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.
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.
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 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…
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.
“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.
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.
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.
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).
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.
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.
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.
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.
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
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.
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.
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.
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?
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).
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?
In between quaffing copious amounts of red and white grape juice from the terroirs of Toulouse and savouring the delicacies the southwest of France offered during lunch, it was easy to miss the reason we were all there this Tuesday week: to witness the launch of Airbus’ new cute little aircraft, the A220-300.
Except that the new jet isn’t actually new; two years ago in June 2016 the plane, previously known as a Bombardier CSeries jet, was delivered to Swiss. Those on board the CS100 were so impressed with the plane’s economics and comfort and wrote many positive things about it.
Airbus’ legendary salesman, the now retired John Leahy, called the CSeries a cute little airplane and vowed to – in not so many words – kill the programme. It was therefore a tad ironic that on Tuesday, July 10 the European manufacturer rolled out a CS300 and rebranded it as the A220-300, “the latest addition to the Airbus family.”
To recap, Airbus officially took control of the CSeries Aircraft Limited Partnership (CSALP) on July 1. It has a 50.01% stake with Bombardier and the Quebec province holding minority stakes.
A panel comprising the A220 programme sales chief David Dufrenois, head of customer support and engineering Rob Dewar, director of cabin marketing Christine de Gagne and head of product marketing Antonio de Costa tried very hard to convince a skeptical audience that there really was a big demand for aircraft with 110-130 seats.
Dufrenois stunned everyone in the hall (at least the rationale among us) when he announced the world needs at least 3,000 of these cute little thingies over the next two decades. And what’s harder to digest was that Airbus (and Boeing) had spent years telling us the regional jet market was too small to bother.
According to Ascend, regional jets – those that seat between 90 and 120 – make up just 5% of all commercial planes flying worldwide. The majority, or 66%, of planes fall under the narrowbody, single-aisle segment, typically the A320 and B737.
Never mind that, we say. There is a market for regional jets or else Airbus would not have gone into it. And if anyone can sell lots of cute little aircraft, the Toulouse-based planemaker is well positioned to do that, just as it made the A320 the workhorse of low-cost carriers worldwide.
Boeing, too, seems to be keen to gobble up Embraer and get into the regional race; the E190-E2 family has already been dubbed the “Boejet”.
But where will the market for these aircraft be?
Embraer, the market leader in regional jets, dominates the market in North America, where over 2,000 planes (or 60%) of the global fleet are concentrated. Europe is also a fairly large home for regional jets.
In April Norwegian low-cost carrier Wideroe took delivery of its first (of three) E190-E2 while KLM subsidiary Cityhopper has successfully exploited its fleet of 45 E-jets around the continent. The real challenge for both Airbus and soon Boeing, is how to convince Asian airlines to buy these planes.
Dewar thinks the A220-100 and -300 are perfect for China because, he explained, the plane is especially suited to high altitude airports. Seriously, how many airlines in China would buy an A220 because it can land well in Tibet, or Bhutan? The A319 already does a good job at it.
The potential for regional jets is actually in Southeast Asia, where there are many archipelagic countries where an A220 or an E2 aircraft makes perfect sense. That’s because most travellers in this region hardly fly beyond two hours.
In countries such as Indonesia, the Philippines, Malaysia and Thailand, regional aircraft have the right capacity for many routes that don’t justify an A320 or a B737. Additionally, regional aircraft can compete well (or better) when it comes to operating costs, against traditional single-aisle planes, and this is especially true of short-haul sectors.
All things being equal, both Airbus and soon Boeing, must be realistic about the size of the market for regional jets. The Teal group noted that in 2016 regional jet deliveries made up just under 7% of the world transport market value compared to 15% in 1989.
To make things more complicated, the regional jet market is over-crowded, with China’s COMAC aggressively pushing its own homegrown aircraft, Russia’s Sukhoi and Japan’s Mitsubishi also competing for a very small slice of the niche market.
