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Can Malaysia Airlines make it on its own?

Publication Date : 05-05-2012

 

The deal that was designed to save Malaysia Airlines (MAS) ended with more bitter than sweet memories for all those involved.

The fractious relationship, almost from the get go when the share swap agreement was inked eight months ago between Khazanah Nasional Bhd and Tune Air Sdn Bhd owned by Tan Sri Tony Fernandes and Datuk Kamarudin Meranun was met with growing resistance especially from the MAS Employees Union.

There was no denying that some elements in the original blueprint designed to save the national carrier were good, but the deep distrust that exists between the employees of MAS and AirAsia given their historical battles proved too big an obstacle to overcome.

Md Nor: "Plenty has been done and we are more focused on sales now."

Of course the unions and some politicians found the upcoming elections a boon to pressure the government to reverse the share swap.

Whatever the reason, MAS is back seemingly at square one.

There are those who doubt if MAS will be able to pull itself from the rut it is in but there are others who are a lot more sanguine about its prospects.

Standard & Poor's senior aviation analyst Shukor Yusof believes the cancellation of the share swap agreement is the best thing for MAS as the share swap does not add value.

The unravelling was done on Monday and announced on Wednesday, a day after Labour Day.

Now that it is undone, the heat is not on AirAsia because it is on a steady growth path, but on MAS, which has structural and fundamental issues that has yet to be addressed for nearly a decade.

Analysts seem to have lost confidence in the carrier and despite a team being set up to engage with the employees and make things work, the odds aren't looking good for MAS, at least in the near to medium term.

It faces a possible downgrade by Skytrak, an important aviation measure for service standards. Investors are seen to be dumping the redeemable convertible preference shares for fear that MAS may have problem redeeming them this year.

But more critical is that it needs to spend 6 billion (US$1.97 billion) and only has 958.81 million ($315 million) in cash at the end of last year. Going by what MAS group CEO Ahmad Jauhari Yahya (AJ as he likes to be called) said in his memo to staff recently, a copy made available to StarBizWeek, the burn rate of cash is 5 million ($1.6 million) a day.

The question asked is: Can MAS return to the black and change all the negative perceptions on the airline and how much time does it have given that crucial time has been lost over the past eight months?

Revisit the plan

All is not lost, says chairman Tan Sri Md Nor Yusof when he sat down with StarBizWeek on Thursday morning.

He says a lot has been achieved behind the scenes, including mopping up a lot of the mess.

"Plenty has been done and we are more focused on sales now," adds Md Nor.

The first thing on the agenda is to re-visit the business plan to see if there is any need for a re-setting. That is key as earlier plans call for MAS to remain a full service premium carrier. AJ adds there is no need to craft a new business after the collapse of the share swap, only the need to tweak.

Md Nor was in MAS a decade ago but left to head the Securities Commission at the government's call. His return was just days before the Aug 9 share swap. A decade of restructuring and a new business plan but still the need to re-visit the plan?

"Massive work needs to be done and I believe the current set of people are unlikely to pull it through. As every corner you turn there are problems and the issue is structural and fundamental, be it financing, operations, an aging fleet, the product - all this needs to be revamped. It is going to be tough and I feel sorry for them but for how long more are they going to (do surface restructuring instead of deep restructuring and how long more will MAS remain in the red),'' says Shukor.

An industry expert adds that “Somewhere along the line, the losses will crop up if the root cause of the problem in MAS is not addressed. They have a fleeting chance to undo a lot of things now if they care about cleaning up the airline once and for all. Other global carriers which were in MAS' state of affairs have done it and are now flying high. You got to get to the root cause and fix it and cutting cost or reducing the number of employees are not the solution.''

Md Nor admits there are structural and fundamental issues.

"The liquidity crises facing MAS is chronic in nature. Its fundamental cause is structural but no one has sat down to look at that. That is why MAS is always on a financial drip from stakeholders. Even we know about it and yet we are not looking," he says.

But things will change, he assures, and adds, that there will be no shortcuts and no quick fixes.

"We are immediately going to sit down and review everything and then look at how we can (turn everything around)," Md Nor says.

Radical changes perhaps, as that is also what AJ said in his recent memo to the staff.

