Complete overhaul for MAS


  • Business
  • Saturday, 30 May 2015

Malaysia Airlines aircrafts sit on tarmac at KL International Airport in Sepang. The strategy introduced by the carrier

New CEO to create more than 10 subsidiaries, each will be will be given KPIs to monitor cost and deliverables

CHANGE is the constant now at Malaysia Airlines as the carrier prepares for a complete overhaul.

Christoph Mueller, the boss of Malaysia Airlines (MAS) who has done the hard part of dealing with retrenchments and jobs at the struggling airline, wants to create more than 10 business subsidiaries that will be judged by their individual profit and loss statements.

He is the chief executive officer of MAS and CEO designate of MAS Bhd, which starts on September 1.

Mueller’s reason for doing so is simple. “In order to create more transparency, we will create a couple of subsidiaries, fully owned by MAS Bhd, and we will put a little more entrepreneurial spirit into the business,” he tells StarBizWeek in an interview.

“This will in most cases create a completely different attitude.”

The strategy to create subsidiaries brings about accountability, transparency and instils entrepreneurial spirit to compete. Those business instincts are almost absent in the old MAS.

Interview with Malaysian Airlines Bhd (MAS) chief executive officer Christoph Mueller at Khazanah Malaysia Bhd in KLCC. AZMAN GHANI / The Star
Mueller: ‘The low-cost carriers are clearly in the lead but even they are offering prices below their cost levels. That’s the reason they are making a loss.’

The focus on profit has been brought to the front due to competition from low-cost carriers (LCCs). It’s nimble and competitive airlines such as AirAsia Bhd that has slowly eroded MAS’ product and profits over the decade.

Last year’s twin air disasters had damaged the brand and the need to compete and rebuild will see MAS take on the philosophies of LCCs as it tries to rebuild itself from the bottom.

That explains the route, cost and staff cuts it has embarked on.

One indication of how cumbersome cost was for MAS was the 180 different allowances it gave its staff. It paid for someone’s bicycle and overtime was indeed higher than salaries in some cases.

The desire to earn a higher salary through overtime payments was a burden for MAS and proved to be counter productive for the airline. Aircraft were kept in the hangar longer and that cost MAS money.

“So far, he is acting like a boss compared to the past management. He is brave to do things and even talk about abuses. We knew about the bicycle claims long time ago but no one did anything about it,” says Maybank Investment Bank Research analyst Mohshin Aziz.

“We give him credit for he has the guts to do it; his execution of his plan so far is at a level none of the past managers did. But that it is not enough and he needs to do more.”

Profit and cost centres

Mueller didn’t reveal just how many subsidiaries will be created but it is going to be more than 10. Each of them needs to show a profit.

Each subsidiary will be given key performance indicators (KPIs) to monitor cost and deliverables, make money and not be a cost burden for MAS Bhd.

Come January 1, MAS Bhd will start the fiscal year 2016 on a new accounting structure. Details of Mueller’s business plan will be out on Monday but a sample of what he wants to do is clear.

He wants the simple things to be cost-effective and efficient. Cost of checking in a passenger and turning around the aircraft will be looked at more clearly, indicating that nothing will slip past the watchful eyes of Mueller’s cost-cutting scissors.

With the subsidiaries and new accounting platform, he sees improvements will start manifesting in due time.

The change is also important as MAS deals with a lot of third-party business.

“From the accounting point of view, it’s better to account for your in-house customers the same way you account for your third-party customers. Then you measure if you make a profit or loss as oppose to have a little bit transparency in transfer price regime,” he says.

“So there are good reasons other than outsourcing to create new subsidiaries.”

There will be subsidiaries created for heavy maintenance, ground handling, training, asset management and even property.

All its equipment and even aircraft may be housed by the asset management company. MAS will keep a tight check on its property and plots of land via its new subsidiary.

“Since its new hub for operations will be at the KLIA, it does own some land in Subang and that land can be developed at some point, jointly with property developers for recurring income instead of an outright land sale,’’ says an industry source.

As at end 2013, MAS earned RM170mil in rental income from its land and buildings and the net book value of its buildings stood at RM522mil.

It has a huge leasehold land of 10,972 acres in Subang, the book value of which is a meagre of RM14mil. It also has office lots in Singapore and a 7-storey office building in London worth RM22mil.

Getting talented people into MAS and nurturing existing staff will be an important agenda for Mueller.

