Malaysia Airlines’ history of failed recovery

By Stephanie Jacob

Since the government re-took ownership of MAS following the disastrous privatisation of the national airline in the late 1990s, there had been various efforts undertaken to return the national carrier to long-term, sustainable profitability. In the first of four pieces, Kinibiz recaps the last few restructuring plans that were undertaken and have ultimately failed.

_______________________________________________________________________

Last Friday, Khazanah Nasional Bhd released its roadmap to save Malaysia Airlines. Titled ‘Rebuilding a National Icon – The MAS Recovery Plan’, it contains 12 key steps that will have to be undertaken in the course of the rescue effort.

The plan of course is not the first effort in re-routing the  national airline’s ailing fortunes. Rather, it could be said that this is version 4.0 after the 2002 Widespread Asset Unbundling (WAU) exercise and Idris Jala’s Business Turnaround Plans 1 and 2 in 2006 and 2009 respectively.

Khazanah said that from 2001 to June 2014, the government has expended RM17.4 billion on the flag carrier through various rights issuances and other efforts to keep it flying. The latest version will cost Khazanah a further RM6 billion over the next three to five years.

However Khazanah has emphasised that the money comes with strict conditionality. Its managing director Azman Mokhtar emphasised that MAS will have to be willing to take the ‘medicine’. He said “(the) medicine is linked to the money coming in, so if you do not take the medicine, then there will be no money coming in.”

Perhaps what is different this time, is that the plan is looking at both injecting money and overhauling MAS’ current management and operations. It is also attempting to establish a focused and clear direction for the airline, something that perhaps has been lacking since the government re-took ownership after its failed privatisation attempt in the late nineties.

The failed privatisation attempt

MAS woes can be traced back to the failed privatisation of the airline in 1994 to Tajudin Ramli. To recap, MAS was privatised to Tajudin after the latter purchased a 30% via his listed vehicle, Naluri for about RM2 billion.

This translated to about RM8 per share, which was a premium to the RM6 it was trading at. Then-finance minister Daim Zainuddin reportedly told Parliament that the price was a “good buy”.

There are several narratives as to how the privatisation came about and why. What is clear is that post-privatisation, the airline began a downward spiral that is has never truly recovered from, made worse by the Asian Financial Crisis in the late 1990s.

The Asian Financial Crisis had a serious impact on airlines across the region and not on MAS alone. However in the subsequent period, the others recovered unlike MAS.

In 2001, MAS under private management had posted losses for three consecutive years. Losses were in the RM400 million region when the government stepped in and retook ownership of the flag carrier. The government paid RM8 per MAS share despite the fact the airlines stock was trading at about half of that at the time.

The first rescue plan: Widespread Asset Unbundling

In 2002, the first restructuring effort was undertaken in the form of an widespread asset unbundling or WAU.

The plan was suggested by BinaFikir, a consultancy which was formed by current Khazanah chief Azman Mokhtar and Mohammed Rashdan Mohd Yusof (who would later become part of MAS’ senior management team).

According to BinaFikir the idea behind the ‘unbundling’ of the airlines RM5 billion of assets and RM7 billion of liabilities was in order to transform MAS’ gearing ratio of 700% into a net cash position. As a result of this exercise MAS became an ‘asset-light’ airline.

To facilitate this, a special purpose vehicle called Penerbangan Malaysia Bhd (PMB) was created. PMB became MAS’ parent company in exchange for assuming the airline’s aircraft assets and related liabilities. PMB was in charge of engaging in the acquisition, sales and leasing of aircraft, aircraft engines and investment holding for MAS.

In 2004, Khazanah acquired PMB from the Finance Ministry. To date, PMB has accumulated RM2.8 billion in net losses.

Initially the plan showed results, as touted by BinaFikir’s own report card on the WAU plan. It said that the restructuring plan “successfully resolved MAS’ balance sheet problems and gave a strong platform to the management to focus on continued operational improvements.”

Within one year of WAU being carried out, a net loss of more than RM800 million as at end of March 2002 had been turned into a RM339 million net profit as at end March 2003. MAS continued to deliver net profits over the next two financial years.

However the WAU exercise proved to be too focused on financial restructuring and not enough on making the necessary operational changes. Faced with escalating fuel costs, and having not addressed operating costs and yield, MAS announced a staggering RM1.3 billion loss after nine months of financial year 2005.

Business Turnaround Plan 1 – The start of Idris Jala’s tenure

With MAS back deep in the red, turnaround expert Idris Jala was tapped from Shell by the government to take the helm in late 2005.

