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Tales from Toulouse

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is the Cute little A220 ready to conquer Asia? pic/shukor yusof

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.

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CSALP head of sales david dufrenois and friends say global demand for the next 20 years will be 3000 regional jets. pic/shukor yusof

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.

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middle seats on the a220 are cool, say CSALP bosses, because they are more spacious. pic/shukor yusof

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.

 

 

 

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Boeing offers Embraer a deal it can’t refuse

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Embraer’s E190-E2 at the Sao Jose dos Campos factory in Brazil. pic/shukor yusof 

 

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.

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Bombardier’s cs300 in airbaltic livery during the singapore airshow february 2018. pic/shukor yusof

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.

Malaysia: HSR & other transport follies

Najib HSR Tianjin

the guy with the glasses wants to take Malaysians on a high-speed ride… for just MYR72 billion

 

This is a departure from our usual focus on the aviation sector; the topic of high-speed rail (HSR) in Malaysia has been the subject of intense debate since premier Mahathir Mohamed announced he would scrap the MYR110 billion (USD28 billion) project. He later clarified it would instead be postponed.

The man who came up with the 350km HSR idea, Najib Razak, believed the socio-economic benefits far outweigh its costs, which he said stood at just MYR72 billion at the start of 2018. Rahman Dahlan, a former minister in Najib’s cabinet, claimed it was myopic to scrap or postpone the project.

Here’s our brief analysis on the HSR.

Most HSR lines lose money. Only two in the world – the Tokyo-Osaka and Paris-Lyon lines – are profitable. Another bullet train, the Hakata-Osaka line, breaks even. A large number of HSR companies are subsidised by taxpayers and despite the support, HSR travel is costlier compared to air travel for 12 out of the 23 most popular bullet train services globally.

The greatest challenge for any HSR project is to rein in costs. Overruns occur frequently. For instance, Taiwan’s Japanese-influenced HSR was started in the 1990s. In 2007 it launched the Taipei to Kaohsiung 345km service; the HSR had a price tag of USD15 billion or USD43.5 million per kilometre. Seven years later the government warned the HSR could go bankrupt, with cumulative losses of over USD1.5 billion.

Depreciation and interest payments bogged down the company running the HSR. Cost and ridership estimates, too, had not gone according to plan. In 2008 it was anticipated some 240,000 passengers a day would use the service. At the end of 2015, less than 140,000 people a day rode the train.

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Zuoying HSR station in Kaohsiung, Taiwan. Pic/shukor yusof

Minister Rahman used a study by Jetro (Japan External Trade Organisation) to support his case. According to him, Jetro reckoned the HSR would bring in USD1 billion economic gain (see the report here) to Malaysia, which is an over optimistic financial forecast.

Jetro, however, had a vested interest: it was pushing Japan’s bid for Malaysia’s HSR project. Go through the report and one would find it hard to see where the actual benefits would come from, other than some charts, graphs and tables that offer little in terms of real economic gains. The 29-page paper fails to justify spending over MYR70 billion on the HSR.

The fact remains that the HSR is going to be very costly to construct. Older lines such as the Tokyo-Osaka service, built in 1964, cost barely USD5 million per kilometre. According to a World Bank paper (see here), in Europe today the cost would be USD25 million to USD39 million per kilometre while China’s HSR cost between USD17 million and USD21 million per kilometre.

That’s because labour is cheap in China. Moreover, land acquisition and resettlement costs are below 8% of project cost. The Chinese government could also standardise designs – for embankments, tracks, viaducts, electrification, signalling and communication systems – which cuts cost and duplication of efforts. That aside, it attributed the lower cost due to the large scale of the HSR network planned in China.

An estimate by the Institute of Southeast Asia Studies (ISEAS) in 2017 expected the total cost of the HSR to be up to SGD25 billion (MYR75 billion), with SGD5 billion allocated for the laying of tracks. The cost per kilometre is said to be around USD10 million and the cost of a one-way ticket around SGD65.

But nobody talks about ridership for the HSR to succeed. The popularity of rail travel, if anyone bothers to study, has been declining. Not just in Asia but globally. In many countries HSR and conventional rail service represent under 10% of all passenger-kilometres travelled by land. In Southeast Asia, flying is now the most popular mode of travel.

HSR rail agreement MY-SG map

Source: Sunday Times Graphics

Advocates of HSR list many factors to support the implementation of a bullet train service. These include:

  • Safety: HSR is undoubtedly a safe way to travel but most people today travel by air, which is the safest mode of transportation.
  • Mobility: Can HSR improve mobility? Unlikely. With the advent of low-cost carriers, most people now fly. In fact Malaysia would do well to redirect some of its resources to upgrade Subang Airport in the heart of Kuala Lumpur, now severely constrained because only turboprop planes are allowed there.
  • Going green: supporters of HSR maintain it is more environmentally friendly than flying. That is a myth. Constructing and maintaining a HSR line is energy-intensive and HSR needs lots of electricity generated at the electric plants. Rail can offer lower energy usage and fewer carbon emissions than road or air travel, but that happens only when it is at near or full capacity.
  • Economic gain: Malaysia has a different spatial structure compared to China, France or Japan. Kuala Lumpur, where most people are likely to board the HSR, has not quite the same population density as Beijing, Tokyo or Paris.