He says there is a skills deficit within the organisation because for far too long the airline has been cutting down training programmes and stopped investing in its people.

“That’s one of the reasons why I, with a German passport, am sitting here. We don’t want that to happen again. We will invest in people so the next leadership can be recruited from inside.”

Can a leaner MAS compete against others?

Creating a winning airline will be tough given the competitive landscape. Its battered brand will not help much but from the money perspective, it needs to get the price of tickets right.

“It is very inconsistent but I will look into it because what basically makes an airline attractive is good prices for our customers,’’ Mueller says.

Cost is a major consideration in pricing and so is competition.

“The low-cost carriers are clearly in the lead but even they are offering prices below their cost levels. That’s the reason they are making a loss,’’ Mueller says.

The industry to him is at the inflexion point, and this is something which happened to the US airline industry 25 years ago and in Europe about 15 years.

It is happening here now, and the low jet fuel prices are fuelling airlines to stimulate markets but that could be at the expanse of yields.

“People (the airlines) will massacre themselves and it’s going to get tougher. It is good news for the travelling public as prices will go down but it will affect profitability,’’ he adds.

Mohshin of Maybank says that 2015 is wanderlust year for some airlines. “Carriers in Taiwan, the Philippines and, to a lesser extent, Japan are smoking cigars everyday. Things are good in those countries.

“The second tier are still having fun, such as the China-based carriers. Thai carriers are getting a new lease of life, and of course the South Korean airlines and Australian and New Zealand are more optimistic. Their management is in good mood that things are improving.”

At the bottom, the results are not to the liking of those carriers which includes MAS, Garuda and even Singapore Airlines.

Lower oil prices are helping airlines, especially the LCCs, and despite intense competition, airlines are expected to make more money this year.

The International Air Transport Association predicts global airline industry to report a record US$25bil in profit this year, up from US$19.9bil profit last year.

The Association of Asia Pacific Airlines says the region’s carriers achieved aggregated operating revenues of US$176.6bil for 2014, up from US$173.4bil in 2013.

Over capacity is a big issue in the region and Mueller has said the new MAS will be smaller. Its competitors are waiting to see just how small it would be and what routes will it axe.

One worry is that MAS may cut all its European routes. Flights to Frankfurt stopped on May 25 and now MAS is left with London, Paris and Amsterdam in its network.

Khazanah Nasional Bhd, MAS parent, wants it to be a regional airline but experts feel that is a myopic view for a premier carrier given a new lease of life.

“Staying regional limits its range. If it really wants to be a serious premium carrier, then it should get back to the US and Africa and expand in Europe, as China and Australian markets are already very competitive. India is a market it should put more flights into,’’ says an industry source.

Mueller says MAS’ costs needs to come down in order for it to price its fares more attractively.

Another analyst adds that if it becomes a true blue premium carrier, then it will be up against the likes of Singapore Airlines, Cathay Pacific, Emirates, Etihad and even Qantas, because for a long time it has been behaving like a LCC.

Those players have money to splash and they change their product offerings and designs to meet changing market trends.

“Is MAS up to that changes when it cannot even decide what type of new aircraft it needs to compete in the future?’’ asks one source.

“It needs more money than what Khazanah has allocated and unless it starts generating money, it cannot go on spending against the competition.”

Mueller needs to also address the culture within the airline to ensure the quality of services are raised.

Ancient ways

Reducing the number of headcount at MAS since the new airline will be smaller is just one of the many things being done. Then there is the 3,779 contracts that are being renegotiated, the fleet requirements, the livery, branding, the in-flight entertainment systems, menu, the uniforms and the list just goes on.

On Monday, the termination letters for the 20,000 MAS employees will be out. Of that, only 12,000 to 14,000 may be re-employed as the new airline will be smaller than the existing airline. “The reduction in capacity is such that we simply don’t have enough work for everybody,’’ Mueller says.

The other problem is that MAS has not kept up with times, at least when it comes to the use of technology.

“Some of the processors I have identified in MAS is not even current generation. They are last before last generation,’’ Mueller says.

To change that, he has hired a technology officer to map the technology path for MAS and looking at touch screen and QR code for the future, so that a passenger just needs a barcode on a handheld device to get from the car park, airport, lounge and into the airplane.

“These are not dreams. It is basically how I travel around the world with other airlines than MAS. That is a long march but that is our aspiration level. More on that on Monday,’’ he says

Those changes will take up to three years to implement.

