Endau Analytics

It’s “engagement” more than “investment”, says Malaysian minister of Boeing plane purchase

Tok Pa 111017

Mustapa Mohamed: Criticisms of Boeing deal misplaced, misinformed. Pic/shukor yusof

A month after Malaysia’s prime minister stunned the world by revealing his country, whose GDP is many times smaller than that of California, was buying Boeing planes to help strengthen the US economy, a minister who accompanied him on that trip has said the main purpose was actually to “engage with the Americans”.

During a networking dinner with Malaysian professionals held at the Malaysian embassy in Singapore on Oct 11, we asked Mustapa Mohamed, Malaysia’s trade minister: the premier said Malaysia Airlines was buying Boeing planes to help prop up the US economy but the airline’s CEO has clarified the planes will be leased, not purchased, thus it wasn’t an investment. So who’s telling the truth?

“Well, let me put the record straight… it’s all very technical,” the minister replied. “First of all, we have a big trade surplus with the US, some USD25 billion. Second, we’re a small country, so we need to invest overseas. Third, Malaysia Airlines’ planes are old and the airline needs to improve its bottomline.”

The minister is 67 years old. But he looked sprightly and although we doubt if he could dance, he waltzed around our question for about 6-7 minutes with such relative ease and composure (without actually answering) it was almost impossible not to like him. “There’s controversy surrounding the US trip, especially on social media, and the criticisms were misplaced, misinformed.”

And with that he deftly disarmed the pesky prober by moving on to his favourite topic: politics, a subject he clearly was more adept at than aviation. “Elections are just around the corner,” he teased, “and we’ve had an exceptionally strong economic growth in 2017.”

Go figure.

Boeing MAS MOU 0917

malaysians “engaging” with Americans in Washington DC on Sep 12. Malaysia’s trade minister is standing, second from left.

AirAsia to buy GE engines?

The trade minister also confirmed something interesting: that AirAsia was buying four GE engines over the next decade and that this was part of a package for maintenance, repair and overhaul (MRO) purportedly worth USD15 billion. See here.

There’s just one problem: this is 12-year old news and it’s USD1.5 billion over a 20-year period. AirAsia inked the deal with GE, which has a joint venture with France’s Safran, to make CFM engines used by the airline’s A320 fleet. Read it here.

Here’s confirmation AirAsia uses CFM engines and Rolls Royce engines for its A330 planes deployed by AirAsia X.



Yes, Prime Minister

Bellew with Najib & Boeing

can you pick out who is and who isn’t a “shrinking violet”?


When Peter Bellew first took the job of Group CEO of Malaysia Airlines (MH) on July 1, 2016 he said: “The goal will be to fly customers safely to places they want to go with great value fares and superior service on clean modern aircraft.” Read the statement here.

A year later this mission seemed to have changed. From flying customers to destinations they’d like to go to, Bellew now sings a different tune. The Star quoted him as saying: “If the stakeholders feel we should fly into the US, Europe or even Africa, then we will do that.” Read the whole article here.

Isn’t that remarkable? MH’s highest paid employee has succinctly revealed one of his KPIs (key performance indicators) is akin to that of a postman – to deliver what his paymaster wants.

In just one sentence Bellew has opened himself up to further scrutiny; now his detractors may have a reason to label him as a yes-man, a lackey, a stooge, rather than a commercially astute airline boss.

Anyone who has closely analysed or reported on MH would know the company was largely unprofitable in the past precisely because stakeholders meddled in its affairs, like telling management what aircraft to buy and where they should go.

MAS 1997-98

blast from the past – handout from mh’s analyst briefing in 1998. pic/shukor yusof

History of horrendous decisions

In May 2010 MH’s then CEO said he was thrilled the airline was starting twice-weekly flights to Dammam in Saudi Arabia, via Dubai. Less than three years later Dammam was axed, along with several other Middle Eastern cities.

Sadly, Bellew has fallen into the same quagmire.

If only he had studied the airline’s history he would have discovered one of MH’s perennial issues in the past was that it was often manipulated, misguided and misled by the whims and fancies of its stakeholders.

Indeed, the current prime minister himself confirmed the airline’s stakeholders had done the company in. “The history of Malaysia Airlines is fraught with horrendous decisions, and it was a nightmare inflicted on the airline by one of my predecessors,” he said.

The purchase of six A380s for USD1.2 billion (MYR4.9 billion) is a good example. Launching flights to cities with no prospects of profitability is another. Hubris is a word often associated with MH and for good reason.

Around two decades ago, while Bellew was busy establishing Irish Cottage Club in 1998 and later dabbling in online travel management, MH was already flying (at a loss) to, among other destinations: Beirut, Buenos Aires, Cairo, Male and Zagreb.

MAS route & fleet 1998

some of the places mh used to fly to 20 years ago. pic/shukor yusof

If Bellew had pored over MH’s chequered past he’d have found many things; destinations are often chosen and determined (by stakeholders) not for commercial reasons but for political mileage. Zagreb was in the flight schedule because Malaysia was the only country to send a battalion to Bosnia during the Balkan war (1991-2001).

What about Buenos Aires, what’s the value proposition of MH flying to Argentina then? Not much but Argentina is renowned for its horses and Malbec. Apparently some people within the airline’s stakeholders found riding horses on the Pampas therapeutic and well, you know, it’s fun to chill out 16,000km away from home, enjoying the tango and imbibing in a glass of red…

History is about to repeat itself. Allowing stakeholders to dictate where MH ought to fly or what its strategy should be is like giving liquor-laced chocolates to a recovering alcoholic, particularly when the stakeholders have had an atrocious history of interfering in MH’s operations, which partly led to its bankruptcy.