Less than a year ago, at a briefing in Singapore, Boeing declared the market for regional jets in Southeast Asia – a region with 640 million people – was just 40. The planemaker forecasts demand for passenger aircraft in Southeast Asia to reach 4,210 units. Of these, 3,230 will be single-aisle, narrowbodies like the B737NGs.
On 5 July Boeing announced it is joining forces with Brazilian regional jet maker Embraer. It will take control of Embraer’s commercial aircraft and services operations in a deal valued at USD4.75 billion.
Boeing will take an 80% stake in the joint venture worth USD3.8 billion with Embraer holding the remaining 20% and more importantly, keep control of its defence and business operations.
Why is Boeing gobbling up Embraer if it feels there’s just a small market in a region such as Southeast Asia?
Here’s our analysis earlier this year, in January and another one in February. Admittedly we didn’t expect the deal to go through simply because there was no solid case for Embraer to do so, and we under-estimated how persuasive Boeing – flush with cash – can be when it comes to enticing the eager beaver Brazilians.
On 1 July Airbus officially became the majority partner of the C Series Aircraft Limited Partnership (CSALP). The Toulouse-based planemaker has a 50.01% stake, with Bombardier and Quebec province holding minority stakes.
There will be a grand event in Toulouse on 10 July where Airbus is expected to reveal a rebranding of the CSeries family of aircraft: the CS300 and CS100.
Airbus CEO Tom Enders was guarded when he spoke to Bombardier employees in Montreal mid-week but hinted to reporters there could be orders during the Farnborough Airshow starting 16 July.
For Embraer itself, having Boeing as a partner will certainly help boost sales, especially in Southeast Asia – even if Boeing believes there is a market for only 40 regional jets.
Globally Embraer trails Bombardier in the small but increasingly lucrative 70- to 120-seat aircraft market. Embraer’s orderbook stands at 280 but this includes up to 50 E190-E2 and E195-E2 planes for India’s Air Costa, which is no longer in operation.
Bombardier’s CSeries (CS100 and CS300) is already at 402 orders, with a potential 60 CS300s order looking likely from Moxy Airlines, a startup carrier founded by David Neeleman. Neeleman previously founded JetBlue in 1999; ironically the carrier is one of the largest operators of Embraer E190 aircraft.
Embraer’s E2 jets are slightly smaller than Bombardier’s CSeries family of aircraft but promises better fuel burn and are capable of achieving similar (or better) costs per seat of larger re-engined narrowbody aircraft such as the A320neo and B737MAX. Additionally there are no middle seats on the E2s.
Norwegian carrier Wideroe was the launch customer for the E2, taking delivery in April. Kazakhstan’s Air Astana is also a fan: it is taking its first (of five) deliveries in October and has indicated plans to add another 10.
That said, Bombardier’s CS100 and CS300, which seats between 100 and 150, is no less impressive, and promises a very comfortable ride with 20% increase in fuel efficiency. Unlike the E2, the CSeries is an all-new designed plane, lighter than the competition due to the use of advanced structural materials. It went into service with Swiss Air Lines in July 2016.
What this latest move signifies, in the broader picture, is the continued duopoly in the marketplace and further strengthening the influence and footprints of Airbus and Boeing.
Other regional aircraft makers, particularly the ambitious COMAC (China), Russia’s Sukhoi and Japan’s Mitsubishi Regional Jet (MRJ) will be seriously affected. The MRJ programme, mired by delays and other technical issues, and with a negative net worth of minus JPY51 billion, is perhaps the worst hit. The people behind MRJ would do well to re-assess the viability of the aircraft under the current conditions.
Apart from North America, a traditionally strong market for Embraer’s E-jets, the challenge for Boeing is to coax, cajole and convince skeptical Asians – particularly those in Southeast Asia – the benefits of the E2s. There are reasons why the E2, despite being a very strong performer, has yet to gain traction in this part of the world.
The region is ripe for regional jets, with several airlines already flying Bombardier’s products, including the Q400 and CRJ1000 that are currently in service in the Philippines and Indonesia.
Boeing will soon discover, if it hasn’t already, that the demand isn’t just for 40 regional aircraft but at least five-fold over the next 20 years.