Malaysia Airlines — the elephant in the room

Khazanah had decided to purge its books and provide for its investment in MAB

By AZLAN JAAFAR / Pic By BLOOMBERG

The wing flap of the missing Malaysia Airlines Bhd (MAB) flight MH370 sit on a display cabinet in Kuala Lumpur, a stark reminder of the dark episode in the country’s history. The world was again reminded of the doomed jetliner that vanished from the radar on March 8, five years ago.

The world’s media ran a series of articles and documentaries on what was regarded as the most mysterious aircraft disappearance in modern aviation history.

But the mystery behind the vanishing Boeing 777, however, was not able to shroud the larger concerns related to the national carrier.

MAB had grabbed headlines on the same familiar theme that has constantly dogged the national carrier.

Khazanah Nasional Bhd, the owner of the ailing airline, posted a RM6.27 billion loss before tax last year. The unexpected loss was largely due to its RM7.3 billion impairments.

The national carrier contributed about half of the impairments, which threw the previously polished financials of the sovereign wealth fund off the cliff.

Khazanah had decided to purge its books and provide for its investment in MAB.

In 2014, Khazanah unveiled a RM6 billion capital injection plan to save the loss-making national carrier.

The airline was supposed to return to profitability in three years. That dream, however, turned into another repeat nightmare.

The carrier continued to bleed as of last year despite a comprehensive turnaround plan, a national legislature to help in its revival, axing of 6,000 staff, shelving of unprofitable routes and renegotiating hundreds of contracts.

Two Europeans CEOs appointed to lead the airline had opted for the exit door. Reputational damage continues to haunt the carrier.

Since the devastating East Asia financial crisis of 1997, MAB has failed to return to its glory day. Despite billions of taxpayers’ money injected and various restructuring plans, many had grown tired of the excuses. There are already calls for the government to stop funding the ailing airline. Some have even crossed the national pride and demanded that the airline to be put under the hammer.

For Khazanah, MAB has always been the elephant in the room, the monkey on its back, a mystery which continues to haunt the head of the sovereign fund. The state-owned fund threw everything including the kitchen sink to save it.

To be fair, the airline business is not an easy industry despite the glamour and prestige. It would take a very brilliant or stupid man to enter the business, especially in today’s environment.

In all honesty, the cancer at the national carrier started much earlier. The national carrier failed to confront the threat of the low-cost carrier. Thinking that the good times will continue to roll, it falls flat on its face following the emergence of the low-cost carriers.

But it is not the emergence of the popular frill-free airlines alone. The rise of oil-backed, well-funded and mighty Middle-Eastern airlines had made Malaysia Airlines looked like a under-15 football team playing in the Champions League.

Emirates, Etihad and a few others, backed by the ultra rich Arab sheikhs, are bigger, mightier, flying with connectivity second to none. Even carriers in the US are trying to prevent the expansion of these airlines in one of the most lucrative markets in the airline industry.

But that alone was not enough to push MAB off the cliff. It is the Internet. The same network of computers which had sent the fax machine to the graveyard, made greeting cards irrelevant and snail mails look like a relic dug out from a historical site.

Malaysians can choose Emirates, Etihad, Singapore Airlines, Garuda or KLM — and fly to London at prices lower than what is offered by the national carrier — via the Internet.

The final nail that sealed the national carrier’s fate is its unsustainable business model.

A large portion of MAB’s revenues are in ringgit. But it pays for aircraft purchases, fuels, ancillary services at foreign airports, debts, etc in US dollar or euro (if it is buying planes from Airbus SE).

Unlike the American Airlines, Delta Airlines, RyanAir, British Airlines, or even Emirates and Etihad which have a global audience. These airlines’ revenues are largely in US dollar, euro or the stronger Middle-Eastern countries’ currencies.

When the ringgit weakens, oil prices jump or other US-denominated commitments rise, MAB’s revenue can never outpace the costs. Even the most brilliant CEO on the planet will not be able to weave this magic.

The only way for the MAB to even have a fighting chance in this changed landscape — to fight the giants like Emirates, the many choices consumers are showered with and the industry’s volatile costs — is to forge a new partnership.

Khazanah and the government should dispose a stake in the national carrier to a suitable regional or international carrier, and form a new formidable airline.

It could be Singapore Airlines, Garuda, Thai Airways, Qantas or other carriers from the Middle East who are eager to “outfox” their rival neighbours.

Without a partner airline (or airlines) with a substantial shareholding that can provide diversified revenue streams, the power to bargain when doing aircraft purchases, connects the national carrier to another playing field, the only narrative that people will remember about MAB is “it was once a national pride”.

It is time the shareholders do what is right, or the national carrier future is all but sealed.

  • Mohamad Azlan Jaafar is the deputy editor-in-chief of The Malaysian Reserve.