And let’s not forget that Malaysia has an entrenched car culture. In 2014 a Nielsen Global Survey of Automotive Demand revealed that Malaysia has the world’s third highest level of car ownership at 93% and the highest incidence of multiple car ownership globally (54% of households have more than one car).

How many Malaysians (and how often) would leave their cars behind and pay for a costly HSR ticket just to experience the 90-minute ride to Singapore?

Buses are another popular way to get from town to town in Malaysia. A one-way, four-hour coach ride from Johor Bahru, the southernmost city in Peninsular Malaysia, to Kuala Lumpur costs on average just MYR30+ (USD7.50). Buses remain a convenient way to move from the capital to other towns within the peninsular with many citizens unable or unwilling to pay more than MYR50 one-way for a 3-4 hour ride.

One of the reasons many HSR lines are loss-making is that its advocates often over-estimate the number of people who are willing to switch from flying or driving or riding (the bus). According to the promoters of the HSR, annual ridership is expected to reach 15.2 million in 2030 and rise to 37.8 million in 2060. Read it here.

It is unclear how the figures were arrived at. The population of Klang Valley (greater Kuala Lumpur) is just over 7 million while Singapore has a population of 5.6 million. HSR supporters assume by 2030 at least 10 million travellers annually would be persuaded to pay MYR450-500 (the price of a return ticket for the HSR to be profitable) instead of taking a low-cost flight or hopping on a bus.

How on earth did we ever get to this stage? Someone suggested that ex-premier Najib was so taken by his ride on a Chinese HSR from Beijing to Tianjin that he concluded Malaysia needed one, too. That’s fine except that, there are a few differences between China and Malaysia, namely economic growth, population size and land mass.

Simply put, the HSR project ignores history, evidence and logic. There is very little, if any, business case in spending over MYR70 billion on such an extravagant project.

In any case MyHSR Corporation was born in 2015, with seven board directors and a leadership team of nine. The Ministry of Finance owns the company. It remains unclear how much taxpayers money were spent in the past three years just to compensate these executives.

The world’s costliest international ferry terminal?

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white elephant – the Puteri harbour international ferry terminal. pic/shukor yusof

Speaking of taxpayers money, let us introduce you to the Puteri Harbour International Ferry Terminal (PHIFT) in Iskandar Puteri, Johor Bahru. Built by UEM Sunrise (a wholly owned company of Khazanah Nasional) at a cost of several hundred million ringgit, it was officially opened on 8 May 2013. The idea behind the terminal was to cater to tourists and Singaporeans alike, as well as Malaysians working in Singapore, by providing hassle-free sea travel to and from Singapore’s Harbourfront.

Najib and Singapore premier Lee Hsien Loong officially announced a ferry service between Puteri Harbour and Singapore during a leaders’ retreat in Singapore on 19 February 2013. Read the full joint statement here.

PM retreat SG 190213 - Puteri harbour ferry services

Over five years later, the said service has not started. No reason has been provided on whether it has been postponed, delayed or outright cancelled. Daily ferry services between Iskandar Puteri and Singapore would do much to alleviate the daily traffic congestion at both the Causeway and the Second Link.

A recent detailed Channelnewsasia report estimated that over 300,000 Malaysians travel across the Causeway each day. Some 145,000 vehicles cross Johor Bahru’s checkpoint daily.

Newly installed politicians in Johor blame congestion on the Second Link on the increase in number of users; some 9 million people apparently used it in the first five months of 2018.

 

Oddly enough officials have conveniently forgotten and completely disregarded the ferry terminal at Puteri Harbour, which was built using public funds to facilitate easier travel between Johor Bahru and Singapore.

With the failure of the intended service to Singapore – a sea link that could cut congestion and provide seamless access for commuters and tourists – the ferry terminal has been reduced to providing daily, very likely loss-making rides ferrying a handful of travellers to Batam and Karimun, in Indonesia’s Riau archipelago.

Today, the PHIFT – despite its strategic location and millions invested – is an under-used white elephant, quite possibly the costliest ferry terminal in the world based on a cost-benefit analysis.

 

 

A billion here, a billion there…

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It’s not all gloomy when viewed from the top of the Petronas Twin Towers. Pic/shukor yusof

 

“A billion here, a billion there, and pretty soon you’re talking real money” – U.S. senator Everett Dirksen

Malaysians are not new to financial scams and scandals of immense proportions.

