, with no guarantee of success! So, plus, minus, we’re back to square one.

Aviation aside, why did Azman get all worked up on July 11 when The Star published a photo taken at a Khazanah event in San Francisco way back in September 2013?

Amokh with Najib & friends in Frisco

a smiling azman with ex-pm najib and two uninvited guests

He quickly informed the media that the two people who were with him and former PM Najib Razak in the photo – ex-Goldman Sachs banker Tim Leissner (currently being probed by the US Department of Justice) and wife Kimora Lee – were in fact uninvited guests.

Why did it take Azman five years to set the record straight when the photo had been widely circulated on the Internet in Malaysia since September 2013? Would Azman have made the clarification if there were no change in government on May 10?

Man in the Arena

Azman said he found the Man in the Arena passage inspirational and we couldn’t agree more.

What we find disappointing is that Azman used it to exhort his former colleagues to pay scant attention to Malaysians who are not “in the arena” as if (constructive) criticisms from working class folks do not matter to the gladiators in Khazanah.

He reminded them: “It is not the critic who counts, not the one who points out how the strong man stumbled or how the doer of deeds might have done them better… The credit belongs to the man who is actually in the arena, whose face is marred with sweat and dust and blood…”

But the critics do matter. Brushing aside (constructive) criticisms and ignoring questions from the media is rude and unprofessional. It comes across as haughty; belittling fellow citizens deemed unfit to question those who sit in high office (33rd floor of the Twin Towers, no less).

Criticism arises as a result of differences in thoughts, and thought processes. Malaysians are giving Khazanah their opinion although some may be, admittedly, baseless and unworthy of replying.

Whatever it is, (constructive) criticism helps our SWF to improve. Most Malaysians may never understand what Khazanah actually does or how it works or appreciate the sacrifice, toil and torture its employees have to endure, being “in the arena”.

All they know is that many employees of Khazanah, a government-owned company where all Malaysians are stakeholders, are very well paid and that its CEO gets a handsome MYR7 million salary, according to Tun Mahathir.

Have a good rest, Tan Sri. We hear Azman has invested in a swanky waterfront property in Iskandar Puteri, Johor Bahru. It makes sense given that he was one of the architects of the Iskandar Malaysia project and will have a vested interest in its long-term success (or God forbid, failure).



Whither Malaysia Airlines without Khazanah’s guidance?

MAS A350 ii

A malaysia airlines a350 at the airbus delivery centre in toulouse. pic/shukor yusof


Trouble can come in threes.

Or in Malaysia Airlines’ (MAS) case, trouble lurks in many places.

The most serious trouble, as far as the eye can see, is a drop in operational discipline. Here’s an incident involving a MAS Airbus A330-300, registration 9M-MTK on a flight (MH134) from Brisbane to Kuala Lumpur on July 18.

Long story short, the flight suffered an airspeed indication failure on takeoff, because the covers on the aircraft’s pitot tubes weren’t removed. These tubes measure static and kinetic air pressure in a moving aircraft to determine the indicated airspeed.

Pitot tubes are critical in an aircraft; a pitot tube failure led to an Air France A330 crash into the Atlantic Ocean in 2009.

Other news from Australia are damning, too and reports from Down Under suggest the pilots should have seen a discrepancy during the takeoff roll.

MAS indiscipline appears to be rampant in Australia. On June 30 a cabin crew of the airline was arrested in Melbourne for allegedly smuggling 3.5kg of heroin aboard a flight into the country. The drugs were worth AUD1.4 million.

Just a day earlier on June 27, a passenger on board a MAS jet lodged a complaint alleging the airline lost his cat, that was supposed to be transported with its owner on the domestic flight.

Complaints against the airline are coming fast and hard.

One passenger took to social media to highlight how MAS had, firstly been cancelling flights, and secondly, served all passengers (including those in business class) on an A380 plane, standard economy class meals on a Kuala Lumpur to Bangkok trip.

