By Stephanie Jacob
Malaysia Airlines’ new CEO hosted his first press conference on June 1, in which he identified key areas of the airline which needed to be fixed and briefly laid out his plans to do so. The new chief has a plan, but can he execute it?
On June 1, 2015, Malaysia Airlines new chief executive officer (CEO) Christoph Mueller held his first press conference with the media to give a broad outline of his plans for a turnaround. His first comments addressed the massive workforce cuts which had been his first order of business to oversee.
“Today is an important day for Malaysia Airlines, it is a happy day because we have sent out 14,000 offer letters. But it is also a sad day, because 6,000 staff will not receive such a letter. I want to take this opportunity to express my gratitude for all that they have done in helping to build the airline into what we have today,” said Mueller.
In a nutshell, it was a bittersweet day as Malaysian Airline System Bhd began its descent and Malaysian Airline Bhd prepared to take off. That theme will undoubtedly continue at Malaysia Airlines at least for the rest of 2015 and into 2016 as the turnaround is in motion.
Christoph Mueller
According to him, several questions were considered during the discussion of what to do with Malaysia Airlines.
The first question was if Malaysia needed a national carrier at all, the answer for which was “yes”. Whether this is an accurate assumption, it will only be established over the next three years – the time period which Mueller said he needs to turn the airline around.
More importantly, what kind of restructuring process was needed to save the carrier? To which the stakeholders decided that a hard reset would be necessary, if there was any chance of Malaysia Airlines surviving.
Enter Christoph Mueller, an airline person who knows how to execute a hard reset at an airline. A person well known for being willing to make hard calls and for being a cost slasher. As was seen during his time at the now-defunct Sabena in Belgium, Germany’s Lufthansa, and Ireland’s Aer Lingus.
In his first press conference, Mueller outlined what he sees are the three broad issues affecting the airline – costs are too high, the revenue is too low, and the employees are not properly equipped with the necessary skills to staff a modern airline.
He opined that costs are about 20% too high and highlighted two main areas from where savings and efficiencies might come – fixing the airline’s ineffective procurement procedures and its outdated IT system.
According to Mueller, Malaysia Airlines’ IT system is “not just the last generation (of software), but the last, last generation of software”. Unacceptable for any modern airline, given that IT is an airline’s main enabler, he said.
Its procurement processes are also old fashioned and inefficient. Mueller noted that Malaysia Airlines has 20,000 suppliers, but an airline of its size ideally should have about 2,000 to 2,500 suppliers only. Proof, he said, is in the very fragmented procurement system and it means that the airline is losing out on cost savings.
It was heartening to hear Mueller emphasise that moving forward, there will be a zero-tolerance policy for bad procurement to prevent wastage. Furthermore, he said all contracts will be renegotiated.
But cost cutting alone will not save Malaysia Airlines. Especially if there are plans to start growing the airline again once the bleeding has been stopped.
Mueller acknowledged that, he said that Malaysia Airlines must also pursue revenue optimisation. Ideally, an airline with the accolades Malaysia Airlines has garnered over the years would have no problem in charging fares which commensurate with the services provided.
But Malaysia Airlines has three issues in terms of revenue. It has overcapacity, its revenue per passenger is too low, and it is a good but tired product, said Mueller.
The wrong strategy of “load active, yield passive” has contributed to overcapacity. Besides, the two tragedies of 2014 have impacted the Malaysia Airlines’ brand name outside of Malaysia; while its once storied brand has also suffered from a lack of investment, hence leaving a tired product.
Another difficult conversation, which will need to be had in the coming months, will be on the airline’s branding. In surveys taken in some important overseas markets after the 2014 tragedies, 50% of travellers would not even consider flying with Malaysia Airlines. That is something which the airline needs to address.
Mueller has labelled the first part of his turnaround plan as the “stop the bleeding” phase. Doing so will be unpleasant but the painful steps are necessary to steady the airline for the next phase, which is to make Malaysia Airlines “fit for the future”. This too will be a tough period as getting into shape always requires sweat and tears.
Mueller seems ready to make the hard calls which will inevitably crop up in a project of this magnitude. In carrying out some of his reforms, he will come across resistance as there will be vested interest at stake. Khazanah, as the airline’s sole shareholder, must be firm in ensuring he has the space and freedom to do what is necessary.
Then in 2017 and 2018, the more exciting period of growing the airline will begin. For Mueller, a key challenge will be balancing cost rationalisation decisions, especially when it comes to routes, while ensuring there is something to grow and build on when the time comes.
Promisingly, Mueller has confirmed that Malaysia Airlines will continue to be a full-fledged international airline, one which will continue to connect Malaysia and the rest of the world.
Aside from the business decisions, Mueller’s biggest task, one which could break his entire tenure, is to get the staff working with him. Cutting 6,000 jobs was not a good way to make friends, nor was offering the remaining 14,000 lower salary packages than what they were earning before.
Mueller will have his work cut out for him in winning their trust and loyalty. He has said that part of the Malaysia Airlines’ turnaround involves putting the staff back as the heart of the airline.
He said there needs to be a reset and to reestablish relationships based on mutual respect and a common purpose. The new CEO’s ability to achieve this will be as important as his other efforts to get Malaysia Airlines soaring again.
GRRRRR!!!
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