Let’s pause for a moment and consider these figures: the latest MYR42 billion losses from 1MDB, Port Klang Free Zone (PKFZ) incurred losses of MYR12.5 billion in 2008, and Bank Negara Malaysia, the central bank, blew over MYR31.5 billion between 1992 and 1994 in forex losses.

These are just some examples of plundering that have taken place over the past 30 years. Someone out there has actually put together a list on Wikipedia. Take a look here.

One of the most prolific plunderers (of taxpayers’ money) is national carrier Malaysia Airlines (MAS). The airline has turned the act of losing money into a fine art, losing MYR2.5 billion in one financial year alone, in 2011. It prompted then chief minister of Penang – now Malaysia’s new finance minister Lim Guan Eng – to describe it as “shocking”.

Lim has a point. Despite persistent losses, the airline’s parent and sole shareholder Khazanah has been unable (or unwilling?) to install professional management at the company. A German touted as a “turnaround specialist” was appointed MAS’ first expat CEO in January 2015 following a “rigorous assessment”.

Alas, Mueller left after barely a year at the helm, citing “personal reasons”. His replacement, Irishman Peter Bellew, lasted slightly longer – just over a year.

Malaysians are waiting anxiously to see what Lim, who now controls Malaysia’s purse, will do with MAS’ and Khazanah’s management.

By the way, why do photos of ousted former premier Najib Razak, the ex-second finance minister Johari Ghani and ex-secretary general of treasury MoF Irwan Serigar still adorn Khazanah’s website more than a fortnight after Malaysia ushered in a new government?

 

When it comes to burning money, few GLCs can rival MAS; it is simply sensational at squandering cash. In FY2005 it posted losses of MYR1.3 billion. In 2013, the penultimate year it was listed on the bourse, MAS incurred losses of MYR1.17 billion . The year before (2012) it lost MYR432.6 million.

Over a period of 20 years (1997-2017) it is plausible the carrier frittered away at least MYR20 billion, and we’re being conservative. Even after a bailout of MYR6 billion from Khazanah in 2014, and assurances that its recovery is on track, the airline remains in peril, with current liabilities of more than MYR1 billion according to people familiar with its finances.

Let’s open the Pandora box

On May 24, Malaysia’s new government revealed the country’s national debt had crossed MYR1 trillion. That’s 80.3% of GDP; as a rule of thumb, anything over 60% is a cause for concern as it could result in a country’s credit rating downgrade.

The previous government under Najib Razak, who was premier and finance minister, had put the official debt figure at MYR686.8 billion as of end-2017 or 51% of GDP. Here’s how finance minister Lim said he arrived at the new figures.

The latest revelation has caused astonishment and anger, not to mention shock. But while the figure of MYR1 trillion does look big – there are 12 zeros – let’s look closely at what it actually means.

Is Malaysia about to go bust? The short answer is no. In fact, Malaysia is in no danger whatsoever of going bankrupt. Is the financial system in a crisis? Again, no. As the finance minister readily said, Malaysia’s banking system remains intact and is well capitalised.

More importantly, Lim signalled Malaysia had the capability to service its debts when he said the government would pay all obligations. “We will honour those… ”, he stressed.

That’s positive news, at least to the major credit rating agencies that are assessing Malaysia’s financial standing following the installation of the new administration. Rating agencies focus mainly on a sovereign’s ability to repay debts on time, as well as how it manages its fiscal policies and the country’s cashflow.

Moody’s current view of Malaysia is A3, with a stable outlook. It has flagged the loss of revenue from the abolishment of the Goods & Services Tax (GST) as a negative, even if oil revenue improves following higher crude prices. In 2017, GST revenue was MYR44.3 billion.

Standard & Poor’s rates Malaysia A- with a stable outlook. In its most recent review in June 2017, S&P highlighted the country’s “strong external position and monetary policy flexibility”. At the same time it noted that Malaysia’s general government fiscal position carries contingent risks (including a USD3 billion letter of support for 1MDB) from its public enterprises and financial sector.

Seen in the context of Malaysia’s GDP, its debts and fiscal deficit – MYR11.2 billion in 1Q18 or 3.3% of GDP – shouldn’t make the finance minister lose sleep at night. It’s manageable. That said, we haven’t seen the end of the 1MDB saga and where it’ll take the country. Malaysia’s current woes look petty now, compared to what lies ahead. This is just the beginning…

 

 

Malaysia’s aviation industry to soar?

AirAsia A320 Klia2

airasia remains a leading discount airline, despite its founder’s pathetic political ploy. pic/shukor yusof

It has been a strange week, one that has seen some strange sights. In Malaysia’s history of strange sights, there has never been quite anything like this.

Malaysians woke up on May 10 to a new government, but not a new prime minister. Mahathir Mohamad was Malaysia’s fourth premier for 22 years (1981 to 2003) and is now the country’s seventh leader and the world’s oldest.