Not a shrinking violet

It makes us Malaysians ponder: did the stakeholders promote Bellew after Christoph Mueller left because of his airline skills or because they think he is malleable, with an uncanny ability to acquiesce? Can we trust him?

After all, this is the same person who bizarrely (and unrepentantly) banned checked-in luggage on flights to Amsterdam and Paris in January 2016. The reason: strong headwinds might cause MH planes to run out of fuel.

But Bellew told a Singapore newspaper he cares not what people, including Malaysians, feel. “If people aren’t happy there’s a foreign CEO, well, boo hoo. I’m a big boy. I should be able to take that. If you can’t, then you shouldn’t be on the job. This is not a normal job and it’s not for shrinking violets.”

His claim of being disinterested in “anybody’s politics”, however, have rung hollow. MH found itself inadvertently embroiled in a high stake, global political gamesmanship when the Malaysian premier assured the US president of an impending aircraft investment worth over USD10 billion within five years, money which would strengthen America’s economy. Or so it seemed.

Within days Bellew had to do some “damage control” – and he gave the game away when he revealed the purported aircraft purchases weren’t exactly that – MH was actually going to lease the planes, not buy them. So boo hoo, Mr Trump…

Project Amal

Here’s another interesting development currently being concocted by MH. Called Project Amal (initially known as Project Hope), the plan is to deploy six of MH’s loss-making A380s for use in transporting Hajj and Umrah pilgrims. A new separate entity (airline) has been formed, with its own management team and its own P&L. The project is slated to launch in 2019.

The initiative is commendable but the project also has another equally important purpose – to remove the A380s from MH’s books. The A380s have been bleeding the carrier since it first arrived, amidst much fanfare, in mid-2012 and are a big red blot on MH’s balance sheet.

Shifting the six A380s to another airline would, in one clean swoop, also mean shifting the burdensome assets to another vehicle. With the six A380s gone, there’s every chance MH could break even or even eke out a profit.

Smart, yes? Not really, because the A380s will remain in Malaysia and will likely continue to incur losses for the new company but who cares as long as MH and its CEO look good, right?


What’s going on, Malaysia Airlines?

MH 738 takeoff

an mh b737-800 taking off. pic/boeing


On Sep 20 Malaysia Airlines Berhad (MAB) managing director Peter Bellew told The Malaysian Reserve MAB would not pay for the acquisition of 16 Boeing aircraft, but rather leased them. This contradicted a statement made by the Malaysian premier on Sep 12 that “Boeing planes to be purchased by MAS… within five years, the deal will be worth beyond USD10 billion.”

Is this some kind of legerdemain to lull us into thinking Malaysia is making a major investment in the US economy, when all it really is, is Malaysia Airlines (MH) leasing some Boeing planes, plain and simple?

On Sep 15, when the PM arrived home at KLIA he reaffirmed his statement made at the White House and said: “The decision was made by MAS. I merely conveyed the message to US President Donald Trump.”

So what is it, MAB – did the PM not get a full briefing on how the aircraft are to be acquired, did he misunderstood or was it just a case of words being lost in translation?


boeing 787 dreamliners in mh livery. pic/boeing

Sweet Dreamliners are made of these…

In an email sent out to MAB staff on Sep 15, Bellew explained MAB had inked an MoU with Boeing in Sep 2017, switching eight of a firm order for 25 B737 MAX8 to eight B787-9 Dreamliners. On top of that, MAB also placed “purchase rights for an additional eight B737 MAX8, all while maintaining the total firm order at 25.”

The 737s will be funded through current progress payments along with sale and leasebacks done with international lessors. As for the Dreamliners, Bellew said the carrier plans to buy direct from Boeing and subsequently fund them via sale and leasebacks and operating leases with leasing companies.

At list prices, the 787s cost USD2.5 billion. Typically an airline receives anything between 20% and 40% discounts, depending on its financial strength and how badly the aircraft maker wants to sell the planes.

Nobody’s disputing the efficiency and economics of the Dreamliner but what’s uncertain is how it fits into MH’s game plan, if MH has one, that is…

Bellew claimed it’s being acquired to “add capacity to our widebody fleet and provide a high level of quality on our most lucrative routes.” From what it looks, the planes, which will start arriving in 3Q19, are being sought for use on routes that are as yet to be determined because MH’s network has shrunk considerably.

The initial Dreamliners are, according to Bellew, for use on Asian sectors; he emphasised that their range capabilities allow for flights from Kuala Lumpur to “any point in Europe” and “cities on the West coast of the USA.” The Dreamliner, he added, offered MH “great flexibility… over the next 20 years.”

Huh? On the one hand Bellew is keen for MH to stay ahead of the competition with new state-of-the-art aircraft. On the other hand, he suggested MH stick with the 787s 20 years down the road? Does anyone in the airline’s management seriously believe MH can make money offering premium seats from KLIA to the US west coast? Or any point in Europe, for that matter?

Why is MH investing heavily in premium products when traditionally strong premium carriers in Asia like Cathay Pacific and Singapore Airlines are struggling with theirs?


