P Gunasegaram
Malaysiakini
18 Jul 2017

A QUESTION OF BUSINESS | During electioneering, it is common to make political capital out of everything. Malaysia Airlines Bhd was not spared when Prime Minister Najib Abdul Razak blamed one of his “predecessors” at a Hari Raya open house earlier this month for “horrendous decisions”.

He was very obviously referring to former prime minister Dr Mahathir Mohamad, although he did not name him. But to be fair, Mahathir was not responsible for the latest disaster at Malaysia Airlines. Paradoxically this happened largely during Najib’s time.

This latest disaster which resulted in losses of billions of ringgit and required a RM6 billion injection of capital and privatisation in 2014 by Khazanah Nasional Bhd, the previous major shareholder and now sole shareholder, resulted after Malaysia Airlines was turned around in 2007.

What Najib was referring to was the previous disastrous privatisation of Malaysia Airlines, to a Mahathir-Daim crony Tajudin Ramli who bought a controlling near 30% stake in the airline in 1994 for RM1.8 billion. After mismanaging the airline into the ground, he sold back his stake in the airline to the government – at the same price – in 2000. The market price was less than half that.

Turned around in 2007

Najib’s immediate predecessor Abdullah Ahmad Badawi brought in Idris Jala from Shell to turn around Malaysia Airlines in 2005, the same Idris who would head the Performance Management and Delivery Unit or Pemandu at the PM’s Department in 2009 and join the cabinet.

Two years later, in 2007, Malaysia Airlines had turned around. In Idris’ first year on the job, he reduced the losses to RM133 million and turned the company back into the black with a record profit of RM853 million in 2007, according to this letter written by a former investor relations manager at Malaysia Airlines, Song Eu Jin, to Malaysiakini.

“The profit in 2007 was the highest in MAS’ corporate history and was earned through a massive operational cost reduction of RM745 million as well as on the back of record revenues of RM9.4 billion. The profit numbers were real as reflected in the cash balance at that time of RM5.3 billion which had grown from RM1.5 billion at the end of 2005, when Idris joined MAS (Malaysia Airline’s forerunner),” the letter said.

But in 2009, Idris left Malaysia Airlines to join Najib’s cabinet and head Pemandu. A succession of CEOs after him proved to be incapable and sent the airline down back into losses of billions of ringgit yet again. And no mistake about it, this happened during Najib’s time.

Horrendous decisions but by whom?

This is what Najib said at the open house: “The history of MAS was fraught with, I would say, horrendous decisions in the past. I’m not going down that road but that was a nightmare that was inflicted upon MAS that was done by one of my predecessors.

“But I will put it right. I will make sure MAS recovers and becomes one of the leading airlines in the world,” said Najib to applause from thousands in the audience present at the event. How ironic that is when the latest problems occurred during his time entirely.

I have followed the Malaysia Airlines saga over the years – from the 80s onwards and read up its history before that. Idris did turn the airline around solidly although it incurred a huge hedging loss of RM557 million in 2009 on fuel when fuel prices fell. The contracts had to be marked to market.

The way he did this was to focus on two things – yield and load factor. Yield represents the unit amount that the airline got from selling tickets and load factor is a measure of how much aircraft are filled. The right pricing of seats results in the best combination in terms of unit revenues from seats sold and load factor to maximise revenue.

In practice, this revenue management system is extremely complicated and uses sophisticated computer modelling which critically requires right inputs. That focus helped Malaysia Airlines increase revenues, helped along by an important fact – the airlines’ services were among the best in the world, as measured by Skytrax, the industry standard by which airlines are measured. Skytrax gave five-star status to Malaysia Airlines, with less than two handfuls among hundreds of airlines in the world qualifying.

Meantime, on the cost side, Malaysia Airlines’ was among the lowest in the world for full-service carriers but still advances were made here as well. The combined reduction in costs with an accompanying increase in revenues was what turned Malaysia Airlines around under Idris.

