Time to look east for MAS


  • Business
  • Saturday, 20 Jul 2019

Modern planes: MAS needs to re-vitalise its fleet with more modern airplanes that include the B787 Dreamliner series and more of the A350s and the B777-9s.

The airlines industry is one tough industry to be in. Whether in the US, Europe or Asia, governments have from time to time come to the rescue of their national carriers mainly due to catastrophic incidents like the Sept 11 terror strike, unsustainable business models or even simply due to a massive debt load.

Operationally, airlines are in a highly leveraged business due to the cost of acquisition of aircraft, which comes with not only high borrowing cost, but as well as a non-cash item called depreciation and amortisation, which eats into an airline’s accounting profit. Together with the vagaries of jet fuel prices and gyrating load factors, managing an airline and showing profits year-in year-out is one tough call for any CEO. Even the likes of Cathay Pacific or Singapore Airlines find it tough to sustain a predictable earnings model.

Of course we have also seen failures among other major airlines which were not incident related and the closest example was the Japanese government’s rescue of their national airline to revive the carrier in 2009. Three years after its rescue plan, Japan Airlines (JAL) emerged bigger and stronger and went back to the market with one of the biggest initial public offerings (IPO) in 2012, with the sale of the shares owned by the government worth some 663 billion yen, almost double the 350 billion the government provided JAL before.

JAL was saddled with US$25bil debt when it filed for bankruptcy and to help the airline to re-emerge stronger, the government’s rescue plan then came with a price. Banks wrote off a third of its debts, one-third of its employees were laid off and the airline cut some 31 of its domestic and international routes over a three-year period.

Today, JAL is back on its feet, registering total revenue of 1,487 billion yen and net profit of 151 billion yen in the last fiscal year ended March 31, 2019 and its market capitalisation is now almost 1.2 trillion yen, almost double from its IPO in 2012.

Indeed, the JAL story is one success story that perhaps can be looked upon to replicate and fine tune for whoever intending to buy MAS from the government today. Previous attempts to resurrect MAS from its operational challenges as well as financial mess have not been positive, despite almost billions of ringgit spent on rescuing MAS since 2001.

With the challenges facing MAS today, it is of no surprise that the government is re-looking into ways to rescue MAS yet again as the government can longer afford to sustain the losses carried by MAS at Khazanah Nasional level, which is hurting the sovereign wealth fund’s own performance. While the government is said to be willing to listen to any bidders (said to be between two and four potential bidders) to acquire MAS, whether it’s majority control or significant interest or just a collaboration is left to be seen as the buyer has to ensure two things – to keep MAS’ current image as well as jobs for its 7,159 employees.

There are many suitors to MAS and this include other non-Malaysian based airlines as well as previously known individuals associated with the airline industry. Having a new shareholder with control at the board level and management is one thing, but far more important is what is the strategy behind to have MAS flying high again?

Based on a weekly business news report, it is understood that MAS’ current management’s new Long Term Business Plan (LTBP), which is awaiting the government’s green light, will help the national carrier to achieve break-even point by 2022.

The LTBP entails MAS fleet management and network expansion, premium customer service, diversified revenue base as well as a partnership strategy. Hence, the question is what are the plans of these bidders, if the new owners do not intend to carry out MAS’ current LTBP? Other than the LTBP, what else can MAS do to revive its golden years again?

One of the mistakes in the previous attempt to rescue MAS following the double tragedies was to cut routes as well as employees that were needed to fly to these destinations. Hence, MAS cut off many European routes and elsewhere and went into code-sharing agreement with other airlines, especially Emirates, to fly Malaysians all over the world. In return, Emirates added its code on MAS flights to domestic routes in Malaysia, South East Asia and selective cities across the Asia Pacific region.

Other than London, MAS does not fly directly to any European destinations anymore, leaving Malaysians having no choice but to either fly other airlines or via its code-sharing partners like Emirates. Dubai is now one of the busiest airports where Malaysians bumped into each other, while waiting for connecting flights in transit to destinations in Europe, US or even the African-continent, and vice-versa.

Even Singapore Airlines (SIA) and Thai Airways have now benefited from MAS’ move to cut so many of its international destinations. With these two airlines, Malaysians just have to fly to either Bangkok or Singapore and go direct to their final destination, instead of having to have a long stop-over in Dubai itself. The lay-over at Dubai can be as short as couple of hours to as long as five to six hours as Emirates only flies KL-Dubai and vice-versa three times a day.

Locally, MAS can’t compete with AirAsia, neither can it compete with Malindo as MAS is a premium carrier and hence it is unable to match the price-sensitive needs of travellers for flying time of between 45 minutes and less than three hours, which includes routes like KL to Tawau.

Serving a glass of drink and perhaps an occasional biscuit should not be a big price differentiator when trying to compete for these routes and hence MAS is also losing out serving mostly Malaysians, who are even more sensitive to ticket prices but are more generous in spending on other airlines’ flight related services, like paying for a meal or a drink.

So what shall the new owners of MAS do?

Our beloved Prime Minister, Tun Dr Mahathir, is a strong believer of Japanese work ethics, culture and strategies and hence the Look East policies should also apply to MAS as to how JAL turns around its business and making it today one of the world’s most profitable airline.