MH A350 in Toulouse. Pic/Airbus

Cutting capacity, adding capacity… A330, A350, A380…

The confusion doesn’t stop there. Bellew said in March this year he wants to cut capacity in the single-aisle segment while raising capacity in the twin-aisle fleet. If we understand correctly, he wants to cut capacity and then increase it?

“I need bigger planes. It’s kind of a no-brainer,” Bellew said in that article. What about the six A380s MH has in its fleet, each with almost 500 seats – are those not big enough for you?

As part of Bellew’s grand plan to make MH’s restructuring as the “greatest turnaround” ever, the company is taking no prisoners when it comes to other aircraft acquisition.

Two of six A350s on operating leases are slated to start delivery starting January 2018 (to London), and four more A350s will join the fleet by June 2018 ostensibly when MH reopens flights to Amsterdam, Frankfurt or Paris or maybe all three?

And that’s not all. The MH boss is on a no-holds barred shopping spree. Bloomberg reported he’s also going after Airbus A330neo planes!

MH’s desire to add widebodies is nothing short of mind boggling. It is already running a fleet of 15 A330 aircraft, including three A330-200 freighters and 12 relatively new A330-300s (see table below).

Malaysia Airlines A330 Fleet

Regn Build Year Type Engine Owner Financier
9M-MUA 2011 A330-200F PW4000 MAB
9M-MUB 2011 A330-200F PW4000 MAB
9M-MUD 2012 A330-200F PW4000 MAB
9M-MTA 2011 A330-300 PW4000 Standard Chartered
9M-MTB 2011 A330-300 PW4000 Standard Chartered
9M-MTC 2011 A330-300 PW4000 JSA Int’l Syndicate of banks
9M-MTD 2011 A330-300 PW4000 JSA Int’l Syndicate of banks
9M-MTE 2011 A330-300 PW4000 MAB BNP Paribas
9M-MTF 2012 A330-300 PW4000 FE Novus Fin 1 Ltd NordLB
9M-MTG 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTH 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTI 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTJ 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTK 2013 A330-300 PW4000 MAB
9M-MTL 2013 A330-300 PW4000 MAB DVB Bank
9M-MTM 2013 A330-300 PW4000 MAB DVB Bank
9M-MTN 2013 A330-300 PW4000 Sama Aircraft Fin 1 Ltd BNP Paribas
9M-MTO 2014 A330-300 PW4000 MAB

Data compiled by Endau Analytics

Bellew argued he needed new A330neos and used A330s to replace “older” B737-800s but where will all these planes fly to – China? We know the MH chief is extremely optimistic on Chinese traffic. “I will expect China to move from about 8% to 9% of our business currently to about 20% in the next two to three years,” Bellew told the media on the sidelines of Invest Malaysia 2017 recently.

But even if it does reach 20%, isn’t it unwise to splurge on all these widebodies, especially when MH is still a structurally frail airline? The best way, in our view, to make money from China is not by using widebodies but with A320s or B737s or even regional jets on some sectors between Malaysia and southern China. Don’t believe? Ask Tony Fernandes…

Remember, the airline industry is notoriously cyclical. This cyclicality is due partly to the relative high-income elasticity of demand for air transport services. Demand and revenue-cyclicality on airlines’ financial performances is multiplied many times by their financial leverage. In other words, interest-bearing debts surge. Before MH was delisted, it was paying around USD420 million annually on interest alone.

Airlines typically order aircraft when the going is good and take delivery of them when the economic cycle becomes bearish. Overcapacity will be worsened, resulting in many planes being stored.

In his email to staff, Bellew concluded by saying “management will continue carefully evaluating all options available to us to ensure our purchases make both business and operational sense.”

It’s hard to see how all these acquisitions make sense. Unfortunately for MH, old habits die hard, and this avaricious appetite for widebodies will likely do it more harm than good.


In the airline business politicians are best seen, not heard

Boeing MAS MOU 0917

Boeing’s Mou with Malaysia Airlines on Sep 12


“I think you all know that I’ve always felt the nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.” –  former US President Ronald Reagan, August 12, 1986


Thirty-one years ago and the words still ring true. The Gipper was an astute president and not ashamed to admit that many of the problems during his two terms in office were caused by the government’s long history of conflicting and haphazard policies.

On September 12 the Malaysian government, led by its prime minister (PM) and several key cabinet ministers went to the White House in Washington DC and announced that Malaysia Airlines (MH) would buy Boeing 787-9 and 737 MAX aircraft. At catalogue prices, the planes cost just over USD3 billion.

Regrettably the PM, perhaps unwisely advised, said this of the aircraft deal: “We want to help you in terms of strengthening the US economy… we intend to increase the number of Boeing planes to be purchased by MAS… We will also try to persuade AirAsia to purchase GE engines.

Additionally, he added that Malaysia’s Employees Provident Fund would make a sizeable contribution to the US economy by pumping “three to four additional billion dollars” in infrastructure redevelopment.

Predictably his remarks elicited a furore in Malaysia and understandably so as it appeared the investments were either to appease or to curry favour from the Americans.

Was there a political posture to the aircraft purchase? We think not but because the head of government said it, it is unfortunately perceived as such.

The fact is, MH had indicated its interest in buying widebody aircraft as far back as January 2017. It is well known in the airline industry MH wants to expand and was evaluating twin-aisle aircraft – either the Airbus A330neo or Boeing’s 787 Dreamliner.

