Third time lucky for Malaysia Airlines turnaround?

By Chan Quan Min

Corporate turnarounds are nothing new to Malaysia Airlines. For the third time in a little over a decade MAS is attempting to switch from reporting in red ink to black. Turning around a company is the greatest measure of a CEO’s ability. We take a look at Jauhari’s progress thus far.

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Ahmad Jauhari Yahya, the man who has been at the helm of Malaysia Airlines just a few days shy of a full two years, was given the heavy responsibility of turning around the ailing airline. He has set himself an ambitious deadline of end-2014 to bring the flag carrier back into the black.

Business turnarounds are nothing new to Malaysia Airlines, a seasoned underperformer. This would be the flag carrier’s third corporate turnaround, if Jauhari were to succeed.

Could this be a case of third time lucky?

So far, Jauhari has managed to show some results, albeit limited, for his efforts. Since he took over, Malaysia Airlines has been posting smaller net losses, with the airline reporting a small operating profit in three out of the last four quarters ending June 2013. Passenger numbers and load factor are at a record 10-year high.

But his term has seen the airline’s yields weaken, plunging 14% year-on-year for the last quarter. In the second part of our series we touched on the impact poor yields have on profitability. Passenger yield is a measure of average ticket prices and by inference, revenue-generating ability.

Essentially, Jauhari’s turnaround plan for the airline is no different from the previous two restructuring attempts.

All three Malaysia Airlines business turnarounds read more or less the same – slash unprofitable routes, streamline operations for greater efficiency and introduce new management.

Thus, the greatest judge of a business turnaround is not the length or quality of the plan itself but its results. Plain and simple, Jauhari has to deliver – a heavy burden on his shoulders.

Industry analysts agree that the crux of the success of a business turnaround plan is its implementation. Promises can be made but they can just as easily be broken or disregarded completely.

In the two years since Jauhari has taken over the reins, the direction of his ‘Business Plan’ has shifted away from its original intentions.

Some of the changes were admittedly beyond his control. However, he has puzzled the industry with some of his decisions, such as the shift from a conservative stance towards capacity expansion by announcing a new growth phase for Malaysia Airlines this year, adding some 20% in available seat-kilometers (ASK) in the first-half.

It does not help that Jauhari is extremely media-shy. In the past several weeks he has declined comment to all media outlets, even as Malaysia Airlines made headlines on talk that the government is looking to sell the national airline to a private party.

While Jauhari is more than capable of articulating his vision and direction for the company he has not been able to engender confidence in his leadership abilities.

But Jauhari has big shoes to fill. He is following in the footsteps of none other than Idris Jala, who led Malaysia Airlines out of its last slump.

Jala is known as a transformation man. He is now presiding over a government-led initiative, the Economic Transformation Programme (ETP). Jala was recruited from the private sector – from the oil giant Shell to be exact – where he famously turned around the company’s Sri Lanka operations in just two years.

Jauhari on the other hand is still unproven as a turnaround man.

Jauhari has to prove himself

The year was 2011 and Malaysia Airlines was bleeding money in the millions every single day, posting the sharpest quarterly loss ever in the final quarter of 2011 – slightly over RM1.3 billion (operating loss).

The flag carrier was in crisis. Add to that a messy share swap agreement between AirAsia and Malaysia Airlines’ largest shareholder, state investment arm Khazanah Nasional.

Opinion was divided over the share swap. The collaboration was seen from a business perspective to be beneficial to the airline by outside commentators. But from within Malaysia Airlines dark clouds were forming. Malaysia Airlines’ powerful unions were regrouping for a battle.

Because Malaysia Airlines’ stock was trading at a record low while AirAsia’s share price was close to an all time high, the deal was also considered by some to be unfair to the national carrier.

Jauhari was appointed CEO in a surprise move during this difficult time although he was no stranger to Khazanah. At the time of his appointment he was sitting on the board of Malaysia Airport Holdings (MAHB), which also counts Khazanah as its largest shareholder.

Jauhari’s appointment was unexpected. For one, unlike Jala, he was an unproven turnaround man. While he has extensive experience in operating relatively healthy companies he did not have experience in restructuring an unprofitable one.

He was also unfamiliar with the airline industry. Jauhari’s professional training was largely in publications, engineering and power & electricity generation. Jauhari holds a Bachelor’s degree in electrical and electronic engineering.

He started his career working at Esso and the New Straits Times Press, where he was senior group manager of production and circulation.

He has served as a managing director of a string of government-linked companies; Time Engineering, Malaysian Resources Corporation (MRCB) and Malakoff.

While Jauhari may not be from the industry and faced a steep learning curve when he took over as CEO, he is not the first person without any airline experience to lead Malaysia Airlines.

Jauhari’s Business Plan

“These plans are not new,” Maybank Investment Bank head of research Wong Chew Hann pointed out in his December 2011 report on Jauhari’s Business Plan.

“In a nutshell, the company will cull severe loss-making routes which are no hopers, extract the cost benefits of new aircraft, streamline business operations and focus to enhance service levels,” Wong wrote.

In early 2012, the airline was to cut several unprofitable long haul routes such as Buenos Aires, Dubai, Cape Town and Johannesburg, eliminating some 12% of available seat-kilometres (ASK) to build a smaller more profitable network.

This is not a surprising or odd move as it’s a worldwide practice; airlines cut back on long thin routes when times are bad.