At 92, and despite two bypasses, he isn’t just sprightly; he is mischievous, displaying his trademark sarcasm and wit at a 3am press conference following his party’s victory. The next morning, on May 11, he was spotted cycling along the lake at Putrajaya.

We don’t know what it’s like to be Mahathir, but we imagine there are enjoyable moments. Cycling aside, he enjoys riding horses and, it would seem, proving Tony Fernandes wrong.

Mahathir is well known for giving Fernandes the green light to start AirAsia by letting the former Warner music executive buy two B737 belonging to DRB-Hicom in 2001 for a mere MYR1 or 25 US cents.

Fernandes, on the other hand, is well known for his penchant for football (he owns English club QPR), Formula 1 (Caterham) and hanging out with Nazir Razak, youngest brother of Najib Razak, the leader Mahathir toppled last week.

Dr M 2003

Sandwiched between a prime minister and a former prime minister’s brother. Mahathir Mohamad (L), Endau Analytics (C) and Nazir Razak (R) at a dinner in 2003. pic/shukor yusof

Both Mahathir and Fernandes have the gift of the gab and a wicked sense of humour.

While one is a doctor and the other an airline CEO, they both have political leanings. Many of us will agree, the true art of politics is to utter the foolish and the ridiculous – at the same time, with a straight face.

Which is why we were amused by the political stunt that Fernandes pulled recently. First, the AirAsia boss, looking comfy and relaxed at home, came up with this video just days before polling day on May 9, coaxing Malaysians to vote for the incumbent leader and his Barisan Nasional (BN) party.

Second, he ferried ex-premier Najib and colleagues from Kota Kinabalu to Kuala Lumpur on an AirAsia X A330. To add glamour to the event, the plane was plastered with BN’s slogan. On top of that, AirAsia X’s cabin crew wore blue (the colour of BN) instead of its usual red.

Najib & TonyF A330

Tony fernandes and Najib razak in front of an airasia x a330. pic/najib razak facebook

Long story short, Fernandes got a lot of stick from many Malaysians for sucking up to Najib. On May 13 he apologised on video and said his actions were done under duress.

Those of us in the aviation community who have followed his mercurial rise and success with AirAsia know Fernandes as an extremely savvy, slick and smart corporate figure. In other words, he’s far too clever and too shrewd to be coerced into making a video batting for BN unless he expected it to win.

In his video apology, Fernandes claimed he was under pressure and that “one must always support the government of the day”. It was unnecessary because AirAsia is a well-run, profitable airline with a sound strategy and is serving Malaysia and Malaysians well. No right-thinking government would do anything to destabilise or destroy it.

Meanwhile, his grovelling did little to pacify netizens and presumably his shareholders, too, when AirAsia’s shares tanked at the bourse. Worse, Fernandes is now facing a potential court case after he claimed the Malaysian Aviation Commission (Mavcom) had forced the airline to cancel 120 flights.

TF Hardtalk 250917

“i was under pressure”. pic taken off BBC hardtalk

Mavcom has lodged a police report against Fernandes. As many aircraft financiers will tell you, Fernandes can be belligerent and AirAsia has upped the ante by saying the airline had evidence against the regulator. Fernandes added he saw no reason for Mavcom’s existence.

To make things merrier, AirAsia X’s chairman Rafidah Aziz, a former trade minister under Mahathir’s previous administration and someone who is “loved” by Fernandes, believes the new prime minister – with whom she has very close ties – will bring positive impact to aviation in Malaysia.

She expects the problems faced by the industry to be “eased and removed” and that AirAsia will be “flying in clearer skies”. There’s little doubt AirAsia will continue to survive and prosper – in spite of this latest skirmish – because it has first mover advantage in the region and it has the right business model.

Whether you like or loathe him, Fernandes has put Malaysia on the world map. His words are often abrasive but he has consistently done something which no other Malaysian has in the airline industry: make money.

What about Malaysia Airlines then, the national carrier? Will it be positive for MAS under Mahathir? He has thus far been understandably busy with other pressing national issues that require immediate attention, and MAS isn’t one of them although it’s a matter of time before Mahathir reviews the carrier and its parent, Khazanah.

MAS’ future looks grim as it has, according to people familiar with its finances, once again racked up huge debts, this time over MYR1.5 billion (USD378 million). Sure, it’s a pittance compared to 1MDB’s MYR42 billion losses but still shocking nonetheless after the restructuring undertaken by Khazanah Nasional in 2014 that cost taxpayers MYR6 billion.

This was our take on the flag carrier in a CNBC interview in 2014.

They think they know best; that’s the problem with MAS and Khazanah. It makes us weep. Almost.