Therefore, it didn’t really surprise the aviation community when the PM made that statement. What startled observers was: (i) him attributing the acquisition as a sign of Malaysia’s support of the US economy and (ii) the number of aircraft ordered.

The anger and allegations of political chicanery over the national airline inking a MoU with Boeing could have been avoided had the statement been made by MH’s managing director or its chairman or both since they were part of the PM’s delegation.

Think about it: why pay millions a year to a chief executive, fly him half way round the world to DC and not let him be accountable for the airline’s decisions and justify the move to buy planes to Malaysians back home?

The MH boss sings well and we believe he would have no problem serenading Malaysians on the virtue of spending a few billion bucks on Boeing aircraft. At an industry event in Manila last November 2016, the Irishman’s rendition of Stand By Me was pretty cool – check out this video.

Plane silly

No airline in its right mind would risk buying aircraft just to help create jobs in another country. It’s plane silly, pun intended. And Malaysians have the right to question the deal given that MYR6 billion of taxpayers money were used to bail out MH over two years ago.

This isn’t about the airline’s choice of Boeing aircraft, or even its ability to fund the planes. MH is fully backed by the sovereign, whose strong credit rating would provide easy and inexpensive access to the debt market. That’s not the issue.

The issue is about fiduciary duty. Given the airline’s tattered financial track record MH’s management has a responsibility to: (i) explain why it needs those aircraft, (ii) where it intends to deploy those aircraft, (iii) say if the planes are to be leased or purchased outright, (iv) assure Malaysians the assets would not end up like the A380s and finally, (v) ensure the purchase wouldn’t lead to uncontrollable debts (before it was nationalized end-2014 MH was paying close to USD500 million annually in interest alone).

The other burning question is this: why is the Malaysian government interfering in the running of AirAsia by trying to nudge it to buy GE engines? While it is a Malaysian carrier, AirAsia is a public listed company and answerable to its shareholders, not to Putrajaya.

Moreover, AirAsia is not the flag carrier and is being run competently. The airline makes purchases based on what’s good for the company and its equity holders, not on how it would benefit a certain engine manufacturer.

GE laggard

GE a laggard – could this be a reason to make Airasia buy GE engines? Grab pic taken off TV on Sep. 15

Pro aviation

The PM has been a staunch supporter of aviation for a long time, even when he held the defence portfolio. In his capacity as deputy PM, he personally welcomed an Airbus A380 prototype at KLIA in November 2005, after MH agreed to acquire six of the superjumbos.

Sadly the six A380s bought by Malaysia – which arrived barely five years ago – for over USD1 billion (MYR4.2 billion), have proved unsuccessful for MH. The A380s are now being refurbished (at great cost) for use on Hajj and umrah flights, a futile attempt in our view of trying to make something good out of the bad assets.

Although AirAsia is a huge success story, Malaysia’s aviation landscape is littered with the carcasses of failed airlines: Rayani Air, Pelangi Air, Silver Fly, Saeaga Airlines, Ked-Air… and the PM is well aware of it.

In March 2015 during the biannual Langkawi International Maritime and Aerospace show, the PM and transport minister witnessed a signing ceremony between a Malaysian company, Flymojo, and Canada’s Bombardier, for up to 40 regional jets. The PM made no public remarks then.

flymojo LIMA Najib March 2015

where’s the mojo gone to?

Flymojo was capitalized at MYR3 million and planned to have its bases in Johor Bahru and Kota Kinabalu. Its management team was helmed by chairman Alies Nor Abdul, coincidentally a former political secretary to the PM when he was deputy PM. Flymojo is believed to have lost its mojo and is now no longer active.

That the PM continues to be an active supporter of Malaysian carriers and the aviation industry is indisputable. Not many leaders pay such close attention to their countries airlines. Fewer still have the gumption to make tough decisions, even if it appears irrational and rash.

During a visit to China in May this year, he witnessed the MoU signing between AirAsia and Everbright Group and Henan Government to launch a discount carrier in mainland China. Much to his credit, the PM refrained from speaking publicly about it.


AirAsia Everbright Najib

airasia & china’s everbright group to form lcc jv



Adieu A380


Building the A380, from scratch. Pic/Shukor Yusof


“The more sand that has escaped from the hourglass of our life, the clearer we should see through it.” – Sartre

What would Jean-Paul Sartre make of the Airbus A380? Imagine, if you will, Sartre expressing his love for Simone de Beauvoir in the sumptuous Suite of a Singapore Airlines A380 as he coos, “Try to understand me: I love you while paying attention to external things. At Toulouse I simply loved you…”

In Toulouse today, they are more focused on profits than on philosophy, on “Love at First Flight” than on decoding what de Beauvoir means when she says, “One’s life has value so long as one attributes value to the life of others.”

It is a safe bet that Fabrice Brégier and Tom Enders, the two Airbus helmsmen, understand perfectly the philosophy of making money. Both know and recognise why the A380 hasn’t succeed and that it probably never will in years to come. But can Airbus turn it around?

The A380 programme is living on borrowed time, in our view. Inject a couple more billion euros in it or cut the losses? Airbus has broached this idea before – read it here. The European planemaker has cut A380 production to 12 in 2018 and eight in 2019.

A380 MSN 2 - a

the A380 MSN 4 while on a visit to changi in 2006. pic/shukor yusof


Last week the first A380 operated by SIA (the A380 launch customer) reportedly has been taken out of service. The airline said it plans to hand it back to its German owners instead of renewing the 10-year lease. Three other SIA A380s are also slated to return to the lessor by June 2018.

