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Malaysia Airlines Berhad – What Is Your Raison d’être?

Malaysia Airlines Berhad – what is your raison d’être?

31 December 2015

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MAS Boeing 777-200ER at Paine Field Airport, Seattle.

There are close to a thousand ex-Malaysia Airlines – now known as Malaysia Airlines Berhad or MAB – employees plying their trade in the Gulf today. They work as pilots, cabin crew, engineers, aircraft technicians, and in various other segments of the airline chain. Almost 300 are currently living in Doha, employed by Qatar Airways (QR).

For ground staff and office workers, they work Sundays to Thursdays each week, from 7am to 3.30pm daily (Fridays-Saturdays are weekends in the Gulf). For many, their contracts stipulate 30 days of annual leave and, on top of that, an extra 8 days for Aidil Fitri. They are provided accommodation, cars and other utilities. Their children’s educational expenses (up to 19 years old) are also covered, along with medical insurance, dental visits and so on. And there are no personal income taxes in the Gulf. They are paid in Qatari Riyals (with a fixed exchange rate to the USD).

Ex-MAB staff working for Etihad (EY) and Emirates (EK) get similar deals. It’s a good life and one these Malaysians richly deserve because, as many of them said: “talent and hard work are rewarded accordingly…” And talented Malaysians are directly contributing to the successes of QR, EK and EY, among the best carriers in the world today.

The situation at MAB unfortunately, is dismal. Between 2011 and 2013 the airline once known as MAS lost over USD1.2 billion. In 2013 it returned a negative 4% operating margin; it was the 3rd worst performer in the world that year (the other two were from India), according to data compiled by Airline Weekly, in a year where airlines averaged a 5% margin. In our estimates, the airline likely has lost in excess of MYR20 billion between 1995 and 2015.

What ails the national carrier? 

The carrier has not been profitable for years. To set the record straight, this had little or nothing to do with the majority of its 19,000-plus workers (figure from MAS annual report 2013). We do not dispute that this number is large for an airline of MAS’ operations but the reality was that the carrier’s fall had more to do with shoddy management and a lack of vision – a strategic failure – rather than a bloated workforce.

MAS was consistently voted as having the best cabin crew for many years. It had an excellent cockpit crew, too, and until the tragic incidents involving the loss of two Boeing 777-200ER aircraft in 2014 (which can’t be blamed on its pilots pending conclusive evidence), had a better safety record than its more illustrious rival, Singapore Airlines (SIA).

The fall of the airline was largely due to the inability of successive senior executives over the past 12-13 years to comprehend trends in a constantly evolving and complex aviation industry. This was further exacerbated by hubris – acquiring six Airbus A380 aircraft when there was absolutely no economic reason to do so (see here), as well as aggressively expanding capacity by adding some 20 narrowbody aircraft at the start of this decade when demand wasn’t there.

Another decision that caused the airline’s finances to be compromised was management’s move between 2008 and 2013 to lease aircraft. In 2008 alone leasing costs were almost MYR2 billion. By end-2013 leasing and finance charges plus debts caused the company’s cashflow to be acutely affected.

A closer look at the leasing costs for 2013 raises questions (see our compilation MAS 2005 to 2013 Historical Operational Figures). For example, a total of 24 aircraft were on lease that year and the annual lease amount was about MYR1.3 billion. These comprised 21 Boeing 737-800s and three Airbus A330-300s. The monthly rental for a B737-800 on average in 2013 was between USD350,000 and 400,000 while an A330-300 between USD800,000 and USD1 million. It’s unclear how MYR1.3 billion were spent on 24 aircraft in 2013 given the market rates for those models during that period.

In its first quarterly update (MAS Recovery Plan Quarterly Update (1 September – 30 November 2015)), MAB stated that most aircraft leasing contracts are in the hands of the old MAS, which is under administration. “The new airline will only permit leasing agreements at competitive market rates. This process of contract renegotiation will continue into 2016,” it added. This supports our theory that the airline had in past years leased aircraft well above market rates – resulting in a difference of hundreds of millions. Can someone please explain why?

However, it isn’t surprising that MAS got its leasing business awry. Its majority shareholder then, Khazanah Nasional, apparently got entangled in the leasing world, too, judging from an article in FOCUS Malaysia of Dec 6-12, 2014 (see below). Penerbangan Malaysia Berhad (PMB), a leasing company owned by Khazanah, reportedly lost almost MYR2 billion! Talk about the blind leading the blind…

And this is where it gets more bizarre for PMB… According to the same article: “2010 accounts filed with the Companies Commission of Malaysia show a huge discrepancy in that its revenue – previously stated as being MYR13.05 billion – was restated in its 2011 accounts as being just MYR588.04 million! Net profit for this period was also restated, from MYR382.87 million to MYR129.45 million.”

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FOCUS Malaysia Dec 6-12, 2014.

The airline also felt it necessary to spend over MYR1 billion in selling and marketing (advertising) for financial year 2013 at a time when it was already hemorrhaging a huge amount of cash. The irony is that having spent so much in 2013 on marketing and buying/leasing aircraft, MAB today has decided to significantly shrink its size.