 

 

 

New broom to sweep Malaysia Airlines clean

Boeing MAS MOU 0917

boeing svp sales for asia pacific & india dr dinesh keskar (standing 4th from left) with former pm najib razak to his right. MAS chairman & board director is 3rd from right. pic/boeing

With the prospect of losing a USD20 billion aircraft deal in Iran looming ever closely, Boeing appears poised to forfeit another one following the installation of a new government in Malaysia, Southeast Asia’s fourth biggest economy.

On Sep. 12, 2017, Malaysia’s ex-premier Najib Razak confidently told US president Donald Trump that Malaysia Airlines (MAS) would acquire eight B787-9 Dreamliners and eight B737 MAX jets. Those aircraft have a list price of USD3.06 billion before discount.

During election hustings the past fortnight Mahathir Mohamad, Malaysia’s newly elected 93-year old leader, made a mockery of Najib’s trip to Washington and the subsequent promise to buy Boeing planes. It is understood Mahathir will instruct officials in his administration to review the MoU signed between Boeing and MAS. The MoU, which isn’t binding, will “almost certainly be scrapped,” according to an insider.

This was our analysis when the Boeing-MAS accord was inked.

Malaysia’s national flag carrier is about to see a radical removal of many of its key officials in the coming weeks, including directors on its board, as Mahathir wastes little time in overhauling the country’s government-linked companies (GLCs) and crucially, its sovereign wealth fund, Khazanah Nasional.

Khazanah Nasional is the parent of MAS. In 2014 it delisted the airline after decades of losses and summarily sacked 6,000 workers. The then government also enacted MAS Act 2014, ostensibly to facilitate the rehabilitation of the airline but seen by many of its workers as being unjust.

MAS’ board of directors is led by Md Nor Yusof, chairman of the airline and Malaysia Aviation Group. He was the managing director of the carrier from Feb. 2001 to Mar. 2004 and subsequently sat on Khazanah’s board from Apr. 1, 2006 (no, this isn’t a joke).

MAS’ board comprises 13 directors (including CEO Izham Ismail), several of whom are from Khazanah and a mish mash of corporate figures, including one who is known to be a very close ally of former premier Najib. Why a loss-making airline such as MAS needs 13 directors is beyond us, given that just next door, Singapore Airlines does perfectly well with only eight.

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Boeing, going, gone? Computer-generated photo of MAS Dreamliners courtesy of Boeing.

Mahathir has been critical of Khazanah’s management of MAS for a long time. He sarcastically remarked that Malaysians were “too stupid” to run an airline when Khazanah appointed German expat Christoph Mueller as the company’s first foreign CEO. Ironically Mueller lasted barely a year, resigning from the carrier due to “personal reasons”.

Read Mahathir’s caustic comments about Khazanah’s decision to assume full control of MAS here.

Mahathir has a sharp grasp of the aviation business and recognizes its importance to Malaysia. He started the Langkawi International Maritime & Aerospace (LIMA) exhibition in 1991 when he was the country’s fourth premier.

And let’s not forget that it was Mahathir the doctor who had a hand in the birth of AirAsia; he had the foresight and wisdom when he gave Tony Fernandes approval to buy the two aircraft from DRB-Hicom for a token MYR1 (USD0.25).

He was also instrumental in getting Boeing to set up a joint venture plant in his home state of Kedah with carbon fiber maker Hexcel in 2002, producing aileron composites for the 737 aircraft.

It’s unclear the extent to which Malaysia’s new leader will go to rid MAS and its stakeholder of its incompetent executives and dead wood. People close to Mahathir – once described by Australian premier Paul Keating as a “recalcitrant” – say he will leave no stone unturned.

What is clear is that for many directors within MAS and Khazanah, their days are numbered.

 

 

No “Pil Sung” for Korean Air

Incheon terminal

Bags of nuts sold here. Incheon Airport, Seoul. Pic/Shukor Yusof

It’s probably fair to say that Heather Cho Hyun-ah knows more about macadamia nuts than most people.

The former vice-president of Korean Air became infamous in late 2014 after ordering the flag carrier’s aircraft back to the gate at JFK New York as it was about to take off for Seoul. The reason: she was unhappy the nuts served in first class came in a bag, instead of on a plate. This incident has even made it into Wikipedia as the nut rage incident.

Being petulant seems to run in the Cho family. Last month her younger sister Emily Cho Hyun-min, a senior vie-president in Korean Air, was suspended following allegations she threw water into the face of an advertising manager.

But wait… the sisters’ mother is now being accused of behaving crudely and rudely, too. A video recorded in 2014 purportedly showed their mum physically harassing workers at a construction site being developed into a hotel owned by the Hanjin Group.

More seriously, the Cho sisters are not just being accused of being ill mannered; Korea’s Custom Service now say they are probing allegations the two women smuggled luxury goods into the country using Korean Air planes without paying duties.

