By Stephanie Jacob
Malaysian Airline System Bhd has now become Malaysia Airlines Bhd or MAB. It has a smaller staff and a new management. Can this finally be the turnaround that brings sustainable and long-term success for the national carrier? Tiger believes this will depend on management getting its yield and route network right.
On Sept 1, 2015, MAS as it was famously known for decades ceased to exist. In its place Malaysia Airlines Bhd or MAB was born. Aside from the name not much changed outwardly, the famous wau logo still adorns its aircraft and its cabin crews will continue to wear the same uniforms they have worn over the past years.
So it was not the branding of Malaysia Airlines that has changed, but its corporate plans and its legal commitments. In the transition from MAS to MAB, every contract that the old company had entered into was scrutinised and renegotiated. In particular the negotiations over its catering contract with Brahim’s Holdings Bhd was among those most closely watched.
The new airline is also very much leaner – both in terms of its staff count which was reduced to about 13,000 from 20,000 and in its route network which has been trimmed. So inwardly, MAB is very much a different entity from its predecessor.
Of course, this is not the first time the national carrier has gone through name changes and had to adjust its corporate and legal structures. In fact the national carrier which began as Malayan Airways Ltd in 1947 has had several name changes over the years.
It first changed its name to Malayan Airways Ltd or MAL when the Federation of Malaysia was formed in 1963. Then several years later when Singapore was expelled from the federation, the airline was renamed Malaysia-Singapore Airlines (MSA). It remained the national carrier for the two countries.
However as the national interests of the two became increasingly different the countries decided that MSA as a single entity would cease operations and split its assets. This formed Singapore Airlines and Malaysia Airlines System or MAS, and the name stuck till Sept 1, 2015.
The latest name change comes just over a year after Khazanah Nasional Bhd (Khazanah) announced that it would privatise the airline and pump in RM6 billion in a rescue attempt that many feel should be the last push to save this national icon.
And the transition from the old company to the new company is a significant milestone in the process of executing the rescue effort that was put forward just over a year ago.
Christoph Mueller
Helming Malaysia Airlines is Christoph Mueller, a man who comes with plenty of airline experience but is facing what might be the biggest challenge in the airline industry today. Not only has the airline been languishing financially, it also has a branding crisis following the two tragedies of MH370 and MH17 in 2014.
Making Malaysia Airlines a successful airline may be a long and arduous journey. The airline will have to work very hard at regaining the trust of its international passengers. According to the airline, in places such as Australia and China there are passengers who rate Malaysia Airlines as their very last option to fly and some who will rather not fly then use the airline.
One would think that is not what Malaysia Airlines would want to publicise but it did, perhaps to show how difficult things are. Malaysia Airlines should also have publicised that even after the crash of MH17 passengers subsequently boarded a flight from Amsterdam to Kuala Lumpur. When asked why, some of them remarked that the crash of MH17 was not at all Malaysia Airlines’ fault.
Crashes do happen and eventually airlines recover, especially one like Malaysia Airlines which prior to March 2014 had a stellar safety record. Challenging as it will be, the airline must begin to try and steer the conversation away from the tragedies of MH370 and MH17 which could have struck any other airline.
A good reputation takes years to build but can be lost in mere months as Malaysia Airlines has sadly found out. The process of regaining and reestablishing the airline’s good name will similarly take time and flawless branding as well as marketing.
Nonetheless while undoubtedly a crucial part of the airlines recovery this is the long game. In the short and medium term, Mueller must ensure that Malaysia Airlines’ business plan and by extension its financial performance substantially improves from what was delivered by MAS over the past few years. It is this portion of the turnaround which will determine long term sustainability and viability.
Mueller has indicated that he wants to work on reducing the airline’s cost and has said that Malaysia Airlines must get its cost under control as a matter of priority. The airline has taken several steps towards that by initiating a large downsizing of its staff count and by renegotiating contracts to ensure that MAB is not overpaying for services.
The airline has also sold some aircraft and made cuts its route network – dropping its Frankfurt route, cutting several Asian destinations and reducing capacity on many others. The result of these moves already can be seen, as a recent attempt to book a flight to Bali one month in advance found that there were no seats available.
While some route cuts are inevitable and Malaysia Airlines must focus on flying routes which are sustainable – route rationalisation is something that must be done with a scalpel rather than a cleaver.
The quickest way to pare its losses and return to profitability is route rationalisation and selling aircraft. But while that will bring a quick turnaround, it will not necessarily bring a sustainable turnaround.
Of course running a cost effective airline is important whether it is full-service aircraft or a low-cost carrier and in the case of Malaysia Airlines, getting cost under control may well be the low hanging fruit. Nonetheless, at some point MAB will have to start growing again and it must not be downsized to a point that it limits the airline’s future growth prospects.
Mueller has indicated that not all routes which have been stopped will remain so forever and that there will come a time for expansion, and this is positive. After all, Malaysia Airlines has been profitable in the past even with an extensive route network.
The key then, as it will be now is getting yield right and in the long run it will be Mueller’s ability to get this right which will prove key to the airline’s long term success. Since the Global Financial Crisis, Malaysia Airlines’ yield has failed to recover to the level of its competitors. As has been well established the past management’s business plan of ‘load active, yield passive’ proved to be a failed experiment. Fixing the airline’s yield will be crucial going forward.
Overall, improvements seem to have been made. A comparison of Malaysia Airlines fares (please see table below) for six destinations versus AirAsia Bhd and AirAsia X Bhd fares (including add-ons for 20kg luggage allocation and a meal each way) showed that Malaysia Airlines fares were higher for all destinations. This is an improvement from the past two years, when the airline’s fares were at times lower than that of the low-cost carriers – a move that hurt both airlines significantly.
However with the exception of its KL to Melbourne fares, Malaysia Airlines rates are still not significantly higher than those of the low-cost carriers. For an instance, the difference between their fares to Bali is about RM122 – which is not much when you consider that on MAB you could have several beverages, including alcohol.
When compared against a fellow full service carrier and regional competitor Singapore Airlines, pricing on long-haul routes to Melbourne and London only differed slightly. This could mean that MAB has started pricing its fares closer to that of its full service peers which is a step in the right direction given that it offers a similar service. After all it is important to remember that Malaysia Airlines was a multi-year five star airline.
In a few years, Khazanah plans to re-list MAB on Bursa Malaysia. For it to be an attractive proposition it has to have good financial management and importantly, good growth prospects. They have already been given a helping hand by the government which allowed massive job cuts and paved the way to allow the migration from the old airline to the new, and for the renegotiation of contracts and agreements.
It is now all about getting MAB’s business plan right and that is the challenge that faces Mueller and his team. And the two crucial components will be MAB’s route network and its yield levels. Time will tell if the airline’s new management gets it right.
GRRRRR!!!
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