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A task force to undertake MAS restructuring?

Publication Date : 17-08-2014

 

It was in February this year that the Malaysian government told Khazanah Nasional Bhd to look at options to save Malaysia Airlines (MAS).

Its problems had become the elephant in the room and all plans to turn around the airline had not achieved the desired results. Ernst & Young was then hired to conduct a due diligence on the airline once the decision to deal with MAS’ problems was given the green light.

A presentation was then made to the powers that be, spelling out the options: from taking MAS private to selling a stake in the airline to declaring it bankrupt.

In early August, the decision to privatise and de-list was made.

In the morning of August 8, Khazanah said it was taking MAS private, just a month after dismissing market chatter that such action was on the cards as “mere speculation’’.

Khazanah is proposing to pay 27 sen a share or 1.4 billion ringgit to buy the remaining 30 per cent  stake in MAS it does not own. What comes next is a massive overhaul of the airline.

Thus far more than four dozen young and old executives are furiously hammering out the comprehensive plan for the revival of MAS. More than half a dozen of the executives are from Khazanah, the rest are consultants including those from CIMB Group and Ernst & Young.

Even Seabury Group, a consulting firm, has submitted details of what it think needs to be done for fleet and network rationalisation to Khazanah. Seabury had also worked with MAS for sometime, those in the know claimed.

The glaring difference in the current restructuring is that there is political will to do it. But without a complete break from past practises, it will be difficult for MAS to turn around as the problem are structural in nature. The process breathing life into the airline will involve painful steps and sacrifices from all parties.

Task force

The margin for error now when it involves MAS is tiny and that explains why Khazanah has nearly half a dozen war rooms to formulate and trash out the nitty gritty in devising the next action plan for MAS. But is that the priority?

MAS cannot lose focus of its current business while it undertakes a painful restructuring. It is likely that a task force might be set up to undertake the restructuring, says someone in the know.

In that way MAS can continue its operations of selling tickets and flying passengers, while the task force goes in and conducts major surgery.

He adds that this is to ensure separation and avoid distraction from current and future work.

The to-do list is huge for the task force, but the glaring question is how will it help MAS bring in the money it needs. More importantly, how can cost be reduced?

Can it renegotiate the so called over-priced contracts given to politically connected parties and plug the leakages? Then there is the “must use contractor’s” list. While it is also nothing wrong to have a list of prescribed contractors but is MAS getting market or fair value?

Perhaps it should also review the Global Sales Agency (GSA) that is said to be owned and controlled by influential individuals and the requirement of latest equipment from computers to aircraft to be used by the airline and its employees.

Following the two recent tragedies, MAS has lost a lot of customers, so a refreshed brand is a must to manage the perception issue. It must take a re-look at the way tickets are priced and sold, not at the expense of yields as done previously.

Cost is a big area that needs addressing. In this respect, cutting down on its 19,557 employees will remain its biggest challenge. Some 55 per cent  of its employees are unionised.

Business Model

The priority is a new business model for MAS. It is not clear if MAS business plan for 2014 is still intact after two tragedies, but its prime market is certainly no longer China after MH370 en route Beijing disappeared.

That tragedy has resulted in more than 1,000 flight cancellations until June, and getting back into the China market will not be easy at least in the medium term. Its focus has to be North Asia, India, Indonesia and the Middle East, but competition is also keen among the Middle Eastern carriers.

Khazanah needs to be cognisant of the fact that 10 new low-cost carriers are entering the market in Asia this year and many players are already feeling the pinch from low-cost carriers.

To win new passengers, its business model has to be different from the rest.

“The business model will also determine how big an airline Khazanah wants to maintain. MAS’ current cost structure is meant to support a far bigger network and since MAS has cut so many routes, it cannot sustain its operations with its current size,’’ says a former senior executive.

Those executives in the war rooms are also keenly studying what Singapore Airlines has done.

“Ironically, both MAS and SIA were one when it was known as MSA. It’s like two children from the same womb but why is one performing better than the other after the separation?’’ asks someone who has been in the airline industry for nearly 40 years.

SIA today is one of the top global airlines, operating international routes but has no domestic operations. It has hived off its engineering and ground-handling units, leaving the airline to focus on selling tickets to fly passengers globally. That is its core business and it focuses and invests regularly to keep its customers happy.