Korean Air is slated to host the Association of Asia Pacific Airlines (AAPA) 62nd Assembly of Presidents on the resort island of Jeju on October 18-19. It remains unclear if Emily, Heather and their mother will be there to mingle with the delegates…

The Hanjin Group, one of the country’s biggest chaebols or conglomerates, is the owner of Korea’s flag carrier. Hanjin’s founder is Cho Choon Hoon, who was also Korean Air’s former head. His son Cho Yangho is the current chairman and co-CEO of the airline. The president and co-CEO of Korean Air is Cho Won-tae, Yangho’s only son and grandson of Choon Hoon.

Following the above incidents, there are murmurs amongst Korean Air employees for the airline to be run and managed by professionals (meaning non-Cho family members), especially since the carrier is publicly listed. Hanjin Group controls about 30% of the airline while Korea’s National Pension Service has a 13% stake.

There have increasingly been calls for the flag carrier to cease being called Korean Air, as it is majority owned by the Cho family, and not the Korean people.

Jin Air

A Jin Air B737 at Gimpo Airport, Seoul. Pic/Shukor Yusof

Interestingly, since the historic meeting between South Korean president Moon Jae-in and North Korea’s leader Kim Jong-Un on April 27, there’s widespread discussion within the Korean aviation community of a (potential) unified airline for the two Koreas. This came after Pyongyang made a request last week to the International Civil Aviation Organisation (ICAO) to open up new international air routes.

Not surprisingly this has sparked a lot of speculation on North Korea’s appetite to open up. But all things being equal, a joint national airline is something that is far off. The immediate thing that needs to happen before there’s any talk of any collaboration is the official cessation of the Korean War and the removal of the Demilitarised Zone (DMZ).

Having said that, a Korean Air employee we communicated with recently perhaps spoke for many of his colleagues when he suggested (half in jest) the two Cho sisters (and maybe their mum) be posted to the national airline of North Korea, Air Koryo, to “learn some manners”.

Korean Air’s stock has been stagnant since the start of 2018, and closed Friday at KRW34,150 (USD32.15) per share while that of its 100%-owned low-cost subsidiary, Jin Air, ended at KRW32,150. From an equity perspective Jin Air is performing better than its parent, with its stock price gaining almost 20% since January this year.

Jin Air operates six domestic flights and 26 international destinations, including Kota Kinabalu and Johor Bahru in Malaysia. It operates four widebody Boeing 777-200ERs on its long-haul flights. The airline’s market cap is around KRW500 billion, smaller than its discount rival, Jeju Air with a market cap of KRW740 billion.

*Pil Sung: In Korean it means “certain victory”

 

 

 

When Boracay was not a cesspool

Boracay beach rainbow 1991

White Beach, Boracay, January 1991. Pic/shukor yusof

Twenty-seven years ago Boracay had no airport, no Internet connection, no big hotels, no crowds. It had a solitary bar along White Beach that served San Miguels for 50 cents a pop, accompanied by soothing sounds from the 80s. It was bliss.

We’ve not been to Boracay since then, so we can’t smell the cesspool that the Philippine president spoke of recently but it does look like things have gotten very nasty indeed.

Like Bali in Indonesia, Phi Phi in Thailand and many other resort islands around the world, Boracay is plagued not just by plastics but by parasitic peripatetics. The photos of Boracay in its current condition paint a sorry state of affairs. Can the proposed six months of zero tourism fix it?

The airlines that fly into Boracay Airport (also known as Caticlan Airport or by its code MHP) are undoubtedly feeling the brunt of President Duterte’s edict.

The affected carriers include Air Juan, AirSWIFT, Cebu Pacific, Philippine Airlines (PAL Express), Philippine AirAsia and Skyjet.

Air Juan said the Boracay/Caticlan routes account for some 15% of its business.

Cebu Pacific, the airline majority-owned by the JG Summit conglomerate, operates 180 weekly flights to the said routes. It has about 140,000 passengers confirmed for scheduled flights to Caticlan and Kalibo from April 26 to June 25.

PAL Express has five flights a day to the resort island from Manila, Clark and Cebu. Philippine AirAsia has some 100 flights a week to Boracay.

Boracay Fridays 1991

Fridays resort, Boracay, in 1991. pic/shukor yusof

To puts things into perspective, Boracay contributes PHP56 billion (just over USD1 billion) to the Philippine economy. It is, by a long distance, the most popular destination in the Philippines.

The Philippine government has estimated a loss of up to PHP20 billion (USD385 million) for the six months closure. Some 35,000 workers, mostly on Boracay itself, will be affected.

President Duterte has said the displaced workers will receive payments from a PHP2 billion (USD38.5 million) fund. Whilst money and losses from tourist receipts will be severe, Boracay is in serious need of repair.

When we first visited in late January in 1991, the number of tourists that traveled to the archipelago the year before was a mere million. Last year (2017) the Philippines played host to almost 7 million visitors and a third of those (over 2 million) came to Boracay.