Read his rant here.

What is going on in MAS?

The CEO of the airline has been spewing this mantra of late: Malaysian Hospitality Begins With Us, but the latest incidents and cancellations of 15 domestic flights daily in July are anything but a sign of hospitality.

We understand that poor duty rostering, cancellation of annual leave, aircrew fatigue and changing policies have in some ways contributed to the decline in not just morale but more importantly, discipline.

Critically, pilots have started to leave, creating a shortage. MAS acknowledged this but put a clever spin on it by implying the situation was a healthy one because demand has been soaring. But it appears more a sign of poor planning; why did the airline schedule more flights when it knew it didn’t have sufficient flight crew?

Can MAS make money?

An International Air Transport Association (IATA) survey concluded that airlines’ profits are set to rise over the next 12 months due to firm demand and better efficiencies.

Unfortunately MAS is unlikely to ride on this. The airline is spending more than it earns each month. In FY15 the carrier posted a loss of MYR1.13 billion and managed to narrow this to MYR439 billion in FY16. But oddly, as of June this year, MAS has yet to file its 2017 financial statement with the Companies Commission of Malaysia.

Most other carriers in Southeast Asia had revealed their results for 2017 in May and June.

A big question mark now hangs over the fate of MAS following the en masse resignation of sovereign wealth fund Khazanah Nasional’s board of directors on July 26.

Khazanah was the mastermind behind the MYR6 billion, 12-Point MAS Recovery Plan (MRP) that projects the airline to be re-listed on the bourse in 2019 and be profitable by 2020.

In our view, the MRP has so far been an abject failure. Two foreign chief executives that were appointed by Khazanah at a cost thought to be almost MYR20 million, left within two years.

Obscene pay for executives

Paying its senior executives exorbitant and obscene amounts of money has been a hallmark of MAS.

According to the company’s annual reports of 2011, 2012 and 2013 MAS paid on average an annual salary of MYR2.33 million to its CEO then. During the same period (2011-2013) the airline lost MYR4 billion.

How could an airline described in 2015 by its ex-CEO as “technically bankrupt”, and representing a country now saddled with over MYR1 trillion in debts, justify paying monthly salaries that are five to eight times more than the prime minister? And let’s not forget that MAS is essentially being funded by taxpayers’ money.

To compound matters, MAS is today in the debt market to tap funds for the acquisition of nine Boeing 737 MAX planes.

When Japan Airlines (JAL) filed for bankruptcy in 2009 and subsequently restructured, it eschewed any borrowings. Instead JAL tightened its belt: employees took pay cuts, adjusted the pension policies, shrunk the airline’s fleet and unprofitable routes, and sold all non-core assets.

Speaking of non-core assets, we’d like to know what happened to the Botero artworks bought by a former MAS chairman over 10 years ago at a cost of more than MYR1.5 million – where are they now?

Structural problems remain

After three years of the MRP, the flag carrier is still struggling, shackled by incompetency and an inability to compete effectively and efficiently in a marketplace that is constantly changing and evolving.

The first and foremost issue with MAS is a question of trust. The airline has lost its reputation and the respect of many Malaysians and non-Malaysians, and rebuilding trust requires patience and a solid strategy. And what exactly is MAS’ business model – is it a premium carrier or a low-cost airline or in-between?

The second issue with MAS is internal corporate governance. Morale remains low and many employees are frustrated at the lack of opportunities (personal and professional growth). With low morale and frustration comes complacency, and in the airline industry that can be detrimental, to the company and its customers.

The third issue is, what now after the departure of those Khazanah board directors? Can the airline’s senior executives manage, left to their own devices? Who will the management and board turn to, and who will be accountable beyond the CEO?

If MAS is to succeed, it is absolutely crucial to tear apart the MRP and have a complete overhaul and review of the company, its management and shareholders. The installation of a new government in Malaysia presents an excellent opportunity to do that but has the political leadership the will to do it?



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