By Chan Quan Min
Now that the 12-point recovery plan is out how will Khazanah lead MAS back into the black? While it is still too early to judge the success of the recovery plan, there are more than enough clues to make reasonable assumptions on which direction it may take.
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It can be argued that Khazanah Nasional has put Malaysia Airlines on the right footing with a daring restructuring plan that promises to transform the flag carrier into an entity run on “purely commercial criteria.
Gone is the Malaysia Airlines that boasted of flying to all six of the world’s inhabited continents but could barely turn a profit and so too the Malaysia Airlines that protected jobs but could not guarantee employees a stable future.
If Khazanah keeps to its word, the new MAS will be run strictly as a business, smaller and more nimble than before. New MAS will fly only profitable routes, not prestige routes. And it will put passengers flying to and from Malaysia ahead of those going from point A to point B via Malaysia, according to the 38-page MAS recovery plan distributed to members of the press.
In the plan, Khazanah made the case for a “complete overhaul” by admitting that MAS has been “unable to establish itself as a financially self-sufficient airline,” racking up cumulative net losses of RM8.4 billion since 2001 despite RM17.4 billion in government funding during a string of failed turnarounds.
The plan recognises economic realities that became more apparent when MAS fought head on with AirAsia in a price war last year. AirAsia emerged out of the battle relatively unscathed: the budget airline is still profitable, albeit less so. MAS, on the other hand, posted net losses of RM1.2 billion for the 2013 financial year.
The reason for this is summed up succinctly and to the point in Khazanah’s recovery plan: “MAS has a significant cost disadvantage to its low-cost carrier (LCC) competition, which its revenue premium fails to cover.”
In simple terms, charge the same price as AirAsia and MAS is dead meat, simply because AirAsia can always discount more and still come away with a profit.
Are LCCs the competition?
Khazanah’s recovery plan aptly made frequent comparisons between MAS and other full-service carriers in the region, namely Cathay Pacific, Garuda Indonesia, Singapore Airlines and Thai Airways.
But on one indicator, unit cost, MAS was compared to “LCC peers,” presumably the AirAsia group of airlines. Khazanah managing director Azman Mokhtar, during the press conference last Friday to reveal the recovery plan, gravely exclaimed, “our cost structure is 40% too high.”
Why does Khazanah compare the national airline’s cost structure to AirAsia, despite most experts standing by the assumption that premium MAS and budget AirAsia by and large do not compete in the same market segment?
The plan even calls for the adoption of strategies used by LCCs to drive down costs such as increasing seat density, raising utilisation rates and improving labour productivity to reduce operating costs to within 15% of LCC peers. This would entail a cost reduction of about 25%, a “tall order,” according to Daniel Wong of Hong Leong Investment Bank.
“Judging from the past records of lack of capable top management, weak political will and fragile staff support and morale… we believe the targets set… to be a relatively tall order,” Wong explained.
But are costs high in the first place when compared to full-service carriers? Khanazah’s analysis surprisingly suggests not. In fact, Khazanah found that “MAS has a slight cost advantage” to Cathay Pacific, Garuda Indonesia, Singapore Airlines and Thai Airways.
The national airline’s unit costs or cost per available seat-kilometre (CASK) is 1.4% below that of Thai Airways. Against Cathay Pacific, which has one of the highest cost structures in the region, MAS has a CASK that is 5.7% lower.
Tossing aside cost concerns for the time being leaves revenue as the only real problem MAS is facing. From reported operational data, it is evident MAS either cannot get passengers to pay a high enough price for its flights or worse, that it is undercharging or dumping fares.
In May, AirAsia CEO Aireen Omar said the budget airline would not continue to partake in “irrational competition,” presumably with MAS, when it announced its was retreating from competitive skies. Earlier in the year, AirAsia presentation slides cited “irrational pricing” as one of the factors leading to the national airline’s heavy losses.
Khazanah’s Azman also briefly mentioned “haphazard competition” as one of the factors leading to the national airline’s deepening losses during last Friday’s press conference at the sovereign wealth fund’s head office on the 33rd floor of the Petronas Twin Towers.