The island is tiny, just 4 square miles. Bali by comparison, is 2,200 square miles! Boracay has a resident population of just 30,000.

Access to Boracay in 1991 wasn’t easy. One had to fly from Manila to Kalibo (about an hour), take a bumpy 2-hour ride on a jeepney to Caticlan port and then hop onto an outrigger (known locally as bangka) for about 15 minutes, before arriving on the island (one has to wade in seawater to get ashore as there wasn’t a jetty).

Fridays Boracay, where we stayed for two nights almost three decades ago, sits on the exquisite White Beach, with its fine, almost salt-like sand.

In 1991 Fridays was a row of simple, elegant chalets with hardly any tourists. Today, Fridays boasts of an outdoor pool, beachfront bar and of course, free wifi. TripAdvisor reckons it is worth four stars.

Despite its serenity and splendour, Fridays hides a dark secret. One of its founding owners was found murdered in Manila in a case that has yet to be resolved.

And in 2004 three high profiled, wealthy Europeans and their domestic helper were stabbed to death at a luxury villa in Boracay, purportedly by robbers.

Boracay horse riding 1991

not much on offer in 1991 in boracay: horse-riding and seasports. pic/shukor yusof

How to save Boracay then? Like Bali and Phi Phi, ecological disaster awaits Boracay, if it hadn’t arrived already. Sustainable tourism is the way to go but that’s unlikely to be practised in these once pristine islands.

There are 7,600 other islands in the Philippines, perhaps tourists can be enticed to go to some of them? Part of Boracay’s many problems is partly self-inflicted, too.

Earlier this year a Macau-based company, Galaxy Entertainment, inked a USD500 million deal with the Philippine government to build a casino along the beach.

Ironically the boss of the gaming firm met with President Duterte in December 2017 to discuss and get approval for the project.

 

 

 

Beware the 25% tariff-ic impact

K66674

Not a-ok… China’s Okay airways ordered 15 B737s in 2017. Pic/boeing

 

China signalled it is ready to cut purchases of Boeing aircraft after announcing it is imposing 25% tariffs on single-aisle planes weighing between 15 and 45 tonnes. The immensely popular B737 family of aircraft will be affected.

Beijing revealed its retaliatory plans on April 4, after Washington declared a 25% tariff on about 1,300 Chinese products.

Read our comments on Bloomberg regarding the implications of the dispute.

China’s Ministry of Commerce gave no date for the 25% hike; Chinese officials said it depends on what the US president does and how he reacts to duties placed on Chinese products.

Here’s CNN’s take on the developing story.

Last year Boeing delivered 202 planes to Chinese carriers and half of those were in the narrowbody (B737) category. China is such a huge market for Boeing that B737s sold to Chinese airlines make up a third of Boeing’s production.

In its Current Market Outlook released in Beijing last September 2017, Boeing predicted a demand of 7,240 new aircraft in China over the next two decades. That’s worth some USD1 trillion.

In 2016, the US sold China aircraft worth USD15 billion at list prices.

In May last year Boeing started work on a B737 delivery centre in Zhoushan. It’s slated to deliver its first aircraft end-2018. The plant aims to deliver between eight and 10 planes a month.

It’s unclear if Beijing would actually go ahead with the tariffs, with its trade and airline officials clearly preferring to avoid such a standoff. The CEO of China Eastern Airlines, however, warned it wasn’t afraid of a trade war and is prepared to change aircraft types as well as routes if it comes to that.

But make no mistake: there are no winners in a trade war. In this instance the US stands to lose more, not just Boeing but its airlines. Five US carriers fly directly to mainland China (see the table below).

And according to the US Travel Association, Chinese tourists to the US spend on average almost USD7,000 per trip – more than those of any major inbound market. In 2016 three million Chinese made trips to the US, an increase of 15% year-on-year.

Chinese visitors to US

A lengthy and messy trade war (or any other war) is likely to hurt the appetite for air travel.

Travel exports to China, i.e. spending by Chinese tourists and students in the US, and on US airlines, amounted to over USD33 billion in 2016. That’s more than any other country. This includes USD12.5 billion in education-linked spending by Chinese students.

China can inflict severe pain on its opponent. Beijing’s decision to boycott South Korea’s tourism industry over Seoul’s decision to install a US missile system in 2017 cost the Korean economy USD6.8 billion.

China had been the largest source of foreign tourists to Korea; half of the 17 million foreigners who visited the country in 2017 were Chinese.

As it is, US airlines already struggle to gain more direct flights (a protected market) to China. It’s a government-to-government decision on how many flights are allowed between both countries, and there’s usually more capacity than demand. In 2017, United cut flights to Xi’an and Hangzhou, citing poor demand.

There are 59 direct (non-stop) flights between China and the US at the moment. Imagine the fallout to the US economy if there’s a decline of just 10% in Chinese visitors to the US.