CHANGE is the constant now at Malaysia Airlines as the carrier prepares for a complete overhaul.

Christoph Mueller, the boss of Malaysia Airlines (MAS) who has done the hard part of dealing with retrenchments and jobs at the struggling airline, wants to create more than 10 business subsidiaries that will be judged by their individual profit and loss statements.

He is the chief executive officer of MAS and CEO designate of MAS Bhd, which starts on September 1.

Mueller’s reason for doing so is simple. “In order to create more transparency, we will create a couple of subsidiaries, fully owned by MAS Bhd, and we will put a little more entrepreneurial spirit into the business,” he tells StarBizWeek in an interview.

“This will in most cases create a completely different attitude.”

The strategy to create subsidiaries brings about accountability, transparency and instils entrepreneurial spirit to compete. Those business instincts are almost absent in the old MAS.

The focus on profit has been brought to the front due to competition from low-cost carriers (LCCs). It’s nimble and competitive airlines such as AirAsia Bhd that has slowly eroded MAS’ product and profits over the decade.

Last year’s twin air disasters had damaged the brand and the need to compete and rebuild will see MAS take on the philosophies of LCCs as it tries to rebuild itself from the bottom.

That explains the route, cost and staff cuts it has embarked on.

One indication of how cumbersome cost was for MAS was the 180 different allowances it gave its staff. It paid for someone’s bicycle and overtime was indeed higher than salaries in some cases.

The desire to earn a higher salary through overtime payments was a burden for MAS and proved to be counter productive for the airline. Aircraft were kept in the hangar longer and that cost MAS money.

“So far, he is acting like a boss compared to the past management. He is brave to do things and even talk about abuses. We knew about the bicycle claims long time ago but no one did anything about it,” says Maybank Investment Bank Research analyst Mohshin Aziz.

“We give him credit for he has the guts to do it; his execution of his plan so far is at a level none of the past managers did. But that it is not enough and he needs to do more.”

Profit and cost centres

Mueller didn’t reveal just how many subsidiaries will be created but it is going to be more than 10. Each of them needs to show a profit.

Each subsidiary will be given key performance indicators (KPIs) to monitor cost and deliverables, make money and not be a cost burden for MAS Bhd.

Come January 1, MAS Bhd will start the fiscal year 2016 on a new accounting structure. Details of Mueller’s business plan will be out on Monday but a sample of what he wants to do is clear.

He wants the simple things to be cost-effective and efficient. Cost of checking in a passenger and turning around the aircraft will be looked at more clearly, indicating that nothing will slip past the watchful eyes of Mueller’s cost-cutting scissors.

With the subsidiaries and new accounting platform, he sees improvements will start manifesting in due time.

The change is also important as MAS deals with a lot of third-party business.

“From the accounting point of view, it’s better to account for your in-house customers the same way you account for your third-party customers. Then you measure if you make a profit or loss as oppose to have a little bit transparency in transfer price regime,” he says.

“So there are good reasons other than outsourcing to create new subsidiaries.”

There will be subsidiaries created for heavy maintenance, ground handling, training, asset management and even property.

All its equipment and even aircraft may be housed by the asset management company. MAS will keep a tight check on its property and plots of land via its new subsidiary.

“Since its new hub for operations will be at the KLIA, it does own some land in Subang and that land can be developed at some point, jointly with property developers for recurring income instead of an outright land sale,’’ says an industry source.

As at end 2013, MAS earned RM170mil in rental income from its land and buildings and the net book value of its buildings stood at RM522mil.

It has a huge leasehold land of 10,972 acres in Subang, the book value of which is a meagre of RM14mil. It also has office lots in Singapore and a 7-storey office building in London worth RM22mil.

Getting talented people into MAS and nurturing existing staff will be an important agenda for Mueller.

He says there is a skills deficit within the organisation because for far too long the airline has been cutting down training programmes and stopped investing in its people.

“That’s one of the reasons why I, with a German passport, am sitting here. We don’t want that to happen again. We will invest in people so the next leadership can be recruited from inside.”

Can a leaner MAS compete against others?

Creating a winning airline will be tough given the competitive landscape. Its battered brand will not help much but from the money perspective, it needs to get the price of tickets right.

“It is very inconsistent but I will look into it because what basically makes an airline attractive is good prices for our customers,’’ Mueller says.

Cost is a major consideration in pricing and so is competition.

