MAS: Change in tack as Dunleavy leaves?

By P. Gunasegaram

Signs indicate that Malaysia Airlines or MAS may be tweaking its recent revenue management model which has failed it previously. If that is so, its future prospects are decidedly brighter.

The departure of MAS chief commercial officer Hugh Dunleavy and the interim takeover of his position by chief executive officer CEO Christoph Mueller from June 1 is clear enough indication that the airline is placing emphasis on revenue management.

This is especially so when Dunleavy’s official departure date from the airline is Aug 31, about three months from now. Dunleavy and his colleague, Shihaj Kutty, vice-president of network and revenue management, were the two people brought in to handle revenue management for the airline under previous CEO Ahmad Jauhari Yahya.

Ahmad Jauhari Yahya

Considering that Dunleavy has 30 years of experience in the field and impressive credentials, his departure indicates an admission of failure of his “yield passive, load active” strategy. This envisaged basically filling up the planes by dropping fares in a situation where MAS’ capacity was rising because of new planes.

But despite an increase in capacity, its load factor (a measure of how much the airline is filled) as a result of the strategy went up to 10-year record-high levels but yields (a reflection of fares) dropped precipitously to levels significantly lower than regional peers which resulted in MAS’ profits continuing to plunge.

In a separate article, KINIBIZ explained why this strategy is the wrong one.

Hugh Dunleavy

In an interview with KINIBIZ where we discussed its results for the first half of 2013, in September of the year, Dunleavy said: “An airline’s goal is not about maximising load factor, it’s not about maximising yield; it’s about maximising revenue, and that’s what we do. But there is a control point … Growing revenue past the point where it does not cover the variable cost of operations doesn’t make sense either.”

“But the focus on yield, a lot of airlines do this. And most airlines I’ve worked with, whether it is Lufthansa, Continental or Cathay, are what I call yield junkies. The moment things go well the company says, raise the yield,” he added.

But growing revenue past the point where it did not cover the variable cost of operations was paradoxically what MAS actually did.

An airline’s capacity is measured by available seat kilometres (ASK), which is basically the sum of the number of seats multiplied by kilometres flown for each route. Capacity utilised is the number of revenue passengers multiplied by kilometres flown or RPKs. RPK divided by ASK gives the load factor or capacity utilisation. Yield is the amount obtained for each RPK flown.

However, when we measure airline operational profitability, its unit revenue and costs are those that matter, which are respectively revenue per ASK (RASK) and costs per ASK (CASK). You obtain RASK by multiplying the yield by the load factor. (see table)

Subtracting CASK from RASK gives the profit per ASK, the unit profit. If you have a unit profit, the airline is operationally profitable, the higher it is the more profitable the airline.

Dunleavy further said in the interview: “Our goal is to maximise revenue. We increased the load factor by six points. Yes, yields went down by 14%. But at the same time, capacity (ASK) is up 20% and 30% more people flew Malaysia Airlines than the year before.”

“This translates to a 12% improvement in revenue, even as yields have come down 14%,” he said.

But there’s a fatal flaw in his argument. Revenue went up only 12% when capacity increased 20%, which is of course a clear indication that yield is down and it was down 14%. And a six percentage point increase in the load factor to 84% or 7.7% indicates that planes were filled even more than before the capacity increase.

RASK is the measure of unit revenue and is the yield multiplied by the load factor. Thus if the yield falls by a larger amount (14% in this case) than the increase in load factor (7.7%), then the unit revenue or RASK falls. And if there is no change in the CASK, then the unit profit declines or the unit loss increases, as it did in MAS’ case.

MAS’ revenue management was an utter failure, not even managing to keep revenue growing in line with capacity, and also filling the planes up at prices which were so low that they could not cover variable costs.

Shihaj Kutty

Let’s look at what Shihaj said during the same interview: “We are competing in a space of low-cost carriers. There was one decision we needed to make: are we in that space or are we not in that space?”

“We like to think we’re not but the fact of the matter is: You as a consumer, you’re in that space. Are we interested in you? Absolutely, we are,” Shihaj said.

Shihaj admitted that airfares at Malaysia Airlines have been reduced through heavy discounting to entice passengers away from competitors, both full service and low cost alike.

“That is a strategic decision we have taken, that is to compete in that space until a reasonable point,” he said.

The key words were “until a reasonable point”. As subsequent events bore out, the “load active, yield passive” strategy proved disastrous for MAS with profits plunging and being made worse by the subsequent two disasters of MH370 and MH17, which further adversely affected passenger numbers and fares.

Consider this: MAS has the lowest RASK or unit revenue among competitors such as Singapore Airlines, Cathay Pacific, and Thai Airways. And it has the lowest CASK or unit costs among the same competitors. (see charts)

Where should the emphasis be? Clearly on increasing unit revenue or RASK through managing yields (fares) and load factors. That does not mean that costs should not be managed. In this case, increasing revenue is the cake and lowering costs is the icing on the cake.

It is clear that MAS got revenue management wrong under Dunleavy and by extension Ahmad Jauhari. And hopefully indications are that it will get better under Mueller.

But Mueller, who took over as CEO on May 1, has so far emphasised the cost side of the profit equation. Perhaps that’s because it is the much more visible part of airline operations and the one much more likely to be in the public eye.

Even if he talks more about costs, his focus should be on revenue which is what will yield the best returns.

GRRRRR!!!