By Stephanie Jacob
With Christoph Mueller taking over as head honcho, Malaysia Airlines is flying into a new space but what exactly that means is still unclear. In the first article of a three-part series, KINIBIZ focuses on what is still right with the airline. The second and third articles will look at the things basically wrong with Malaysia Airlines and what it should do to take off.
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Malaysia Airlines is once again at the crossroads. Its sole shareholder Khazanah Nasional Bhd has given it a RM6 billion boost and brought in a man who has had success in turning apparent lost causes around. But he will have his work cut out for him because not only does he take the reins of a company in serious financial trouble, he also takes on an airline reeling from twin disasters in 2014 and low morale among the workforce facing the prospect of 4,000 job cuts.
The next few months are crucial for Malaysia’s national airline and the decisions made by Christoph Mueller and his team will determine if MAS fades into history as a billion ringgit failure or if it soars once again. Can they get it right?
While there are several issues which Mueller will need to fix, at the heart of MAS’ woes is its revenue conundrum. The fact is that ever since the government bought MAS back from Tajuddin Ramli, none of the airline’s subsequent management teams have succeeded in finding the right revenue formula, except for a brief period when Idris Jala was CEO.
Balancing load, cost and revenue
The latest plan to be implemented was Ahmad Jauhari Yahya’s (AJ) ‘load active, yield passive’ strategy which ultimately failed to improve MAS’ fortunes because it could not balance its load factors, fare and cost levels to reach a revenue sweet spot.
Even when the airline was recording load factors, a measure of capacity utilisation, in the 80% region towards the end of 2013, MAS was still recording significant losses.
Mueller will have to find a way to reconcile those three factors by finding the right mix between filling up MAS planes at the right fare, while being cost efficient. Although it will not be an easy task, analysts suggest there are some ‘low-hanging fruit’ or issues that can be addressed to gain some immediate relief.
These are mainly centred around cutting costs, and efficiencies can come from rationalising routes, its fleet and trimming down its workforce. While these steps are not necessarily easy to do, it will be among the more straightforward tasks needed to be done.
There has already been talk that Mueller plans to reduce MAS’ fleet through the sale or leasing of some of its aircraft. In response, Mueller said such talk was premature but stopped short of denying that it was part of his plans.
In his first comments since taking the reins on May 1, 2015, he said that MAS was exploring its fleet options to enhance the viability of its long haul sectors but stated that “recent speculations on the airline offering some of its fleet for sale or lease is too premature when nothing concrete has been achieved.”
“MAS needs to operate and utilise its fleet at an optimum level besides maximizing revenue on the routes it flies. The market needs to give Malaysia Airlines room to explore various options in determining the most viable strategy,” Mueller added.
Along with cost cutting or rationalisation measures, it will also be important for Mueller to maximise MAS’ revenue intake. AJ’s strategy turned away from yield, which is a reflection of air fares, and focused almost solely on load factor. Under his stewardship MAS expanded aggressively and then discounted its fares heavily to fill its planes – a strategy which clearly failed.
At the end of the third quarter of financial year 2014 (3Q14) MAS posted an operating loss of RM170 million, 54% larger than the losses seen in the previous year’s corresponding quarter. While some of this may have been due to the MH370 and MH17 tragedies, analysts note that MAS’ financial slide began some time before the first tragedy with the airline seeing four consecutive quarters of losses in 2013.
Charging the right price for MAS flights
While AJ implemented his turnaround plan, at times it was cheaper to fly locally and even regionally at cheaper rates compared to what was being offered by AirAsia and AirAsia X, both of which are budget carriers with low cost structures.
In fact there were times when MAS was so heavily discounting its fares, that there were suggestions that it was dumping fares. The strategy not only hurt MAS, but AirAsia X as well as the latter had to compete with a full service carrier offering budget rates.
“If with your cost structure (AirAsia X) you are selling it at RM400 and a full-service airline sells it at RM350 with triple the cost structure — how can you compete?” asked AirAsia Bhd founder Tony Fernandes recently, when he was asked to comment on AirAsia X’s troubles.
The fact is that budget carrier could not and based on MAS’ financial results neither could it. So Mueller will have to make it a priority to look into correcting MAS’ fare structure to ensure that it is charging the appropriate fees for the service it is offering. We deal with these problems in detail in the next article.
What’s right with Malaysia Airlines
According to Skytrak, MAS is one of a select group of airlines which has the distinction of being rated as a five-star airline and MAS has held the honour continuously since 2006. And although that ranking is now under review, it is hard to deny that MAS is among the best airlines in the world and has been so for some time.
Under Skytrax’s rating system, an airline is evaluated based on a quality analysis of more than 800 different items spanning from the its frontline product and staff service standards to airport and cabin service environments. The agency also measures the consistency of the airline’s services when evaluating it. If an airline is found to have less than 80% consistency in terms of its offerings across its fleet, then this will negatively impact Skytrax’s final decision.
With such a strong reputation for good in flight and on the ground services, coupled with its strong safety record (tragedies in 2014 notwithstanding) it would make sense for Mueller to leverage upon these strengths to charge rates that are commensurate with that level of service.
Tomorrow: What’s wrong with Malaysia Airlines
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