These strategies have to include looking at, firstly, the current fleet that MAS have, i.e. to revive and to make it a younger fleet. The current fleet of 81 aircraft at an average age of seven years is ageing and for an airline, it is also less efficient in terms of fuel consumption as well as passenger comfort and optimisation of space configuration. In addition, its half leased, half owned-aircraft business model is not here nor there in terms of managing its assets.

Today, out of 81 aircraft, MAS owns 46 of them (40 B737-800s and 6 A380-800s) and these are the aged assets. 35 other aircraft (eight B737-800s, 6 A330-200s, 6 A350-900s, and all 15 A330-300s) are leased assets.

MAS needs to re-vitalise its fleet with more modern airplanes and this include the B787 Dreamliner series as well as more of the A350s and the B777-9s. With the 737 Max 8 and Max 10 in a limbo, which MAS had ordered 25 aircrafts in total, the national airline needs a plan B to ensure it has enough planes to fly in the future. MAS needs to decide whether this business model of fleet management is something it wants to continue or opt for full asset ownership model or majority leased fleet model as well as both have its pros and cons, accounting and cashflow wise. If the government is willing to provide it with government guaranteed papers, MAS can easily fund its fleet with bonds to be raised from the capital market as this will be cheaper than the lease option. Once the fleet issue is settled, MAS can than focus on serving its customers, higher on-time arrivals/departure as well as managing its profit and loss performance should take priority with targets which are reflective of a profitable business model, i.e. improvement in load factors for the 59 destinations that it serves today.

Secondly, MAS needs to revive its once popular international destinations out of KL, which include places like Paris, Amsterdam, Stockholm, Rome, Manchester, Madrid, Munich, Johannesburg, Los Angeles, New York and Vienna. Also some many of the Chinese, Indian and Australian cities too need to be re-instated. Its code-sharing agreement with Emirates sounds more like a ticketing agent for the national airlines on behalf of the Dubai-based carrier. MAS’ recent Memorandum of Understanding (MoU) with SIA to explore strategic partnership that covers flights between Singapore and Malaysia as well as potential expansion of codeshare flights beyond the two cities is positive, but the devils are indeed in the details. MAS should not be compromising itself in terms of profitable routes as SIA indeed has the financial muscle to take-it on at a time when its weak.

Thirdly, in terms of its current business strategy, MAS should perhaps explore a two-prong approach in ensuring its load factor improves and split the business operations into two – a domestic/regional business using the low cost carrier model to compete in the market, and international full fledge carrier model, to compete with the regional airlines like SIA and Thai Airways.

The market is huge within the ASEAN region and deploying the low cost model can indeed work as proven by not only by AirAsia but other low cost carriers as well. In the international scene, having a full fledge carrier service will be the differentiating factor for MAS as the Malaysian Hospitality (MH) if rightly deployed has a strong brand value.

Fourthly, MAS should embark on a transformation journey for its cabin crew and re-ignite their spirit of service to customers. The memories of MH370 and MH17 are hard to be erased from any Malaysians and families affected by the tragedies but what better way to leave the past behind and look into the future. For a start, MAS needs a new image for its cabin crew. While we are proud of our culture in terms of dressing in baju kebaya for the stewardess, perhaps its time to give the baju kebaya a new colour and vibrancy as the current outfits are just too boring. In addition, it needs to improve its service on board for better customer satisfaction, be it in-flight entertainment, meals on board or even how it rewards its Enrich members.

The next point is marketing. Today, MAS is stuck between spending the right dollar amount with measurable return on investment as it has not much traction in the global space while locally, sponsoring the national football team is not going to make a difference to price sensitive customers when it comes to ticket prices. MAS needs to embark on a huge marketing campaign as we have seen how other airlines position themselves in the world of sports (Emirates, Etihad, Qatar, JAL), entertainment events or even brands as well as destination of choice. When it comes to marketing, MAS would also need to up its ante in the digital platforms as well as online reach. In today’s environment, we cannot run away from digitalization of services to bring us closer to the customer and wider market reach. For example, MAS has about 1.8mil and 2.5mil followers on Twitter and Facebook while AirAsia has 3.2mil and 12.2mil. Clearly, AirAsia is way ahead in reaching out to its customers than MAS.

The sixth point – it is time MAS set realistic targets and on a short, medium and long term to ensure all Malaysian see value being created out of our national airlines and for us to be proud of. With targets comes key performance indicators that the new management must meet to ensure MAS can be turnaround for once and for all and let the national carrier be on cloud nine again.

Other than MAS, the government too will need to re-look into Firefly’s business model. Firefly on its own is not a competitor to AirAsia or MAS as its Subang-hub makes it a choice departure/arrival for passengers who prefer to be closer to the city instead of KLIA. With its city-based hub, Firefly should be sold off at a good price as a separate entity based on its competitive advantage against MAS/AirAsia/Malindo and on its well-accepted business strategy which is basically just a convenient way for passengers to fly, fast and easy boarding.

In conclusion, for MAS, some of the above strategies have been deployed by other airlines and they are not new, but they have been proven to be successful, especially JAL. In addition, these strategies must also be well executed. Hence, looking at the potential bidders on MAS, one would need to ask the question whether selling MAS to the highest bidder or a bidder with the financial muscle or experience is a right choice or should the government allow MAS’ current management just focus on turning around just like how JAL achieved it in three years. As long as MAS is able to sustain its operating performance, the government should keep MAS flying under its wings.

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

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Japan Airlines , debt , success story

   

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