To rub salt to the wound ratings agency Moody’s has downgraded bonds issued by transport financier Doric due to worries over the fate of the A380 programme.

SIA took delivery of the world’s first A380 on October 25, 2007 amidst much fanfare and expectations. We’ve been skeptical of the A380 since Airbus first announced it was building it.

First, there wasn’t a market big enough for such a huge plane, so the economics were off. Even under the current climate of low fuel prices, it’s still costly to run the four-engined A380 – ask Malaysia Airlines or Thai Airways. Second, the trend is pointing to (more) people flying point-to-point, rather than from hubs. Third, there’s a case to be made of an over-capacity in long-haul flights.

Turn back the clock a decade ago and these were our comments on the A380 – here and here.

A380 wing Broughton

a cross section of an a380 wing at broughton, north wales. pic/shukor yusof


The A380 is a marvelous aircraft from a technology standpoint: cosy, efficient and quiet. It’s fun to ride in, too, especially on SIA and Qatar Airways, but definitely not on British Airways’ Club World – never understood how they could allow those odd backward and front-facing seats to be installed in the first place.

The A380 has mostly benefitted just one carrier in the past decade – Emirates – with 96 currently in service. Even SIA, with 19 in its fleet, has discovered the plane isn’t a cinch to make money. And so SIA deploys some of its A380s to destinations that appear tricky to extract good yields, such as Auckland, Hong Kong and Zurich.

Dubai-based Emirates has ordered 140 A380s, which is 40% or almost half the total A380s on order. It works for Emirates because Dubai is a mega air hub that connects passengers from say, the Far East or Australasia, to those in Europe and the UK (especially slot restricted Heathrow).

Unfortunately, for second-tier airlines such as THAI and Malaysia Airlines, this sort of strategy isn’t for them. So why on earth did they buy the A380s? They aren’t very smart carriers to begin with… does anyone seriously think the A380s will rake in money from Hajj flights?

To paraphrase Sartre, more money will likely escape from the Airbus hourglass, but can the folks at Toulouse see any clearer?

Cathay Pacific to be more “innovative” – is it just Hogg-wash?

CX screenshot innovation

Image: Cathay pacific. screenshot by Shukor yusof

In a tweet announced following its disastrous 1H17 results, Cathay Pacific Airways (CX) said it was “committed to be a more innovative airline for customers”. See the results here.

CX, which is majority owned by the Swire Group, posted a loss of HKD2.05 billion (USD262 million) for the six months ended June 2017, compared to a profit of HKD353 million for the same period in 2016.

When measured in terms of yield (the amount of money an airline makes from carrying a passenger over a kilometer), the picture looked even worse. CX’s yields continued to slump, down 5.2% to 51.5 HK cents. By comparison, Singapore Airlines’ latest yield stood at 10.3 Singapore cents, just over 1 SG cent higher than CX.

Rupert Bruce Grantham Trower Hogg – if there’s a prize for the poshest airline CEO name he’d probably win it – took over as new boss at CX on May 1 this year, and he vowed to return the carrier to “its winning ways”.

Innovation isn’t just a buzzword at CX. The airline takes innovation so seriously that it’s formed the Innovation Council, essentially a team of general managers with emphasis on using state-of-the-art technology to better streamline operations and customer comfort.

There’s no doubt CX has been innovative before, which led to it winning Skytrax’s coveted World’s Best Airline four times in the past 15 years.

And we are sure many flyers will agree that the Betsy Beer is one of CX’s most creative compositions. The amber nectar is supposedly “10% carbonated, which offsets the numbing of the senses in-flight for a lively sensation on the tongue”… And you thought being a member of the mile-high club was cool!

Sadly, the Betsy brew isn’t likely to improve CX’s yields, battered relentlessly by low-cost carriers, Chinese airlines offering direct routes to other countries (meaning less people going to Chek Lap Kok to connect on CX) and partly also due to CX’s decision to “shrink” its economy class seats, from 9-abreast to 10-abreast and insisting that passengers won’t feel squeezed.

CX A350-900 TAKE OFF (1)_

Apart from structural issues the airline faces, CX hasn’t been very good at playing the hedging game. The airline has lost huge sums betting on jet fuel. In 2016 CX lost HKD8.4 billion on fuel hedges. The year before that it blew HKD8.5 billion. The clever boys at Swire weren’t so clever after all…

So it isn’t all about intense competition (yes, go on, blame Akbar al-Baker and his Gulf gang for your woes) or the absence of a discount carrier for CX’s current plight. It’s about complacency and it’s also to do with the cost of CX staff. This is after all, one of the costliest airlines to run in the world.

CX pays its people really well, partly due to the high cost of living in Hong Kong and partly because they could afford it before. Those days are over. CX has to drastically cut expenses and people at least until the bleeding stops.

In 2016 Hogg (then the COO) was paid HKD11.2 million, up from HKD6.52 million the previous year. He was the highest paid director last year. CX said an independent committee determines directors’ compensation.

We think the answer to CX’s problems is new blood, and not another transfusion from Swire. Hogg is on a three-year contract but CX is unlikely to sufficiently recover during his reign. The board ought to consider an outsider if results by end-2018 show further deterioration. Now that would be a real innovation.