Since low cost is the flavour of the decade, SIA has cleverly got a share of it via its various joint ventures.

In contrast, MAS has a huge bag of everything – premium carrier, engineering and maintenance (M&E), ground handling, cargo, low cost and even domestic flight operations.

Perhaps spinning off the M&E, ground handling, and cargo into separate units will mirror what SIA has done and will allow MAS to just focus on airline operations.

Leaner organisational structure

If there is one airline with the most number of senior executives and business units, it has to be MAS. With 11 divisions, and a huge number of 210 business units, MAS’ organisational structure is said to be convoluted.

“MAS is also said to have 11 division heads, 31 senior vice-presidents and 60 vice-presidents. In total that is slightly more than 100 people and perhaps, that number is bigger than the two country’s largest banks combined. It also has 19 levels of grading for its staff,’’ says an industry expert.

The divisions are commercial, flight operations, engineering, customer services, finance, corporate strategy, corporate communications, human resource, MAS Kargo, MAS Wings and Firefly.

“It just shows how top heavy it has become, adding layers of layers of people to find a solution in the past which has not resulted in any solution. It just creates bureaucracy,’’ says one executive.

Last year, MAS hired 172 people and bloated its workforce to 19,577 employees from 19,405 a year earlier.

After the 2006 mutual separation scheme where 2,600 workers opted for, MAS’ workforce shrank to 18,641 as at end-2006 but it has since then added 936 staff, thereby inflating staff cost.

“Whenever a new CEO comes onboard, he parachutes his team from outside into MAS instead of giving those within a chance to scale up the corporate ladder. Obviously this hiring from outside comes at a price and bloats further the workforce at a time when the airline continues to bleed,’’ says the industry expert.

An airline’s major cost is jet fuel, which accounts for about 30 per cent  to 40 per cent  of total cost, followed by staff cost. In MAS’ case, staff cost was only 7 per cent of total cost in 2011, but grew to 18 per cent in 2012 and dropped to 16 per cent last year. MAS had 20,477 employees in 2011 and 19,406 in 2012.

The new structure has to depend on what the new business model will be and has to fit in the human resource and fleet requirements.

If the SIA model is desired, then expect jobs cuts of 5,000 to 6,000 as SIA has only about 14,240 people.

The executive also points to the performance management system (PMS) that measures the productivity level of employees. According to him, 90 per cent of the employees fall into the category of “fully productive,’’ while 5 per cent each fall into the category of “under performers” and “exceptional”.

In terms of revenue per employee, that has been growing steadily from 679,000 ringgit in 2011 to 772,000 ringgit last year.

“Re-size the airline if it has to be done but do it in a humane way. For those who stay back, a pay cut will de-motivitate them at a time when support of employees is crucial,’’ he adds.

Success with employees’ support?

Without the support of employees, all new plans and ideas will be futile.

The friction between staff, their representatives and management needs to be eased so that all can work towards a common goal.

There are eight unions and associations in MAS, the biggest being Malaysia Airlines Employees Union (MASEU), which claims to have about 7,000 to 8,000 members. There are then the executive unions and the pilots union.

“We want the company to survive because if the company survives, we survive,’’ says an employee who is also part of a union.

He says that even if there is an effort to set up a new company, which may mean the existing unions will no longer be relevant, there is nothing to stop just seven employees to start a new union as all this is provided for in the law and no one can stop the employees from joining a union, which to him basically ensures employees are not worse off.

Another employee says morale in the airline is low and little effort is made to improve it.

“But what we don’t want is to be blamed unnecessarily. We work according to what is told to us,” he says.

“For MAS, it is critical to get the right structure and right people to manage the airline. There has to be increase accountability, transparency and empowerment,’’ says an expert.

MAS has also not benefited from stability of CEOs – many have come and go and each had their own plan. That has garbled up the direction of MAS over the years.

“Just as people get used to one way of doing things, the next CEO comes onboard and changes things and that makes it difficult to adjust because the thinking is different for every CEO. So whatever Khazanah does this time, there has to be a period of stability. MAS needs to learn from others, pick what you admire and implement it. Don’t waste time recreating the wheel,’’ says an executive.

US$1 = 3.15 ringgit

 

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