Shukor adds that “redefining and tweaking the business plan does not excite me as I have heard it all and also all the business turnarounds. They have implemented the financial and operational engineering in the past and it had not worked. So if they are thinking there is a silver bullet, then it has to be a combination of many processes in order to overcome various issues they are facing now.''

"They had so many restructuring but not deep enough, will another make MAS a more efficient airline,'" CAPA Centre for Aviation analyst Brendan Sobie asks.

The emotional factor

MAS has also been accused of selecting a handful of outside talent in the strategy planning and for the running of the airline during the share swap period when there are a lot of untapped talent from within. So this time the re-visit of the plan involves the employees.

"We need to re-visit the business plan. This time it will be more inclusive in that we need to have staff engagement. We have asked them for ideas and we gave them a tough deadline by Friday. We believe there will be plenty of good ideas but what is needed is to focus on what to do first and therefore the wish list cannot be too long. Part of our problem thus far has been what is seen as priority,” Md Nor says.

Today the board is meeting to set the direction for the company. It would have input from the unions and head of units on what their wish list for the airline's strategy going forward. The unions and Md Nor met again yesterday.

AJ adds that “we have many experienced staff and they often talk about contributing. We are ready to listen to them now and even previously. The difference this time is that I believe without the distraction' caused by the share swap, our employees will be more focused on giving good workable ideas on improving processes, improving efficiency and productivity that can help MAS better its current position.”

The buy in from the employees to take the company forward is vital as it was the unions that had a hand in tearing up the share swap agreement.

Md Nor says there is no bad blood between management and the union. He understands the reasons why it did what it did.

"(The union) is an institution that is 65 years old and that means there is three generations claiming equity. We have to manage trans-generational challenges and laggards from the baby boomers to Gen Y. And all of them have ideas of what they want to do for MAS.”

Although the share swap is dismantled, the remnants of the tie-up lingers in a form of cooperation in several areas like training, engineering and others.

There are also a number of new employees that have been parachuted into key positions within MAS, and some had previously worked with AirAsia.

MAS Employees Union president Alias Aziz's stand is clear on that matter,

"We support anyone who can help MAS earn more revenue. We do not want those who cause the airline to lose money. We are not attacking individuals, we are concerned about performance. Thus far, the feedback from staff is that they want to work with the management to move MAS forward.”

The low cost factor?

Md Nor says there is also a need to re-look at the network and adds, the focus will be more regional as that is where the growth will be and by capitalising on Malaysia's central location in Asia.

Will they go back to the low cost game they gave up because of the share swap. Will they get there as most carriers in the region have low cost units to tap that end of the market?

"Can they still realise the benefits by just remaining in the premium market when much of the growth in this region is going to be in the low end of the market,'' said CAPA Centre for Aviation analyst Brendan Sobie.

Ahmad Jauhari: "We have many experienced staff and they have often talked about contributing."

Md Nor said that “we will not compete with a low cost model.''

He believes MAS can tap the regional market by being a premium carrier as this is a catchment area. Our middle class is growing significantly. So there is traffic.''

But Md Nor did say that Firefly would continue with its turboprop operations.

"We just have to re-configure what we want to do with the turboprops and fill the aircraft. Beyond that, Firefly can be re-branded. That is a consideration, and to explore if it can also fly beyond the 1.5 hours (range). All that will come under our regional network strategy.”

While it is limiting itself to a specific market, the long term solution to remain a premium players means it has to address a combination of factors, says an industry expert.

"It will need to renew its aging fleet, have better branding (re-look at the A380 branding), ensure the product is top class and make certain there is network breadth and scale. MAS will also need to invest in a reliable customer revenue management system to manage its premium passengers, be aggressive in marketing like the way AirAsia is or even better.

"This will allow MAS to get higher yielding passengers and MAS is still an amazing brand operating in Malaysia, which has the lowest cost structure than many other countries. It is in the middle of the Asia Pacific region that has huge intra- and inter-regional traffic and growth. There is no other way and cutting routes and sacking staff is not going to solve their problems,” the expert said.

Financing option

While the analysis is that the current structure is flawed and the business model seems weak without the low cost component, MAS is also in dire need of funds. This is notwithstanding that there has been about 3 to 4 billion ringgit ($986 million to $1.3 billion) to cash injection the past few years.

MAS is caught in a vicious cycle, says Md Nor as what the airline earns is not enough to cover its expenses and the cost to maintain its fleet is pricey because it is aging.