Talking tosh, the Singapore Airlines way

Screen Shot Singapore Girl

The Singapore Girl (the one on the right) – Surplus or deficit? *Image: SIA website / screenshot by shukor yusof

Here’s proof the standard (in and out of the aircraft) at Singapore Airlines (SIA) has gone down another notch in recent times.

As part of an on-going review of its operations, SIA announced on August 3 it was offering voluntary unpaid leave to its cabin crew for three months starting September this year.

There’s nothing wrong for an airline to do that. Indeed, we think it’s a wise move. The problem, in our view, is the language used to convey the message to the media.

Bloomberg quoted an SIA spokesperson as saying: “Having temporary surpluses or deficits of cabin crew is not unusual due to the nature of our business… The intention is to offer it from time to time going forward.”

But wait, someone at Airline House in Changi clearly wasn’t done yet, to paraphrase Financial Times columnist Lucy Kellaway, in talking tosh.

“The division will need to exercise flexibility and nimbleness to better manage crew resources. VNPL and the leave buy-back scheme are measures that the division will take from time to time to achieve this objective,” SIA said in a notice to its cabin crew.

Say what?

First, the airline’s cabin crew are “surpluses” and “deficits”? And what is “the nature of our business”? Can’t they simply say: “It’s normal in the airline business to sometimes have more and sometimes fewer flight attendants than are needed.”

Deficits and surpluses – if you must know – belong in the financial sphere; for instance, when speaking about budgets, or goods and services. Your cabin crew, lest you forget, are of flesh and blood. Human beings. They made SIA “a great way to fly”, they’re not just digits on the balance sheet.

And what’s this “going forward” thing? Hasn’t anyone told your communications team such clichés are meaningless and vacuous? Nobody expects a top tier airline like SIA to go anywhere but forward!

Second, are employees in the division now expected to morph into contortionists so they can “exercise flexibility and nimbleness”?

You’d thought a world-class carrier could have done better than to send out banal, jargon-laden communiqués that are not only demeaning to its own staff, but devoid of creativity and originality, something SIA once excelled in.

We give you another example, this time of lazy copywriting: in May this year SIA announced it was flying to Stockholm, Sweden. And here’s how it described the Swedish city – “a vibrant capital with something to offer business and leisure travellers of all ages. From soaking in the rich culture of Gamla Stan…” Read it here.

Look, “vibrant” and “soaking” don’t quite go hand in hand, unless it’s in a vat of (Absolut) vodka. Most people we know go to Stockholm for the sex, snow and Smörgåsbord, or to find the Girl with the Dragon Tattoo, not necessarily in that order. The more adventurous ones will probably go shop at Ikea.

We understand there’s quite a lot SIA needs to do these days, what with profits plunging and pesky low-cost rivals pressuring yields 24/7. But there’s no excuse in coming up with these sort of BS going forward – if you get the drift.

SIA has a tidy surplus of cash in its coffers but one can’t help feeling there’s a deficit in its emotional quotient.

Who’s the fairest of them all?

Everett widebody plant

boeing everett factory, the world’s largest building by volume. pic/shukor yusof

It’s earnings season for airlines and aircraft manufacturers. With the exception of a few airlines, they all seem to be doing swimmingly well but…

Do you believe Boeing is a better stock buy following its recent success over Airbus at Le Bourget? Indeed, shares of the US aircraft manufacturer soared (now hovering over USD230) end-July after the Chicago-based company reported 2Q core earnings per share of USD2.55/share, above the Street’s estimates of USD2.31. A year ago Boeing reported a loss of 44 cents per share.

Look closely at the latest earnings and one will see a drop in commercial aircraft deliveries (minus 16 aircraft from a year ago – that’s an 8% reduction). That equates to a revenue miss, down USD22.7 billion, from analysts’ expectations of USD23 billion.

That said, Boeing has done well in managing its cashflow, shedding jobs and transiting from the current 737 production to the MAX , an aircraft that is expected to win more orders in coming years. It’s impressive by any measure, but we think the share upside potential is limited.

Of the four major aircraft makers – Boeing, Airbus, Bombardier, Embraer – which one offers the best value for money, if you’re an investor? Airbus announced its 2Q figures that were about 3% behind analysts’ estimates – sales came in at USD18 billion and operating profit came in a tad over USD1 billion (the Street had anticipated closer to USD1.1 billion).

Airbus has a few issues it needs to get a grip on: (1) engine woes for its A320 new engine option, or neo; (2) delays over its A400M military transporter; and (3) declining interest in the A380.

A380 tailfin

what does the future hold for the a380? pic/shukor yusof

Toulouse-based Airbus is on course to deliver over 700 planes, but the problem with the A320neo is not with the manufacturer, rather with supplier Pratt & Whitney, according to the European aerospace company. Meanwhile delays on the A400M programme meant a EUR2.2 billion bill.

The A380, meanwhile, is altogether another headache for Airbus, with production now adjusted to 12 (from 27) in 2018. In our view, the A350 is the future for Airbus, not the A380. And the quicker Airbus sorts out what to do with the mammoth plane programme, the faster it will reinvigorate investor confidence.

Boeing is now touting a plane which it calls “middle of the market” or MOM, a product that lies in between a single and twin-aisle aircraft. Boeing’s head of commercial aircraft Kevin McAllister thinks there’s a demand for up to 4,000.