AirAsia’s accusations hold some water. MAS is evidently suffering from poor yields, an airline term for revenue per unit or revenue per kilometre per passenger. Another way to look at yield is as an indicator of average ticket prices adjusted for distance flown.
The network-wide yield for MAS in the second quarter was just 21.7 sen per revenue passenger-kilometre or about 6.8 US cents. Few, if any, full-service airlines report such low yield numbers. Cathay Pacific, Singapore Airlines and Thai Airways all command yields above 8.4 US cents.
Leaning on revenue management
With yields now at the lowest point since 2006, MAS may have little choice but to reverse an unorthodox strategy that ignored yields at the expense of selling seats at big discounts.
Point three of Khazanah’s 12-point recovery plan calls for a “renewed focus on revenue yield management” after recognising that “revenue performance trails other full-service carrier competitors.”
In aviation circles revenue or yield management is the use of pricing strategies to extract maximum revenue out of a finite, quickly expiring resource, seats on planes. Revenue management is based on price optimisation strategies or knowing when and at which price to charge for an air ticket.
Airlines do this by first segregating the market according to flyers’ propensity to spend. For instance, as a general rule, ticket prices become more expensive closer to the departure date.
Taking the revenue management route, which Khazanah is very likely to do, would mean a reversal of MAS CEO Ahmad Jauhari Yahya’s “load active, yield passive” strategy that called for “pricing to the market,” unpopular with aviation analysts at most local bank-banked research houses.
Raising yields or ticket prices will be easy to do if Khazanah goes ahead with a “right-sizing” of the MAS network and fleet as detailed in Khazanah’s recovery plan, which will constrict capacity.
But there are dangers with cutting back too much, such as losing hard-won market share probably for good.
For Khazanah and MAS the hard work has only just begun. “MAS must be able to reduce its costs. But reducing its cost structure sufficiently to compete effectively while simultaneously increasing unit revenues will be challenges that few have ever achieved, especially among flag carriers,” an analysis piece on Center for Aviation or CAPA concluded.
“The seemingly inevitable link with nationalism and politics does not travel well with consistent rational debate over national airlines.”
While not mentioned in detail in Khazanah’s 12-point plan, the spectre of political interference still hangs heavy over MAS. This despite the promise to operate the new MAS on “purely commercial criteria.”
The success of Khazanah’s daring plan now depends on how it will implement and carry out its own recommendations. And it will hinge on the team of people and their advisors tasked with leading the new MAS.
Ultimately, those who manage Malaysia Airlines at the top, perhaps some 100 – 200 people need to be of sufficient calibre to handle route and revenue management. Despite the unfortunate two incidents, the airline is a good one, one of just a handful of airlines repeatedly awarded the 5-star airline rating by Skytrax.
Skytrax is one of the most comprehensive and well regarded airline rating bodies in the industry, “based upon a detailed quality analysis of, more than 800 different items of airline front-line product and staff service standards,” according to the organisation’s website.
The problem is since the time of Idris Jala’s departure from Malaysia Airlines in 2009 and the airline slump following the world financial crisis, Malaysia Airlines yields have not recovered the way those of other airlines have.
While numerous analysts and many KiniBiz reports have highlighted this, Malaysia Airlines seemed blissfully ignorant of this most important factor for the turnaround of the airline. Why?
The only answer: the poor quality of management and specifically those managing revenue and routes.
Hopefully, the push to renew management this time by Khazanah will sort this out once and for all by employing those who understand how to maximise revenue by appropriate pricing. Simply put, Malaysia Airlines is a 5-star airline offering low-cost prices. How can it possibly survive?
What is needed is a new team at the top which knows how to maintain and improve upon Malaysia Airlines 5-star qualities and translate that into appropriate pricing through proper route and revenue management combined with the right marketing mix.
The people who can do that is what Khazanah should be looking for and if Khazanah can find them, Malaysia Airline’s turnaround is not only assured but its sustainability as well. That will mean no more bailouts.
Yesterday: MAS rescue 4.0 – What’s different this time
Tomorrow: Why we need Malaysia Airlines
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