Malaysia Airlines had seen it all before. Jauhari’s Business Plan was the third such corporate restructuring plan for the airline.

Wong praised the 43-page Business Plan as a fairly good academic paper but said, “the devil is in the execution.”

“It is full of comparisons and ‘where we aspire to be’ statements but it lacks critical details on exact execution plans. We felt that this is the key factor that investors want to hear in order to be convinced of the business turnaround story,” he added.

Aside from cutting unprofitable routes, Jauhari’s business plan also prioritised cost cutting, simplification of the overall business structure and winning back customers.

Two major changes to the Plan

Two interesting elements of note from the December 2011 Business Plan that are now off the cards are Malaysia Airline’s equity collaboration with AirAsia and the splitting of short-haul and long-haul flights into separate units.

The share swap agreement between Malaysia’s two largest airlines was aimed at delivering efficiencies through collaboration and consolidation of key activities.

Not mentioned specifically in the Business Plan, the talk then was a grand plan to parcel out air routes between Malaysia Airlines and AirAsia to lessen competitive pressures.

The share swap has now been curiously unwound, reportedly due to strong opposition by Malaysia Airlines staff unions but it is also suspected to be due to anti-competitive concerns.

The December 2011 business plan detailed the establishment of a new full-service carrier to take over Malaysia Airlines’ short-haul narrowbody operations codenamed Project Sapphire.

The staff unions meanwhile, would not see Sapphire for the jewel that it is. Project Sapphire was extremely unpopular with the unions, which viewed it as a backdoor to outsource jobs and reduce costs. Malaysia Airlines had to drop the plan, bowing to union and political pressures, according to the international aviation research agency, Centre for Aviation (CAPA).

Jauhari failed to control yields

Passenger yield at Malaysia Airlines collapsed 14% the second-quarter of 2013 and has remained weak throughout Jauhari’s term.

Malaysia Airlines’ revenue management team contends that the airline is maximising revenue not yields and has delivered an increase in absolute revenue even as yields have fallen.

Industry analysts say the airline is pursuing a ‘load active, yield passive’ strategy, discounting airfares to fill their planes to a higher load factor despite a massive increase in seat capacity of up to 20% in the first-half of this year.

The consequence of lower airfares has been significantly weaker yields.

But the policy is largely in line with Jauhari’s announcement this year of Malaysia Airlines’ new expansion phase.

Two years ago in December, Jauhari did not tell the media quite the same things. His December 2011 Business Plan said the airline needed to win back customers.

To do this the airline needed to “optimize yield through better revenue management and tactical sales programmes.”

‘Winning back customers’ was part of a four-pronged strategy to deliver revenue growth. Jauhari’s December 2011 edition of his business plan claimed a profit impact of approximately RM394 million from yield optimisation through better revenue management.

Jauhari also promised a ‘smaller yet profitable network’ but is now presiding over a huge expansion in capacity, as discussed in detail in yesterday’s issue.

Is revenue maximisation at the expense of yields a strategy to bring Malaysia Airlines out of the black or is it a careless expansion of capacity even before the airline is truly profitable?

Although the timing for expansion may seem a little too much this early, Malaysia Airlines’ network and revenue management team of Hugh Dunleavy and Shihaj Kutty maintain that this will be the best way forward for the airline given the dynamics of the airline industry this year.

More likely than not, and as discussed in the previous issue, Malaysia Airlines had very little leeway in planning their capacity increase. “A victim of consequence” according to Maybank research analyst Mohshin Aziz, the national airline is only now accepting deliveries of humongous planes (Airbus A380) ordered by the previous management.

In addition, a large part of the capacity increases are coming from efficiency gains or increased aircraft utilisation. What this means is that Malaysia Airlines is flying its planes for longer and more often.

Thus it can be confidently said that the airline is increasing capacity with minimal increases in variable costs.

Some lessons from Carlos Ghosn

Carlos Ghosn was responsible for perhaps the most successful corporate turnaround in recent years, transforming the Japanese automotive giant Nissan to one of the most profitable automotive players in the world, boasting top profit margins.

While we often see the turnaround man elevated to an almost god-like status for his achievements, as is the case with Ghosn who achieved celebrity status in Japan for his work culminating in a Japanese manga comic book of his life; no corporate turnaround was ever due to one person alone.

Key to Ghosn’s turnaround was the implicit cooperation of his employees and open channels of communication.

From the outside it is difficult to judge how Jauhari has scored on both. While we have seen union opposition to the direction of his Business Plan this year, in August he managed to convince all the various unions groups to see his side, with the notable exception of the Malaysian Airline System Employees Union (Maseu).

On channels of communication, Jauhari appears to have shut out the media. But sources within Malaysia Airlines say he is reasonably open to the staff about the direction of his Plan. But, as always, he can do more.

For some, Jauhari has given himself a broad breadth, three full years to turn around the fortunes of the company.

But given the challenges facing the airline, which have been explored in previous issues, the main one being revenue management in-house and severe competition externally, perhaps three years would be an ambitious deadline to deliver a profit.

With a little over a year to go before the deadline is reached, Jauhari can do himself a favour and come clean on the direction of his Business Plan. He can begin by making public the company’s financial targets on a regular basis. He should speak to the media and the public with courage. As Malaysia Airlines is publicly owned, public are also stakeholders.

Not to do so will not only elicit suspicion but leave his staff and the public confused.

Yesterday: Malaysia Airlines faces a brave new world

Tomorrow: Should Malaysia Airlines be privatised?