We’re not convinced, given that Airbus’ A321neo (with 236 seats) is already serving that market and has been outselling Boeing’s 737 MAX 9 (220 seats). Orders for the A321neos is close to 1,400. And the A321neo has an added advantage – a long-range version in the form of the A321neo LR, offering a 4,600 mile range, compared to the B737 MAX 10’s 3,700-mile range. Expect to see more future orders for the A320neo/A321neo as well as the A350.

BA 747s LHR 0616

not “middle of the market” but proven workhorses – boeing’s 747-400s at lhr. pic/shukor yusof

The regional aircraft makers, Bombardier and Embraer, seem to be doing relatively well, too. Canada’s Bombardier reported an unexpected profit of 2 cents per share for 2Q17 (Apr-Jun), beating the 1 cent loss estimate by analysts polled by Bloomberg.

Bombardier, which has been bailed out time and again by the Canadian authorities, expects to deliver 30 C Series planes this year, subject to available PW1500G geared turbofan engines. The C Series is a “nice little aircraft”, observed Airbus chief salesman John Leahy, but it hasn’t sold well, notwithstanding delays that plague the project. And it is positioned in a tricky segment – competing head-on against the A320neo and 737 MAX.

That brings us to Embraer, the world’s 3rd largest aircraft manufacturer (bet you didn’t know that!) whose latest product, the E190-E2, is slated for entry into service in the first half of 2018. The E190-E2 is powered by PW1000G engines and can seat up to 114 passengers in a single class configuration.


Embraer’s E190-E2 all set to samba… pic/Embraer

The launch operator for the E190-E2 is Norwegian carrier Wideroe, the largest regional airline in Scandinavia. Wideroe currently operates 41 Bombardier Dash-8 turboprop aircraft but has opted to switch to an all-jet fleet with up to 15 of the new E190-E2s.

The E2 programme has been quite amazing: on time and on budget. We think sales will pick up once the first E2 is flying and once airlines, especially those second-tier carriers in Asia who aren’t making pots of money (if at all) with their Airbus and Boeing planes, start to understand that sometimes, smaller is better and smarter.

While the costs to the E2 programme have inevitably eroded Embraer’s stock price, currently floating just above USD20/share, there’s a good reason to believe – after the company’s latest 2Q earnings – there’s more room for upside. Embraer said it earned 32 cents per share and that revenue rose close to 30%, to USD1.77 billion, which is higher than the USD1.62 billion the Street was expecting.

The Brazilian company reaffirmed guidance for 2017; it expects revenues between USD4.9 billion and USD5.7 billion. Weakened defence and business jet segments are also affecting its profit. But the commercial side is doing quite well, thank you very much and we think the stock is undervalued and could outshine its peers in North America and Europe.

Clearly, there’s room for more growth. In China, for example, the government is telling its super rich to cut back on lavish spending, including private jets. Jackie Chan, the effervescent Hong Kong actor and an Embraer ambassador, will need to do more than say a few nice things about his Legacy 650

Qatar Airways suffers from blockade, but only just

QR A350 J class

Inside a Qatar Airways A350 business class section. Pic/Shukor Yusof

A month after Saudi Arabia and five other nations cut diplomatic ties with Qatar, the former British protectorate, located on a 11,586 sq km peninsula that protrudes into the Persian Gulf, is still alive and kicking.

Some denizens of Doha, Qatar’s modern capital city, tell us there is no panic, no rationing or shortage of food, no hoarding of petrol and politically, no surrender by the Al-Thani family that runs the gas-rich state.

Indeed, it’s business as usual, according to Malaysians and Singaporeans living in that Gulf state, adding they are now enjoying more tantalizing Turkish food than before. Fresh supplies from Turkey and Iran, close allies of Qatar, have been airflown since the embargo on Jun 5. Some dairy products, say the residents, are cheaper and taste better than those from Saudi Arabia!

What about Qatar Airways, the national carrier? Eighteen regional destinations were automatically severed and several long-haul flights now need to be rerouted via Oman and Iran, adding to operational costs.

As expected QR is experiencing less capacity, about 20% lower while duty free revenue at Hamad International Airport is reportedly down 25%. That’s to be expected given fewer flights and therefore, fewer visitors.

QR’s combative CEO Akbar al-Baker has vowed the schism between his country and the other Arab states won’t stop the airline from expanding during the unveiling of the carrier’s latest product –  the Qsuite – at the Paris Airshow last month.

And he’s got every reason to feel positive: QR was voted the world’s best airline for 2017, it has won reprieve from the dubious laptop ban imposed on Gulf carriers and has got unexpected business from British Airways (QR has a 20% stake in IAG) for the lease of nine A320/321 planes while BA cabin crew goes on a 16-day strike. That has helped to somewhat offset some of the losses within the Gulf region.

QR 772LR GRU Nov 2015 - a

A qatar Airways B777-200LR. Pic/shukor yusof

And to reassert its influence in the industry, QR has scrapped orders for four A350s due to delays at Airbus. QR was the launch customer for the A350 and took delivery of its first aircraft late December 2015. In our view QR’s A350 fleet has the best products in both business and economy classes.

More importantly, QR has the backing of Qatar Investment Authority, one of the world’s largest sovereign wealth fund with USD335 billion worth of assets, is still keen to take a 10% stake in American Airlines. Both are oneworld members but AA is among the three US carriers (together with Delta and United) that are up in arms against the Gulf airlines (QR, Emirates and Etihad), accusing them of operating on an unlevel playing field by being heavily subsidized.