In our opinion, such careless and profligate behaviour – paying for leases above market rates along with mounting debts and massive finance charges – were largely to blame for the deterioration of the airline. And in a sign that management and the board had lost touch with reality, MAS continued to pay its senior staff exceedingly generous annual compensations in the last few years of its existence, even when it was bleeding on average MYR5 million a day.

In 2012 its executive directors received MYR2.639 million in remunerations. In 2013 total directors’ remunerations were MYR2.431 million (see annual report 2013 pages 90-91). There were even unconfirmed reports that several general managers were paid over MYR50,000 a month!

Is MAB a necessity?

Giovanni Bisignani, the former CEO of the International Air Transport Association (IATA) in 2008 urged governments not to protect airlines. “Governments around the world… say they cannot lose their flag carrier. I am always telling them that the flag on the tail is killing our industry.”

There’s been much debate – for and against – on saving Malaysia’s flag carrier since the unfortunate events of MH370 and MH17. In analysing the need to have a national airline (MAB) we must examine what impact its existence (and non-existence) has on the economy. Also, its effect on the traveling public and if there is a sufficiently compelling case to use public funds to support a carrier that has consistently lost money.

We acknowledge the arguments for having a flag carrier, namely that it doesn’t serve just a commercial purpose but also a diplomatic one, ferrying officials to many cities where Malaysia has representations. But then again, with the current CEO determined to slash MAB’s network, what is left of the national carrier other than pride and the perceived importance of having an airline carrying the country’s flag?

Perhaps the more persuasive argument is that MAB is not just an airline. It is linked to the broader economic environment. For instance, its contributions to KLIA and other airports throughout the country; to freight services; to tourism and to job creation. In other words, its impact on Malaysia’s overall financial health.

That said, can Malaysia live without MAB? Are there better, cheaper alternatives than to maintain a moribund airline? Why spend MYR6 billion only for the new entity to be sliced and diced into an insignificant airline? Does Malaysia, with a population of 30 million, really need two major carriers (MAB and AirAsia), not to mention Firefly, Malindo, Rayani?

Our view is that MAB in its current shape and form has become irrelevant. Not just for Malaysia, but for the entire industry. We live in a profit-driven world, and no amount of pride and sentiment can overcome the intense competition and reality of the current airline industry, a dog-eat-dog world, the survival of the fittest.

Hence, while we recognise the desire to maintain a national airline had prompted yet again another costly (MYR6 billion) restructuring, there is a case to be made about prioritising public expenditures, where the government already faces immense pressure to allocate (increasingly limited) resources to other more pertinent areas such as education and healthcare.

The MYR6 billion “investment” on resizing the national airline, in our opinion, is unlikely to return much benefit (if any) in the long-term, judging from its pathetic past efforts at revamping itself, including this MAS BTP.

Thanks for the memories…

We remain skeptical the injection of public funds into MAB would result in a more competitive and competent national airline in the future. This is mainly because the talent pool within the airline is severely depleted. A large chunk of Malaysian Aviation Talent (MAT) now resides in the Gulf, churning out profits for their generous and more importantly, egalitarian employers.

Those sentimentalists among us, especially the benevolent Tan Sri Abdul Aziz Rahman, widely regarded by past and current employees as the national carrier’s most accomplished CEO, will no doubt rue the decline of what was once a very good and respectable airline. On the other hand, some senior MAS managers will look back fondly and miss the “good old days”, when they experienced many memorable moments representing the airline at home and abroad, at the company’s expense.

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Malaysian legend P Ramlee on board MAS business class

But the world has changed: and people who fly today mostly don’t care much if MAB rebrands itself with a new livery or a new logo. Many people just just want to fly on a safe and responsible airline, preferably at low prices. It matters little to them MAB has inked a code-sharing accord with Emirates, touted by many as a “game-changer” or “groundbreaking”.

Code-sharing with Emirates doesn’t make MAB a better carrier or guarantee its survival long-term. Rebranding won’t change anything. It just buys (at MYR6 billion) more time… while newly appointed senior executives (again this suggests a dearth of talent within the airline that it needs to parachute in outsiders) find their footing.

The airline says it is investing in talent. “The new team is an important building block in an overall strategy of having world class and diverse talent that reflects the company’s global business and operations,” it proclaims on its corporate website (see here). Seriously, “global” and “diverse” (they’re mostly ex-CIMB, Khazanah and Sapura Kencana)? And how can one be world class when one isn’t even head of the class at home? What kind of koyok are you selling us?

It’s apparent MAB will be morphed into a regional airline, given its latest decision to decentralise loss-making operations by moving 18 Boeing 737-800s away from KLIA – to Kota Kinabalu, Kuching, Miri, Labuan, Kota Bharu, Penang and Johor Bahru by March 2016.

MAB thinks it can raise the B737-800 utilisation by up to 20%. More importantly, the move is aimed at cutting staff costs by avoiding the need to overnight crews in these towns as it did before. This clearly is budget airline strategy, focusing on regional bases in the Peninsular and East Malaysia, hoping it might drive tourism and local economies.

There’s much more to be said and learned from MAB’s sad slump into mediocrity, but that’s another story for another day. Here’s wishing everyone in the industry good health, many joyous moments and be blessed with prosperity in 2016.

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