By P. Gunasegaram
Ah, yes, humans – they take such a long time to learn their lesson and then no sooner have they learnt, they promptly forget it. There is only one way to survive in the jungle, be fit. And it is the same for corporations. Get your business into shape and let people know about it.
When Malaysia Airlines CEO Ahmad Jauhari Yahya said that MAS needed radical and sweeping change, he was stating the obvious . But what is not obvious at all is the type of sweeping change that is required.
One more thing which is pertinent that he finally admitted to, though not picked up widely by most of the press, was that the current plan was not working and needed to be reworked.
What was the plan that did not work? That was the load active, yield passive strategy. Translated, it simply means, just fill up the planes (load active), never mind the fares that you got (yield passive). And what it got MAS into was a lot of problems which detracted from the fact that MAS is actually a damn good airline.
Ahmad Jauhari Yahya
Now, Ahmad Jauhari also admits this and it is worth repeating here what he identified as the strengths that Malaysia Airlines had and has.
They include:
- MAS has a world-class product. being one of only seven airlines in the world to achieve the Skytrax 5-star rating, the highest quality ranking for a commercial airline. Also MAS took the ‘Asia’s Leading Airline’ recognition at the World Travel Awards in 2013.
- MAS now has one of the newest fleets in the industry, with the ongoing fleet renewal programme reducing the average fleet age to just under five years.
- The service is “truly world-class”, having received more than 100 awards in the last 10 years, including World’s Best Cabin Crew eight times since 2000.
- MAS has a “world-class engineering arm” used extensively by the rest of the industry.
- And over its 41-year history, it has enjoyed an excellent safety record, thanks in part to this world-class engineering arm.
“These four world-class assets: our product, our service, our engineering capabilities and our safety track-record, are real and tangible assets. To be competitive in the future, we have to unlock and unleash the full value of these great assets,” he said in his address at the annual general meeting (AGM) on Tuesday.
Nevermind that he has realised this rather late in the day – he finally has. How does he plan to use this to turn around the airline? That is the crux of the matter, and we have reported on that widely before here and here. But let us repeat ourselves yet again.
MAS’ load active, yield passive strategy was wrong because it cheapened the full service carrier and the excellent service it gave – and it lost a lot of money doing this for close to three years.
It dropped prices so much that this Tiger often chose MAS over AirAsia because flights were a lot cheaper when booked earlier. Imagine, a full service five-star airline with a 30kg luggage allowance, costs less than the basic low-cost, low-service, penny pinching airline where you pay for everything, even before you pay for all the extras to make fares comparable!!
Next, it has made no attempts in any of its advertising to market its strengths which Ahmad Jauhari now lists. Its poor branding some of which are examined here and here sometimes brought it more harm than good. A slick new expensive advertisement (view it here) is rather esoteric and generic and could be advertising suitcases for all you knew instead of extolling MAS’ virtues.
What is the basic problem with MAS? It’s yield, not excessive cost, not Brahim’s, not anything else. Fix that and MAS will become profitable. Yield is the average amount that a passenger pays for one km flown. If yields are good and load factors – how much plans are filled – are reasonable, then revenue increases by more than the addition of capacity.
Simple as it may sound, it is the most crucial and most difficult part of airline operations. For full-service airlines, your fares must reflect that, and if you are a 5-star airline, you must make your marketing good enough to ensure that enough people know about it and are prepared to pay a premium for flying with you.
At the back-end, your systems and people must be so good that they are able to predict customer behaviour, have a feel for it and ensure that there is proper optimisation between yield and load factor to get the best revenue. Right now, it is clear that Malaysia Airlines has not – revenue has not even kept pace with increases in capacity despite yields starting at a low base.
Take a look at the chart of yield comparisons between regional airlines for 2004-2013. Bear with Tiger for just a little while more. When Idris Jala joined MAS around 2005, the airline’s yield was among the lowest, with a gap of nearly one US cent (about 3.3 sen at current exchange rates) with top ranked Singapore Airlines (SIA).
That looks small but it is not. It is estimated that one sen (yes, sen) in yield makes a difference of RM500 million to revenue. Increase yields by four sen, and that’s a cool RM2 billion, enough to turn around MAS and make some profit too. In 2013, for instance MAS lost, RM1.2 billion. If the yield was four sen higher, it would have made a profit of RM800 million!
Back to Idris, in a year, he had narrowed the yield gap with SIA to half a US cent or 1.65 sen, thereby turning MAS around. Just look at the steep increase in yield after that and up to 2008 when MAS’ yield was on par with SIA.
However, in 2009, following the world financial crisis, MAS’ yields plummeted along with that of all other airlines. The problem is when the economy recovered after that, MAS’ yields did not, while other airlines’ did. That was the problem.
And then 2013 was a disaster as MAS’s yield plunged following the load active, yield passive strategy. The yield gap with the top airlines is a huge three US cents, about 10 sen at current exchange rates. Even if MAS recovered half of that or 5 sen, the increase in revenue will be a massive RM2.5 billion, which at 2013 costs, will give it a profit of RM1.3 billion!!
MAS’ problem is simply this – between 2008 and 2013, the yield gap between its yields and those of the best airlines increased from 0 to 10 sen. In revenue terms, it has lost potential income of RM5 billion a year as a result.
So Tiger’s advice to MAS is simply this: Throw everything you have into increasing yields and make sure all the marketing you do goes into showing what a great airline MAS is. That’s the radical and sweeping change MAS requires to turn to profit.
GRRRRR!!!
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