7 March 2016
“History is the sum total of the things that could have been avoided” – Konrad Adenauer
8 March 2016 marks the second anniversary of the loss of a Malaysia Airlines Boeing 777-200. Nobody can say for sure what actually happened to MH370 or the 239 people on board it. Maybe one day we will know. Maybe we will never know.
What we do know is that Malaysia Airlines Berhad (MAB), as the carrier is known today, is no longer the airline it once was. What was it before? To answer that, one needs to take a flight back into history to try and understand how a flag carrier went from a global airline to a regional one in less than two decades.
Some 18 years ago, on 30 May 1998 (see excerpts below), we attended a Malaysia Airlines (MAS) company briefing held at its offices in Kelana Jaya, in a suburb not far from Kuala Lumpur. The briefing was an annual event to inform both the media and the investment community how the airline had fared in its last financial year, which was then for April 1997 to March 1998.
The summary of the financial figures was made by then MAS executive vice president (Group Finance), S. Suppiah. MAS made a profit (MYR250 million) for the1996-97 financial year but lost MYR225 million for 1997-98. However, this wasn’t a surprise given the Asian financial crisis that severely impacted many Southeast Asian economies during that period.
Between 1997 and 1998, many other airlines in Southeast Asia also suffered gravely due to decline in traffic demand and an escalation of costs brought about by massive forex losses. For instance, the MAS Group suffered MYR3.5 billion in translation losses that financial year. Much of these were due to aircraft financing (denominated in USD).
Nevertheless, MAS continued to grow then. In the same year it took delivery of six B777-200s, three B747-400s and a B737-400 while deferring delivery of three B747-400s. On top of that, the airline introduced twice weekly services to Cairo (Egypt), Davao (the Philippines), Shanghai (China) and Zagreb (Croatia).
At that time MAS flew to 77 international destinations (63 operated by the carrier and 14 by other airlines on code-sharing and joint operations). At home, it flew to 18 main towns and 18 rural stations, mostly in East Malaysia.
How did an airline with such an enviable and wide network and connectivity shrink in less than 20 years? Apart from London, MAS no longer flies to Europe. It stopped flying to Los Angeles and New York several years ago. The furthest it will fly now is to Sydney in Australia.
There is no single factor that contributed to the decline of the airline, in terms of size, profitability and credibility. For the past 20-plus years MAS had been widely acknowledged as having among the best cabin crew in the world (as seen from countless Skytrax awards), yet this did not often enough translate into real money at the end of the financial year.
In our view, the airline was poorly managed for the best part of the last two decades. Between 2000 and 2015, MAS has had six managing directors, including its latest one. Five years ago The Star newspaper’s Anita Gabriel (now with Singapore’s Business Times) wrote an interesting article here.
MAB’s competitors in the region, such as SIA, Garuda and Cathay Pacific, have done well with half that. More importantly, five of the six MDs were not from the rank-and-file within the airline. It’s unclear who is being groomed as successor to the current chief but if the company’s recent history is anything to go by, it’s not worth losing sleep over.
Unlike low-cost airlines, many successful flag carriers are headed by CEOs who have been around for at least 20 years in the company. This is especially true for profitable companies such as SIA and Cathay Pacific (from the Swire Group) and for Northeast Asian airlines (Asiana, Korean Air, Japan Airlines and All Nippon Airways).
What an executive who has been around the company for 10-20 years brings is continuity and a certain degree of rapport with the rest of the staff within the group. There is no substitute for a boss who has been through a company as a rookie until the board level in terms of his/her intimate understanding of the vision and values, or the lack of it.
Unfortunately for MAS, many of its able and best are no longer with the company. Over 1,000 ex-MAS employees are currently plying their trade with Qatar Airways, Emirates and Etihad. Many hold high positions and are unlikely to be enticed back by the prospect of working for a regional carrier, with regional wages. In short, there’s little, if any, talent left within MAB to ensure the carrier can compete and develop effectively.
It’s unclear what MAB wants to be. It can change its livery, its colours, its motto and whatever else, but if the mindset remains unchanged, no amount of money or turnaround experts can help the company. There are currently 13 directors on MAB’s board, many remnants of past administrations when, in contrast, there are just nine on SIA’s board.
Then again, this is the same airline that implemented a ban on check-in baggage to Amsterdam and Paris due to “unseasonably strong headwinds”, and thinks the “bucket list” is an apt title for one of its promotional campaigns.
Apart from shedding jobs, cutting its fleet size and renegotiating vendor contracts, it would appear nobody envisions what the airline might look like in 10 years’ time, or how the ever-changing aviation landscape might impact on a severely depleted company (in terms of morale and talent) once the days of cheap oil are over and done with.
MAB doing OK… Really?
On 4 March 2016 MAB released an update that was long on ideas but short on details. The company said available seat kilometer (ASK) for its second financial quarter ending 29 February (2QFY16) improved by 10% year-on-year. It also trumpeted its on-time performance (OTP=punctuality), which hit a high of 100% on 17 February domestically.
However, there was no mention of yields, which is a better gauge of how an airline is performing, or profit and loss (P&L). The quarter in question included December 2015, a traditionally busy period for most airlines as it coincides with school holidays and Christmas/New Year travel. And not surprisingly, loads were up (350K) during the period leading to Lunar New Year.
MAB said it had also successfully renegotiated aircraft lease rates with operating lessors, but again did not specify the savings. As of end-2014 the airline was paying in excess of MYR1.3 billion for around 30 aircraft, well above the market rates. There was also no mention of debts or finance charges (in 2013 it was close to MYR500 million).
As for its six Airbus A380s, MAB said those would go for maintenance and would be out of commission for the rest of 2016. The pertinent question though is, how much is MAB losing being stuck with six unproductive A380s? It’s all well and good to cite OTP and gains made from flogging off assets and contract renewals, but is MAB making money operationally?
We’ve seen how MAB has evolved in less than 20 years – from a proud airline that once flew to all the continents – to one that is struggling (“very ill”, according to its current MD) to find its place in a more competitive, more unforgiving market.
Again, if history is any indication, it is evident MAB has learned little from the past, especially when management seems uncertain how to make the airline relevant again, other than the usual slicing-and-dicing. Sadly its mid- to long-term future, under the current circumstances, looks almost as bleak as the possibility of finding the missing MH370.