There may be five suitors or less for loss-making Malaysia Airlines Bhd (MAS), but the reality is that Khazanah Nasional Bhd, which owns the airline, is tied down by political constraints when dealing with it.
Allowing MAS to collapse is unthinkable. MAS cannot afford to fold despite chalking up losses year after year. The sale of a controlling stake in the national airline to a competing airline so that it can be restructured and become operationally viable is politically unpalatable. This actually does not leave Khazanah with much choice.
Rescuing MAS needs political nerves of steel, which the previous government did not have. The current government already has its hands full in trying to win back support from voters.
Doing anything that goes against nationalistic sentiments such as allowing MAS to come under the control of a foreign or local company is something that the current government cannot afford to do at this juncture.
But MAS is not the only airline in trouble. The aviation industry in Europe has been ravaged, with FlyBe being the latest to succumb to the weight of intense competition. And in FlyBe’s case, the British government has decided to help the low-cost carrier to stay afloat, much to the chagrin of its competitors - British Airways, EasyJet and Ryanair.
In 2017, three airlines went bust in Europe – Monarch, Air Berlin and Alitalia. In 2018, there were five other airlines in Europe that fell under the weight of intense competition and insufficient funds. In the last few months, three airlines, including FlyBe, have raised the red flag.
So, MAS is not the odd one out.
It has been reported that the suitors for MAS include the AIRASIA Group, Malindo Air and Japan Airlines (JAL).
Among the suitors, the choice for Khazanah, without taking into account political considerations, comes down to only AirAsia and JAL.
AirAsia, a low-cost carrier, is Malaysia’s most successful airline, having a market capitalisation of RM5.2bil. In AIRASIA X (AAX), the group has established a long-haul, low-cost carrier that made profits in 2016 and 2017 but went back to the red in 2018.
AAX was set up 12 years ago at a time when sceptics dismissed the idea that a long-haul, low-cost airline could be viable. This is because the model of a low-cost airline is to fly to destinations within a four-hour flying time so that the airline can return within the same day, hence optimising on the crew and parking charges.
In contrast, long-haul flights are at least seven hours long and involve a higher cost such as having to maintain two crew for one flight.
AAX claims that it has the lowest unit cost per seat compared to any other long-haul airline in the world, with a cost per available seat kilometre (CASK) of 3.2 cents and 1.95 cents if excluding fuel. It contends that the low operating cost allows it to offer fares of between 30% and 50% lower compared to any full-service carrier.
JAL comes with a track record of having turned around from filing for bankruptcy in 2010 to being a profitable airline. It shed almost 15,000 employees and totally revamped its organisation and business model.
JAL has a stable earnings stream from domestic operations where its only other competitor is All Nippon Airways, while forming alliances with other global players to service international destinations. According to Japan Credit Rating Agency Ltd, JAL is a highly profitable company with a stable business performance despite the travails of the airline industry.
The rating agency attributed the performance of JAL to the expansion of its global network through alliances and the operations of a new core system for passengers that have led to good results since financial year 2017.
JAL has consistently recorded profits and improved cashflows over the last five years. Its net income dipped in 2016 and 2017 but showed growth in 2018, the year when many airlines stumbled due to the spiralling cost of jet fuel. Its operating cash flow has been on an uptrend, an indication of the quality of its earnings.
The third contender is Malindo Air, which is controlled by Rusdi Kirana of Indonesia. Kirana’s cash-generating machine is Lion Air in Indonesia, which controls 50% of the domestic market. In a country with a population of 230 million, Lion Air can afford to have a much bigger fleet than any other airline in the region.
Lion Air is a stiff competitor to AirAsia and both are going after the same market, which is to capture travellers flying within the four-hour flying time destination. In Malaysia, AirAsia is in the lead while in Indonesia, it is the reverse.
Malindo Air started operations in 2013 with the National Aerospace and Defence Industries (Nadi) group, a bumiputra company, holding 50.99% while the Lion Air Group held the rest. Recently, it was reported that Nadi had reduced its stake to 5% with the emergence of Sky One Investors Sdn Bhd with 46%.
Since 2001, the government through Khazanah has pumped in RM23bil into MAS. It has been restructured several times but the airline is unable to come up with a model to ensure sustainable profits.
The officials say that MAS continues to suffer from an industry that has 1.7 seats available for every one flying passenger. Apart from the over-capacity, MAS, just like any other airline, has to contend with financing costs, aircraft lease rates and volatile jet fuel costs.
So, what can the government do?
It cannot allow MAS to fail. At the same time, selling a stake to a competitor who then takes control of operations will need great political will, which is difficult to muster at the moment.
The views expressed here are the writer’s own.
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