At the point of Jala (pic) taking over, it was estimated that MAS would run out of cash by April 2006. To address the massive losses, Jala announced his Business Turnaround Plan 1 (BTP1).

BTP1 focused on cost cutting measures, including selling off assets such as MAS headquarters in KL, an unpopular but necessary step. Jala also cut routes, reduced operational costs and worked towards raising yields.

He also implemented a voluntary separation scheme which reduced MAS’ bloated staff count significantly.

In his first year, net losses were reduced substantially from RM1.3 billion to a net loss of slightly more than RM100 million. The turnaround was completed in 2007, as MAS recorded a net profit of RM900 million – the highest in the airline’s corporate history.

Analysts credited the turnaround to a massive operational cost reduction plus yield enhancement, and given the parameters set out in the BTP1 deemed the effort a success.

Business Transformation Plan 2 – The third plan

Jala then introduced his five-year Business Transformation Plan 2 (BTP2). The central aim of the plan was to transform MAS into a five star value carrier which would, “aim and plan for the best, and assume for the worst.”

According to Jala, this meant that the airline would aim for record profits, but prepare for the worst, which was the imminent liberalisation and overcapacity issues in Asia.

However MAS’ recovery was again hit in 2008, with the Global Financial Crisis affecting airlines across the region. The price of crude oil also skyrocketed, hitting its bottomline. As a result net profit fell in 2008, coming in at RM200 million.

Then in the first quarter of 2009, MAS was hit by significant loss from fuel hedging contracts. Engaging in fuel hedging is something that Jala introduced at MAS. Although not a new strategy in the airline industry it can sometimes backfire, as Jala found out during the last year or so of his time at MAS.

Jala did not stay at MAS to see BTP2 through, leaving in Aug 2009 to join the Cabinet as a Minister in the Prime Minister’s department and to helm Putrajaya’s economic and government transformation programmes as CEO of Pemandu.

Despite the fuel hedging loss and Jala’s departure, MAS still succeeded in increasing its net profit in 2009. It recorded a profit of around RM500 million for the year, up from the RM200 million seen during 2008.

MAS-AirAsia Comprehensive Collaboration Framework

Jala was replaced by then chief financial officer Tengku Azmil Zaharuddin, who was largely expected to continue where Jala had left off. The year 2010 again saw a fall in profits to RM200 million and it proved to be indicative that trouble was returning to MAS.

The following year 2011 marked the beginning of this latest return to unprofitability as the national carrier posted a full year loss of RM2.5 billion, the biggest ever in its history. High fuel costs and poor management were given as the reasons for the dismal showing.

In August, Tengku Azmil left MAS, and was replaced by Ahmad Jauhari Yahya or AJ (right) as he is popularly known. The appointment raised eyebrows as AJ did not come from an aviation background, and neither was he known as a turnaround expert.

It was also during this time, MAS and AirAsia entered into a share swap agreement which saw MAS’s majority shareholder Khazanah acquire a 10% stake in AirAsia and AirAsia X each. While Tune Air Sdn Bhd acquired 20.5% equity in MAS.

The aim of the deal was to create joint synergies and economies of scale. Ultimately, the deal was called off due to strong protest from MAS unions, who feared substantial job cuts as a result. The deal was also not popular politically.

The two were subsequently fined RM10 million each by the Malaysian Competition Commission (MyCC), after the regulator ruled that the carriers were guilty of anti-competition practices.

AJ goes for ‘load active, yield passive’ strategy

After taking the MAS hotseat, AJ introduced his own turnaround plan which focused on what he called “sweating our assets”.

Basically this meant offering increased capacity at lower prices to fill the planes. Or in another way; by increasing available seats per kilometre (ASK) you increase capacity, this in turn allows you to increase your revenue. The hitch in this plan is when the quantum of revenue from this increased capacity is not enough to cover the costs of flying.

Since AJ took the helm, MAS has continued to post losses. In 2012, losses amounted to RM400 million, before ballooning again in 2013 to RM1.2 billion. Khazanah estimates that losses will hit RM2 billion by end 2014.

In late June, AJ admitted his strategy had not worked and said that MAS  was in consultation with its various stakeholders and were evaluating their next move.

Khazanah’s proposal in early August to buy out the remaining stake it does not own at 27 sen per share and its recovery plan is that new move. But will it be able to achieve what three different plans have failed to do?

Tomorrow Kinibiz takes apart Khazanah’s RM6 billion recovery plan, to see what is different this time around and if the new plan has the right mix of solutions and strategies to save MAS.

Tomorrow: MAS rescue 4.0 — what’s different this time