That said, China has to be careful in totally brushing aside Boeing. If Beijing completely stops buying the B737s, China loses its leverage with Airbus. It’s never wise to depend on just the one manufacturer.

Chinese carriers flying direct to the US

Air China China Eastern China Southern Hainan Airlines
IAD-PEK DTW-PEK LAX-CAN LAX-PVG
JFK-PEK SEA-PEK SEA-PEK ORD-PVG
LAX-PEK DTW-PVG DTW-PEK ORD-PEK
ORD-PEK HNL-PVG DTW-PVG SEA-PEK
SFO-PEK JFK-PVG    
IAH-PEK LAX-PVG    
EWR-PEK SEA-PVG    
HNL-PEK SFO-PVG    
ORD-PVG      
SFO-PVG      
LAX-PVG      
EWR-PVG      

US carriers flying direct to China

American Delta Hawaiian United US Airways
ORD-PEK LAX-CAN HNL-PEK EWR-PEK JFK-PEK
SEA-PEK DTW-PEK   IAD-PEK LAX-PEK
LAX-PVG SEA-PEK   JFK-PEK ORD-PEK
ORD-PVG DTW-PVG   LAX-PEK SFO-PEK
  JFK-PVG   ORD-PEK ORD-PVG
  LAX-PVG   SFO-PEK LAX-PVG
  SEA-PVG   IAH-PEK  
  SFO-PVG   HNL-PEK  
      EWR-PVG  
      LAX-PVG  
      ORD-PVG  
      SFO-PVG  

Airport codes

China

Guangzhou Baiyun International (CAN)

Beijing Capital International (PEK)

Shanghai Pudong International (PVG)

US

Chicago O’Hare (ORD)

Detroit Metropolitan (DTW)

George Bush Intercontinental (IAH)

Honolulu International (HNL)

John F Kennedy (JFK)

Los Angeles (LAX)

Newark Liberty (EWR)

San Francisco (SFO)

Seattle Tacoma (SEA)

Washington Dulles (IAD)

 

 

 

On board Malaysia’s first Legacy 500

Bugis Sedili front profile

Malaysia’s first Embraer Legacy 500 at Penang Airport. Pic/Shukor Yusof

 

Would you step into an aircraft with “666” as part of its registration – the number of the beast for those who are superstitious – let alone fly in it?

Malaysia’s first Embraer Legacy 500, a midsize business jet made by Brazil’s Embraer, arrived at Senai International Airport in Johor Bahru (JHB) after a long ferry flight from São José dos Campos around mid-March.

With triple sixes in the aircraft’s registration, the USD20 million private plane is the first medium cabin business jet with digital flight controls, based on fly-by-wire technology. It can fly at 45,000 feet and is powered by two Honeywell HTF7500E engines, touted as the “greenest” in its class.

Perhaps one of the best things about the jet is its range – 3,125 nautical miles, or 5,788 km, with four passengers. That means it can fly non-stop from JHB to Delhi (DEL), Perth (PER) or Tokyo (HND).

Endau Analytics was invited to review the jet this past week.

We took off late morning from JHB in clear, sunny conditions, with two pilots and five passengers. Destination: Penang.

The Legacy 500 can take off in just over 4,000 feet and with the runway at JHB at over 12,000 feet, it was a cinch for the plane to make a quick, swift getaway. Its maximum takeoff weight (MTOW) is 37,919 pounds.

Interestingly the Legacy 500 can land in around half that distance (4,000 feet), meaning this plane is perfect for many small airports in ASEAN.

Once in the air, the first impression is the stillness (very quiet) and the spaciousness (floor-to-ceiling is 6 feet) as well as its simple yet elegant bespoke interior.

We were kindly requested not to show the cabin interior by its owner, a low profile, unassuming businessman.

SY Legacy 500 copilot

on approach to penang airport in the co-pilot seat of the legacy 500.

The Legacy 500 has a fabulous cockpit. It sports Rockwell Collins Pro Line Fusion avionics, with four 15-inch displays, with options like paperless operations capability, auto brakes and the Embraer Enhanced Vision System, which includes a Head Up Display (HUD).

Our commander during the flight was Embraer trainer pilot Captain Luiz Salgado, who took us cruising at 32,000 feet at around Mach 0.8.

In about an hour we landed at Penang’s Bayan Lepas International Airport. The landing was smooth and quick, assisted by the jet’s carbon brakes and brake by wire.

Legacy side profile full

Malaysia’s first Legacy 500 on the apron at Senai International Airport. Pic/shukor yusof

Conclusion: the Legacy 500 is a private jet that punches above its class. At its list price, the jet is certainly value for money, with comfort level, safety and performance matching many aircraft priced higher.

By the way, here in Asia, the number 6 has a different connotation. Our Chinese friends are quick to remind skeptics that “666” or “liuliuliu” in Chinese means smooth or skilled.

 

 

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