Subsequent CEOs lost focus. They thought budget carrier AirAsia was the competition when Malaysia Airlines was a full-service, five-star airline. Yield dropped, load factors went up too much but still revenues were not enough. Fuel prices continued to climb, exerting further pressure. Revenue management deteriorated.

And then came the two unfortunate crashes of 2014 which depressed revenues even further.

When Khazanah Nasional came in with their recovery programme during and post privatisation in 2014, I was flummoxed – nothing about revenue management, it was about cutting costs. But with unit costs for Malaysia Airlines still among the lowest in the full-service industry, revenue management was the key.

Enter Mueller

Khazanah Nasional went on a worldwide search for a CEO and found Christoph Mueller, a German, who reputedly turned around Ireland’s Aer Lingus. He joined in May 2015. He continued with extreme cost-cutting, shrunk the airline to a regional one, maintaining one flight to Europe, London. He made a deal with Emirates (the airline) for code sharing, all but killing Malaysia Airlines’ more international routes.

I was not impressed with him – turnaround means making unprofitable routes profitable, not cutting them and keeping only profitable ones – any fool can do that and show a profit, albeit a shrunken one which will never recover to the levels seen before. It meant that Malaysia Airlines’ main competitors would be the low-cost airlines – yes, AirAsia again.

Mueller’s cost-cutting would lose Malaysia Airlines five-star rating, one of its main assets. Because of the drop in level of service as a result of severe cutbacks, Malaysia Airlines asked not to be rated anymore. Insiders maintain to me that he was scathing about that rating, saying that many airlines had better service than Malaysia Airlines.

That and the frequent reference to Malaysia Airlines’ previous two crashes – both of which could not be pinned on the airline itself – made me wonder whether he was the best person to be running Malaysia Airlines. On the one hand, he runs down highly-rated services, on the other he makes frequent references to crashes to show his difficult position, both not in the interests of the airline itself.

Barely a year into his three-year tenure, Mueller announced his intention to resign “for personal reasons” but six months later in September 2016, he joined Emirates as chief digital officer, the same airline with which he negotiated the code-share agreement as CEO of Malaysia Airlines. What a conflict of interest!

On balance, my opinion is that Mueller was bad for Malaysia Airlines and I find it difficult to understand why his hiring did not have stringent conditions attached about joining competitor airlines.

His successor Irishman Peter Bellew, who took over in July 2016, was then chief operations officer at Malaysia Airlines. He was hired from low-cost airline Ryanair and had no experience in a full-service airline before that. However, he has said that Malaysia Airlines is trying to regain its 5-star status.

Recently I travelled to and fro London on Malaysia Airlines and the service and quality of food have indeed improved, a good sign. But it will take more than that to successfully turn around Malaysia Airlines.

An inconsequential airline

A targeted profit only in 2018 is rather late in the day given that most airlines made good profits recently because of the sharp drop in fuel prices. Despite all that cost-cutting and low fuel prices, Malaysia Airlines is bleeding. Why?

The answer lies in revenue management – how come Malaysia Airlines fares can be lower than AirAsia’s which is a low-cost airline. Surely that is indication that prices have been too low, especially since load factors remain high? Malaysia Airlines has got revenue management wrong and it still remains suspect.

And then strategy – how can you expect to succeed regionally as a full-service airline when there are so many low-cost airlines in the space? Surely you must try the longer international routes and make them profitable instead.

The times I have flown to London on the airline, the flights were full on the A380s. Yet Malaysia Airlines has plans to downgrade this route using lower capacity, smaller A350s. This will substantially reduce its competitiveness in terms of comfort relative to other major full-service carriers.

One more thing, since privatisation nobody knows how much money Malaysia Airlines is losing and what are its yields and load factors. Its performance has become rather opaque because the quarterly reports are not anything like what it was before when it was publicly listed. That makes it more difficult to make conclusions.

But the way it is going, it may be that Malaysia Airlines may eventually become somewhere between a low-cost and full-service airline, neither here nor there, floundering between small profits and losses – an inconsequential airline in other words.

What a comedown for a once proud brand!