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Firefly in a fix


The (uncertain) future is up? A firefly ATR72 sits on the tarmac at Subang Airport. pic/shukor yusof

When you name an airline after an insect, you had better made sure of its relevance to aviation. Fireflies, for example, live only a few weeks, just long enough to find mates and reproduce.

In retrospect, whoever decided to name an airline “Firefly” either: (i) never fully understood this loveable lightning bugs, or (ii) never quite see its connection to aviation (there is none).

Malaysia’s discount carrier Firefly was launched on April 3, 2007. It is a unit of Malaysia Airlines Berhad (MAB) and its raison d’etre was ostensibly to serve domestic towns within peninsular Malaysia as well as connect the main Malaysian cities to key neighbouring centres such as Singapore’s Changi, Medan in Northern Sumatra and Phuket in Southern Thailand.

On December 30, 2016 Malaysian newspaper NST reported that Firefly was going through a restructuring “due to the weak economic environment and overcapacity at Sultan Abdul Aziz Shah Airport”, also known as Subang Airport (SZB).

This doesn’t surprise us as we had already raised the red flag in early October over the problems facing Firefly. Aside from overcapacity, which has been attributed for the restructuring, there are several other factors that, in our view, have contributed to Firefly’s dismal performance (losing money in the past four years).

While airlines losing money is not uncommon, an airline not making money in 2015-16 – when oil prices were low and passenger numbers were high – doesn’t quite make sense.

So what ails Firefly, and can the problems be solved, soon?

Firefly’s woes are mostly inter-connected and are largely financial, political and technical, not necessarily in that order. More importantly, if Firefly is to be successfully restructured (if being the operative word), then it would necessitate several critical changes. One can’t make an omelette without breaking eggs…

Among the issues that need to be considered and act upon include the assets (in this case the ATR72-500/600 aircraft) as well as applying the best strategy for Firefly (and Subang Airport).


Firefly ATR72s at Subang Airport. pic/shukor yusof

People familiar with Firefly’s financial health say the airline’s bottomline is in quite bad shape, and that’s putting it mildly. Firefly is dependent mostly on one segment – SZB to SIN – so the decision by Singapore to move turboprop flights to Seletar Airport (from Changi) in 2018 will undoubtedly hurt Firefly.

At present Singapore makes up almost all of Firefly’s international capacity. The discount carrier is key to its parent airline (Malaysia Airlines) but is facing intense pressure from Malindo – the joint venture carrier between Lion Air and Malaysia’s NADI.

While this restructuring will improve Firefly’s load factors in 2017, it is unclear if it will lead to better yields, unless drastic, structural moves are made. Hence, Firefly will remain in a precarious position in the near term.

Both Firefly and Subang Airport present such a wonderful opportunity for Malaysia to demonstrate its ability to further develop and expand its aviation sector but this requires political willingness and ultimately, the knowledge to create and innovate…

And on that note, we wish all our friends a joyous and prosperous 2017!




Aviation is a force for good but coffee’s better

10 June 2016

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IATA outgoing chief Tony Tyler speaking at the 72nd AGM in Dublin on 2 June. Pic/Shukor Yusof

In his final Annual General Meeting speech as chief of the International Air Transport Association (IATA), Tony Tyler concluded that the airline industry is a “force for good.”

However, he also noted that, on average, airlines will make only USD10.42 for each passenger carried. He continued: “In Dublin (where the event was held) that’s enough to buy four double espressos at Starbucks.”

Aviation bosses are fond of making comparisons with Starbucks. This year, airlines will make just USD5.60 for every USD100 in sales, compared to over USD11 at Starbucks. What does it tell us? That it’s incredibly tough to make decent money in the airline industry.

Never mind that IATA expects a collective net profit of almost USD40 billion for 2016 (from a revenue of about USD717 billion); Asia Pacific carriers are expected to post a USD7.8 billion profit this year, up from USD7.2 billion in 2015. More importantly, there will be more (over)-capacity, forecast to grow 9.1% this year, ahead of demand that’s going to grow around 8.5%.