“The low-cost carriers are clearly in the lead but even they are offering prices below their cost levels. That’s the reason they are making a loss,’’ Mueller says.

The industry to him is at the inflexion point, and this is something which happened to the US airline industry 25 years ago and in Europe about 15 years.

It is happening here now, and the low jet fuel prices are fuelling airlines to stimulate markets but that could be at the expanse of yields.

“People (the airlines) will massacre themselves and it’s going to get tougher. It is good news for the travelling public as prices will go down but it will affect profitability,’’ he adds.

Mohshin of Maybank says that 2015 is wanderlust year for some airlines. “Carriers in Taiwan, the Philippines and, to a lesser extent, Japan are smoking cigars everyday. Things are good in those countries.

“The second tier are still having fun, such as the China-based carriers. Thai carriers are getting a new lease of life, and of course the South Korean airlines and Australian and New Zealand are more optimistic. Their management is in good mood that things are improving.”

At the bottom, the results are not to the liking of those carriers which includes MAS, Garuda and even Singapore Airlines.

Lower oil prices are helping airlines, especially the LCCs, and despite intense competition, airlines are expected to make more money this year.

The International Air Transport Association predicts global airline industry to report a record US$25bil in profit this year, up from US$19.9bil profit last year.

The Association of Asia Pacific Airlines says the region’s carriers achieved aggregated operating revenues of US$176.6bil for 2014, up from US$173.4bil in 2013.

Over capacity is a big issue in the region and Mueller has said the new MAS will be smaller. Its competitors are waiting to see just how small it would be and what routes will it axe.

One worry is that MAS may cut all its European routes. Flights to Frankfurt stopped on May 25 and now MAS is left with London, Paris and Amsterdam in its network.

Khazanah Nasional Bhd, MAS parent, wants it to be a regional airline but experts feel that is a myopic view for a premier carrier given a new lease of life.

“Staying regional limits its range. If it really wants to be a serious premium carrier, then it should get back to the US and Africa and expand in Europe, as China and Australian markets are already very competitive. India is a market it should put more flights into,’’ says an industry source.

Mueller says MAS’ costs needs to come down in order for it to price its fares more attractively.

Another analyst adds that if it becomes a true blue premium carrier, then it will be up against the likes of Singapore Airlines, Cathay Pacific, Emirates, Etihad and even Qantas, because for a long time it has been behaving like a LCC.

Those players have money to splash and they change their product offerings and designs to meet changing market trends.

“Is MAS up to that changes when it cannot even decide what type of new aircraft it needs to compete in the future?’’ asks one source.

“It needs more money than what Khazanah has allocated and unless it starts generating money, it cannot go on spending against the competition.”

Mueller needs to also address the culture within the airline to ensure the quality of services are raised.

Ancient ways

Reducing the number of headcount at MAS since the new airline will be smaller is just one of the many things being done. Then there is the 3,779 contracts that are being renegotiated, the fleet requirements, the livery, branding, the in-flight entertainment systems, menu, the uniforms and the list just goes on.

On Monday, the termination letters for the 20,000 MAS employees will be out. Of that, only 12,000 to 14,000 may be re-employed as the new airline will be smaller than the existing airline. “The reduction in capacity is such that we simply don’t have enough work for everybody,’’ Mueller says.

The other problem is that MAS has not kept up with times, at least when it comes to the use of technology.

“Some of the processors I have identified in MAS is not even current generation. They are last before last generation,’’ Mueller says.

To change that, he has hired a technology officer to map the technology path for MAS and looking at touch screen and QR code for the future, so that a passenger just needs a barcode on a handheld device to get from the car park, airport, lounge and into the airplane.

“These are not dreams. It is basically how I travel around the world with other airlines than MAS. That is a long march but that is our aspiration level. More on that on Monday,’’ he says

Those changes will take up to three years to implement.

Related story:

CEO: Restructuring of an airline is a long march

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3
Subscribe now to our Premium Plan for an ad-free and unlimited reading experience!

Business , malaysia airlines , MAS ,

   

Next In Business News

US and UK should be welcoming talent, not driving it away
Short Position: Ringgit rebound, PETRONAS earnings
KWAP seeks stronger income growth
What’s in fashion
Brexiteers, no one wants your regulatory bonfire
EcoWorld redefines concept behind industrial parks
S’pore chips away at HK’s hedge fund dominance
Ringgit seen strengthening further
Hibiscus gets debt boost
Navigating a ‘perfect positive storm’

Others Also Read