QR is investing in AA not because of hubris but out of necessity. Al-Baker has already approached AA CEO Doug Parker but we aren’t privy to all other details other than AA reiterating its opposition to the Gulf carrier’s alleged unfair practices.

QR has deep pockets, in fact deeper than Emirates. It can easily mop up AA shares in the market and having a larger stake in a US airline would help show Congress it is investing in American jobs. While the laptop ban has been lifted there’s no saying when other limitations on Gulf flights to the US might be imposed, hence QR is buying insurance.

Additionally, Qatar probably expects the standoff with Saudi Arabia and the others to continue indefinitely. Thus, investing more outside of the Gulf makes more business sense especially given that US carriers have been among the most profitable in the world the past couple of years.

A few things to note about Qatar: despite having been downgraded by Standard & Poor’s to AA- (from AA) on June 8, its financial fundamentals are strong and sound. That said, we feel while Qatar may resist and continue to operate as normal now and the near future, the longer this drags on, the more difficult QR will find to operate as the block on air traffic ultimately will result in less business and therefore, less interest from potential investors.

All things being equal, Qatar is an exceptionally wealthy state. Here are some facts: it has enough gas to last 143 years, it has the highest per capita income in the world, Qatar’s bank assets amount to QAR1.1 trillion (USD302 billion), it has the highest quality of education among Arab states and, for what it’s worth, is ranked among the least corrupt countries in the Middle East.

Qatar Airways in a quandary


what, me worry? qatar airways ceo akbar al baker on board a QR a350. pic/shukor yusof

There were reports that Akbar Al Baker, the CEO of Qatar Airways (QR), left the 73rd IATA AGM in Cancun in a hurry on a private plane early Monday morning. Al Baker isn’t one who would exit a major event such as the IATA AGM unless something major has come up.

Indeed, something big is happening in Qatar. The Gulf state is in crisis after Saudi Arabia, the UAE, Bahrain, Yemen, Egypt and Libya severed diplomatic ties on June 5. The move, presumably designed to isolate Qatar and starve it into submission, was ostensibly taken by the six nations due to Qatar’s support for the region’s Islamist groups, including Egypt’s Muslim Brotherhood, and its cosy ties with Iran, a perennial enemy of the Saudis.

That’s what it looks like on paper although some suspect the real reason behind it is nothing more than gas, specifically natural gas. Here’s Bloomberg’s  take on it. It’s possible this is the cause of the schism; in 1995 Qatar made its first shipment of LNG from the world’s largest reservoir that it shares with Iran.

The wealth gas has generated for Qatar is staggering: it has an annual per capita income of USD130,000 and is the world’s largest LNG exporter, second only to Russia’s Gazprom. Qatar has a population of just 2.7 million but in recent years have grown increasingly influential and vocal on the international stage. Standard & Poor’s has a sovereign credit rating of AA with negative outlook on Qatar.

Its flag carrier Qatar Airways now ranks among the world’s best. Its publicly funded international network Al-Jazeera has lured many top anchors from other stations, it is the major sponsor of one of the world’s best soccer clubs (Barcelona), and it has won the right to stage the FIFA World Cup in 2022.

But it is QR and the Hamad International Airport (HIA) in Doha that will be hardest hit by this blockade. In 2016 Al Baker said the airline’s full-year profit quadrupled, driven by cheaper oil and a growing international network.

Since the punitive measures were announced on Monday, Emirates and Etihad have stopped flying to Doha. Discount carrier FlyDubai, Bahrain’s Gulf Air and Egyptair are also suspending flights. One doesn’t need to be a mathematician to calculate the losses QR and HIA will suffer daily until the crisis is resolved – it’s huge.

Just within the Middle East region alone, QR flies to 50 destinations. Geographically it will be squeezed – Saudi airspace to the west is blocked with Bahrain controlling much of the airspace to the south. The Saudis can block its airspace as it isn’t a signatory in a 1945 transit accord allowing for open skies and airlines to fly freely through a country’s airspace. Bahrain and the UAE, however, are signatories. Question is, will they revoke it?

QR operates a 14x daily shuttle service between DOH and DBX that’s been stopped. Additionally there are many international flights that traverse Saudi and Egyptian airspace, including those to Europe and Africa and South America. These will have to be rerouted. Rerouting costs money and time. To make matters worse for Qatar, its citizens aren’t even allowed to transit in the UAE (home of Emirates and Etihad) on their way home.

Doha airport bear

there’ll be less transit passengers at hamad international airport. pic/shukor yusof

So, how deep will the losses be? It depends on how long this goes on. The sanctions will continue unless Qatar capitulates, something it isn’t likely to do. In April this year Al Baker said he was expecting record profits for 2017.

Our analysis suggests optimistically QR could see a decline in second half (2H17) revenue of around 20%-30%, and pessimistically up to 40% if ties aren’t restored soon. It goes to say the revenues at Emirates and Etihad will also be affected although not dramatically.

What will happen next? The six countries that imposed the blockade will wait to see how Qatar respond; there are reports Kuwait is trying to mediate but the Arab states are generally divided and if Qatar does submit, it stands to lose not just its credibility but its pride.

That said, Qatar could, alternatively show the middle finger to all six and leverage on whatever strengths it can use: there’s a major US base in Qatar, there’s the gas exports it controls and most crucially, there’s the relationship with Tehran which will be strengthened. Can the Saudis and the US swallow that?

Let’s wait and see…

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