According to IATA’s latest Airlines Financial Monitor global airline share prices fell by 3% in May, and almost 11% lower since the beginning of 2016. And that’s despite an environment of low jet fuel prices. Interestingly, according to this article in The Street – the 10 best airline stock this year, with the exception of top-ranked Ryanair, are all in North America.

Why are Asian airline shares lagging? One of the reasons is there’s just too much competition, very intense competition at that, too. And there’s just not enough appetite among investors for airline stock.

Just look at some of the examples: When Garuda Indonesia listed in January 2011, its IPO price was IDR750 and the stock has languished mostly below IDR500 for a while now despite briefly touching IDR770 in mid-2012.

Then there was Bangkok Airways. It went to market in November 2014 at THB25 and on the first day of trading closed at THB22. The stock is currently hovering around the same level as its IPO price.

Even Cebu Pacific, in our view one of the better managed LCCs in the region, saw its stock faltered for much of the past 2-3 years, following an October 2010 IPO listing at PHP125 (Cebu shares now are just valued at PHP100 apiece).

So it is perhaps unwise for VietJet, the rapidly growing LCC from Vietnam, to go to market this year if airline IPOs in the past 6-7 years in Asia are anything to go by…

Starbucks, meanwhile, is looking quite good at around USD55-56. The coffee company is partnering with Anheuser-Busch to make, bottle and distribute ready-to-drink teas (yes, teas!). In early May, Goldman Sachs raised its target price to USD72/share (from USD66/share). It’s a safe bet Starbucks will continue to make more profit than airlines.

Airbus Innovation Days

At an event in Hamburg end-May, aircraft manufacturer Airbus hosted over 100 guests from across the globe, providing an update on its planes and its financial health.

Airbus Chief Operating Officer (Customers) John Leahy in his usual, candid manner suggested a new name for Boeing’s potential new, stretched version of the B737 MAX – “we call it the Mad Max”. He also described Bombardier’s CSeries aircraft as a “cute little thing”.

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Airbus COO (Customers) John Leahy presents his case at Innovation Days in Hamburg. Pic/Shukor Yusof

Airbus is ahead of Boeing in the commercial aircraft market, with 53% market share. Not surprisingly, Airbus leads in the narrowbody segment, with the A320 family of aircraft having a backlog of 5,478 airplanes. That’s equal to 8 years of production at a rate of 60 aircraft each month.

In the widebody segment, Airbus reckons (and we concur) that the A350-1000 will lead the way in the coming years, ahead of Boeing’s 777X programme. Airbus claims the A350-1000 has a -23% cost per seat with a range of 450nm.

The case for the A380 remains as before, doubtful, in our view. This despite, as Airbus stressed, “an A380 takes off or lands every 3 minutes”. Emirates is by far the biggest operator of the A380 (142 in total, over 70 in operation) although its boss Tim Clark doesn’t expect Airbus to upgrade the superjumbo. His main concern, he said, “is that they stop producing the plane”.

That might not happen anytime soon but it could.

Singapore Airlines (SIA) was launch customer of the A380 and took delivery of the first plane in October 2007. SIA is reportedly unlikely to extend its lease on five A380s from lessor Doric.

It’s clear Airbus is building the A380s at a loss; output in 2017 could be as low as 20 planes. We’ve always been skeptical of the aircraft since its launch and have maintained that while it is technologically and aesthetically attractive to passengers, the A380 is a niche product and won’t make money for Airbus. See here.

The A380 is now entering an interesting phase – the second hand market. British Airways is reportedly looking for used A380s while Malaysia Airlines (MAB) is now having second thoughts about flogging the big bird. MAB appears to have shelved plans to sell the A380s and instead use them for charter services.


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A BA A380 at Finkenwerder Airport, Hamburg. Pic/Shukor Yusof

That said, we know of a couple of leasing companies who feel they can make the A380s work in the secondary market. This might include placing the aircraft with existing A380 operators or the possibility of new operators such as Iran Air. The A380 seems to still have some life in it yet. But only just.

Auf Wiedersehen, Mueller!