The good thing is that “we are breaking that cycle as by end 2013 we will have 26 next generation aircraft and 50 by 2014. That would mean lower maintenance cost and our compounded annual growth rate ratio will rise, hopefully we are on a good start,” Md Nor says.

As at end of last year, MAS has about 1 billion ringgit ($328 million) cash but with the cash burn rate at 5 million ringgit ($1.6 million) ringgit a day and with 100 takeoffs daily, the cash can be depleted in three to four quarters if nothing is done soon.

Whatever, MAS needs fresh injection of funds and a cash call is not on the cards for now, those in the know claim.

In its audited accounts submitted to Bursa Malaysia recently, MAS said it had secured a 1 billion ringgit short term advance from a local financial institution. It is like a bridging loan till it gets the financing for the aircraft sorted. MAS is taking delivery of its first A380 soon and will use the aircraft for its KL-London route beginning July.

For now, MAS deputy CEO and head of group finance and aircraft finance and management Mohd Rashdan Yusof is working on an innovative financing package to address all the financing needs, but he will not discuss this with StarBizWeek at this juncture because it is not complete.

However, those in the know claim it is indeed comprehensive, there is demand for the instruments from local institutional investors and it will be an asset backed type of facility which could be issued in two weeks time.

AJ says MAS will issue a 3 billion ringgit Islamic bonds and Md Nor adds that “there is ample liquidity in the domestic market, why go overseas to get aircraft financing.”

Md Nor adds that “whatever the instrument, the rightful owners of the aircraft will still be MAS.”

But financing is only one part of total problem that is on Md Nor's or AJ's mind. Both are now thinking of conservation and they know they cannot spend like “rich kids.”

“We need money and we need to conserve spending and spend only on income generating activities and not for the feel good factor things,” says Md Nor.

To break away from the vicious cycle, Md Nor says that will mean “the focus has to be on generating revenue.”

Previously, MAS looked at cutting cost but arguments have been made that the fat in MAS is still aplenty.

Md Nor says the “cost structure is not bloated but we need to push up our sales, that is very urgent. We have to reduce our CASK (cost of available seat-kilometer) and raise the RASK (revenue of available seat-kilometre). We have to fill up the seats. Now our average load factor is 70% and we want to push it to 80%, we are getting the numbers, but we still have to push harder.”

If Md Nor and AJ are really keen to get to the bottom of the problem, then cost cuts alone is not the solution and Md Nor says “we have to look at all the cost levers and go beyond blaming rising jet fuel prices as the cause of all our problems. The rise in fuel cost is a given in the industry and it affects all players, he adds.

“The reality is that we need better inventory management, particularly since our fleet is ageing, We are spending too much maintaining old aircraft as there are just too many repairs and naturally the operating cost goes up. We have to zoom into all areas, strip and check one by one,” he says, adding that, don't even get into the fuel hedging business.”

MAS feels that once the newer aircraft arrives, its maintenance bills will fall. But the cost to service the debt taken for the new aircraft, though, will inch upwards.

Still the pessimists feel that a 25%-30% cut in staff strength is necessary to bring down the cost as MAS is seen to have too many employees and the productivity level is low. The comparison often made is that with AirAsia, which is essentially a low cost carrier and an unfair comparison. Any comparison should be with Singapore Airlines. MAS has 20,600 employees.

Md Nor is not talking about cuts but to get everyone motivated, having proper work scheduling systems to keep productivity levels up and reducing the need for after hours work.

“It is about a mindset and inertia issue. We need to address all this issues so that the overall productivity level is up ... it is not something impossible,'' he adds.

There is hope

Despite all the negativity, there is still hope and Md Nor is adamant things will change.

What he and AJ needs is probably another 18 months.

What will help isthe next generation aircraft it will take delivery of. That will put MAS on par with some of the regional airlines and reduce its cost. And getting the unions and employees engaged will hopefully get productivity levels and morale up.

The other plus factor is its entry into oneworld as that will help bring in passengers.

As Md Nor put it, “there is hope, it is about how we reshape ourselves and how fast we can do that to tap the opportunities,”

“This is probably the last chance for MAS to prove its worth and the tax payers are not going to be happy if more money is pumped into the airline as there cannot be another bailout,” says an observer.

 

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