If MAS is to be sold, cast the net wider


Malaysia Airlines Bhd (MAS) is like the Brazilian football team. Almost everybody, from politicians to technocrats and investment analysts, seems to be an expert in how it can improve its services in good and bad times.

The comments on how to improve MAS heighten when it is in trouble, like how it has been since 2001. Everybody seems to be an aviation expert, commenting on what is best for the national carrier.

The bright side is that it underlines the fact that most people care about MAS. The downside is that not many are aware of the non-financial obligations of MAS towards its stakeholders, especially politicians, and the challenging industry dynamics that it operates under.

For starters, the industry is plagued with an overcapacity issue. It’s not only in Malaysia, but also world-wide. Apart from overcapacity, the industry has also been hit by gyrating oil prices that make up between 25% and 30% of an airline’s operating expenditure.

Not many airlines have been able to handle the twin problems of overcapacity and volatile fuel prices. Airlines whose business model is focused and operate without unions tend to have a better set of results compared to the traditional airlines offering an array of services.

AIRASIA BHD, which focuses primarily on a market that offers a travel time of less than five hours, is a splendid example of how an airline that is focused is an attractive business proposition. Its sister company, AirAsia X Bhd, which flies long-haul on a low-cost model, has lost money three times in the last five years. However, its operating cash-flow has been positive, except for 2018.

Both airlines have no union, staff are expected to multi-task and those who slack are sacked without anybody making a fuss. The same does not apply with MAS.

To get an idea of the overcapacity situation here, for every one flying passenger, there are 1.8 seats available. What this means is that the airline industry is grossly in an overcapacity situation with almost two seats available for every one flying passenger.

The overcapacity situation is not only in Malaysia. The environment is the same elsewhere. In Europe, it is worse, causing several airlines to cease operations.

In the last two years, among the airlines that have gone under are Germany-based Germania, Air Berlin and Azur Air, UK-based Monarch, Alitalia, Latvia-based Primera Air, Kingfisher Airlines of India and Cobalt Air of Cyprus.

The closure of airlines has left governments with the expensive task of sending back passengers who are stranded. In October 2017, the UK government had to fly home more than 100,000 passengers after Monarch Airline went under. It was described as the biggest modern day `repatriation’ programme.

In the Middle East, only Emirates remains profitable, although its numbers have plunged. Emirates’ profits slumped 70% in the latest financial year although revenue went up 6%. It has been the worst financial performance for Emirates in a decade.

Etihad Airways that is owned by Abu Dhabi has been loss-making in the last three years, while Qatar Airways has sounded a loss for 2018, which will be the second consecutive year it’s losing money.

The overcapacity situation is a good scenario for passengers because they get to enjoy cheap flights. However, it is bad news for airlines which are already operating under tough conditions.

Towards this end, MAS reportedly lost some RM800mil in 2017 and RM1.2bil as a group. It is likely to chalk up another loss in 2018. It has been losing money for more than seven years, which is a rather long stretch of dripping in the red for any company, let alone an airline.

If MAS was not the national carrier, it would have closed shop years ago. Because it is the national carrier, it has been flying, thanks to the government.

Since 2001, the government has pumped RM23.6bil into MAS, including RM6bil in 2014. However, until now, MAS is still losing money. Under the previous government, MAS was left alone under the watch of Khazanah Nasional Bhd. A restructuring in 2014 resulted in the airline being taken private, employees being reduced to some 15,000 and the appointment of foreigners to head the airline.

Out of the RM6bil, half went towards taking the company private and paying off employees to leave the company. The privatised MAS had RM3bil to revive the operations, of which a portion went towards purchasing planes.

The Pakatan Harapan government has a new direction for Khazanah, under which MAS is a strategic asset that is to be kept under its control.

But it has not ruled out bringing in a strategic investor. Like the many other assets under Khazanah, suitors have lined up for MAS. So far, it has been reported that there are four suitors, although only two are likely to be more serious.

In commenting on the offers, Khazanah’s managing director Datuk Shahril Ridza Ridzuan said that the sovereign wealth fund would have to evaluate serious offers and the capability of the offerers financially and from the execution point of view.

The statement by Shahril, who comes with an impressive track record of being the former head of the Employees Provident Fund, is quite clear. It is not looking for any investor. Khazanah wants an investor with the financial muscle and execution prowess to help MAS wade through the problems of the industry.

What this means is that if the government decides to bring in a strategic investor, Khazanah needs to cast its net wide to see if there are international parties as well, apart from the local ones, who can be a suitable partner for MAS to do the heavy lifting it requires and allow it to operate under a complex set of rules.

It’s easy to fill up seats in a plane even in an overcapacity environment. The airline just needs to throw prices.

However, it is difficult to fill up seats and make money at the same time. MAS needs someone who can help fill up the seats on every take-off without the flight having to lose money. The strategic partner also needs to understand that MAS is a national airline and does not operate on a commercial basis fully.

If a stake in MAS is to be divested, then Khazanah should be allowed to cast its net wide. It should not be forced to only look at the current set of suitors.

The views expressed here are solely the writer’s own.


overcapacity , operating expenditure

   

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