20 April 2016


Passengers leaving a MAS B737-800 Pic/Shukor Yusof

In an interview with Malaysia’s New Straits Times on 2 March 2016 (Getting the basics right), Malaysia Airlines Berhad (MAB) CEO Christoph Mueller professed that the restructuring of the airline was more difficult and likely to take longer (than he or anyone anticipated) because the carrier had embarked on wrong strategies and poor execution.

He stressed: “We need to get the basics right.” Yesterday, seven weeks after making those remarks, Herr Mueller threw in the towel. He is leaving, he says, due to “personal reasons beyond my control”. We aren’t quite sure what his “personal reasons” are, but suffice to say he is constrained by these “personal reasons” that he must have felt he couldn’t achieve anymore than what he’s already done to turn the carrier around.

Mueller officially started work on 1 May 2015. He had immersed himself inside the airline as early as January 2015, meeting staff and learning more about the company and what ails it. Now, not even halfway into his three-year contract, the CEO has quit. And to think this was the man the Malaysian media and Khazanah Nasional (MAB’s sole shareholder) touted as the best person to help the airline. Khazanah’s MD said emphatically of Mueller: “Christoph is the best candidate…” and this local newspaper trumpeted Mueller’s appointment as “German precision…”

Mueller’s departure – for whatever reason – makes a mockery of Malaysia Airlines and its restructuring. It is utterly disgraceful. So the best candidate is now no more. What now? Go for second best? Who is second best, or third best, after Mueller?

One of Mueller’s tasks, according to the Khazanah MD, was to groom a local successor. It does not appear Mueller has done that – if he had, then Peter Bellew wouldn’t be acting boss now…

Mueller was described by many as a man who had nerves of steel and with turnaround skills that were second to none. John Strickland, a renowned analyst and aviation consultant had this to say of Mueller: “He’s got really superb real-world experience facing and overcoming challenges”. (Man who can save Malaysia Airlines) Alas, whatever Mueller’s facing personally now appears to be harder for the former soldier to surmount and overcome.

We have been inundated with many queries since Mueller’s resignation was made public on how his exit might affect MAB’s restructuring and if it could alter the dynamics of the company’s transformation in terms of morale, for example. In our view, the restructuring will continue as planned given that Khazanah has already clearly and categorically outlined its targets (Rebuilding a National Icon-The MAS Recovery Plan). Whoever replaces Mueller will continue with the mission, irrespective of whether the mission has merits.

As for morale, it would appear employees have been demoralized well before the tragic events of MH370 and MH17. The loss of those aircraft only served to further dampened their spirits.

The point is, the next MAB boss (he or she will be the seventh CEO in the past 14 years) will have to execute the rebuilding of the airline according to how Khazanah sees fit i.e. implement the measures in the Recovery Plan.

Could someone be tempted to walk into the cesspool? Why not, if the money’s right. It’s no secret that to entice anyone to run MAB, one would need to pay a premium… Mueller was paid some EUR1.5 million (MYR6.6 million) in his final year at Aer Lingus. It’s a safe bet that he wouldn’t have left Dublin for Kuala Lumpur and risk his reputation if the money wasn’t worth it.

According to the Recovery Plan, the new airline is expected to be profitable by end-2017; Mueller is aiming for breakeven in 2018 and said his “biggest problem is that the day has only 24 hours and the week has only seven days.” (see here)

Be that as it may, the saga continues at Malaysia Airlines. For Herr Mueller, we wish him all the best and may he enjoy the fruits of his labour. To paraphrase Mueller’s sign-off in his memo to MAB staff dated 19 April, “the show (wayang?) must go on!”

Welcome to Endau Analytics

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Selamat Datang!

Endau Analytics is an advisory firm offering a range of aviation-, economics- and strategy-related ideas and analytical skills, helping business people and policy makers comprehend key developments and trends in the marketplace.

Our familiarity of the Southeast Asia region – from all perspectives – enables us to provide practical and profitable solutions, and ensures that our analyses and recommendations are uncompromising and of the highest quality.

Endau Analytics comprise a small but experienced team that come from a diverse background, primarily in aviation and finance. Our aim is to  provide accurate and independent forecasts within our core areas of expertise, allowing individuals and companies the context they need to evaluate opportunities and eventually make critical decisions.

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