Is there still hope for the national carrier?

After decades of national pride that is tied to an airline brand, seeing it disappear can be a humiliating prospect


A STAGGERING RM23 billion, numerous management changes and handful of turnaround plans later, Malaysia Airlines Bhd (MAB) is still wrestling with various issues and finding ways to stay afloat.

The national carrier has been in the limelight for all the wrong reasons in the past year, that even Prime Minister Tun Dr Mahathir Mohamad had suggested on several occasions the possibility of selling MAB to ensure its survival.

Many took it as a signal that the national carrier is days might be numbered.

As MAB drifts further away from its breakeven target yet again, Dr Mahathir’s decision to sell off the loss-making flag carrier might not be that difficult to make.

Why Selling is a Better Option?

In 2014, following the loss of planes and lives in two tragic incidents — MH370’s disappearance and the tragic downing of MH17 over Ukraine — sole stakeholder and sovereign wealth fund Khazanah Nasional Bhd announced a restructuring exercise that was intended to make the airline profitable by 2018.

The turnaround plan saw Malaysia Airlines System Bhd (MAS) being prepped to be a leaner organisation that was renamed MAB.

The aspiration was for the airline to achieve success similar to what was recorded by Japan Airlines Co Ltd (JAL).

To put things into perspective, JAL filed for bankruptcy in 2010 after a decade of losses, but managed a turnaround and returned to the stock market in less than three years.

JAL’s government-backed restructuring saw the airline shedding a third of its workforce, while its unprofitable routes were also axed. It receives full support from the government which provided ¥300 billion (RM11.37 billion) in fresh capital.

As for MAB, it is now in its final leg of Khazanah’s five-year plan — which would ultimately see the airline achieving sustained profitability (by the end of 2017) before being relisted by the end of 2019.

The airline is reported to have used up to 70% or more of the RM6 billion capital injected by Khazanah, yet a turnaround has remained elusive.

MAB also accounts for half of Khazanah’s RM7.3 billion impairments for the financial year 2018.

The sovereign wealth fund recorded a pretax loss of RM6.3 billion last year, bogged down by higher impairments, lower dividend income and fewer divestments.

Most industry observers opined that the flag carrier failed for one central reason — MAB remains a state-owned flag carrier, slow-moving and burdened by political expectations.

“Many politicians fear their nations will be irrelevant if they abandon their money-losing flag airlines. In most places, the market would likely fill the gap — provided the government got out of the way,” an aviation analyst, who wished to remain anonymous, told The Malaysian Reserve.

The analyst — who is also of the opinion that it is only right to sell off the debt-ridden airlines — did not mince his words and reckoned that the country does not need a national carrier.

“If you look at some of the European countries, there is no such thing as a national carrier, yet the number of tourists is there. Instead of the government investing into something that will end up going down the drain, might as well invest into tourism,” he said.

However, politically, the aviation analyst believed that it is not feasible for the government to shut the national carrier down.

“If the airline suffers, governments may need to ask if there’s still value to having a national carrier other than patriotism or pride.

“And they may wonder whether it still makes sense to prop up airlines as more countries open their skies to new entrants and foreign carriers,” he added.

The Relevance of National Carrier in This Day and Age

The concept of a flag carrier dates back to the establishment in the mid-1940s of the International Civil Aviation Organisation, a United Nations regulator.

Every nation was given the opportunity to operate international air

Some countries, including the US, chose to let private companies do the flying.

Others decided to establish, subsidise and protect flag carriers, even to the point of restricting competition on key routes. Those airlines had goals other than profits.

National flag carriers — a somewhat nebulous term today — are very much a 20th century invention.

These 20th-century inventions still form a large part of the aviation market but, many national carriers are floundering.

The explosive proliferation of budget airlines in the 1990s and early 2000s has given travellers no-frill alternatives to the brand-name carriers, and their business model has resonated with many passengers, to the disadvantage of the old guard.

With many flag carriers like MAB struggling to stay solvent, governments are increasingly being forced to consider whether ownership, part-ownership, or financial support of a faltering national airline is a responsible investment of public funds.

Whether Khazanah should pull the plug on MAB, industry observers believe that it would be a tough decision for the government to make, politically.

Competition, Volatility in Fuel Prices, Forex, What More?

MAB has often blamed its poor performance on intense competition, oversupply of capacity and volatility in fuel prices and foreign exchange (forex), among others.

When the 12-point MAS Recovery Plan was conceived in 2014, the fuel price was US$75.68 (RM312.56) per barrel.

As at June 24, 2019, the International Air Transport Association jet fuel price monitor was up 3.8% at US$80.50 per barrel from a year ago.

The ringgit also weakened by 3.6% to 4.9% to 4.1140 against the US dollar as of last Monday.

Khazanah’s assumption under the five-year recovery plan was that the local currency would range from 3.90 to 3.95.

Yet, critics point to Hong Kong-based Cathay Pacific Airways Ltd, which turned things around with a HK$2.3 billion (RM1.22 billion) profit last year after three years of heavy losses, as well as Singapore Airlines Ltd, which managed to turn in a net profit of S$284 million (RM866 million) for the third quarter which ended on Dec 31, 2018, amid the challenging operating environment.

From MAS to MAB and Everything in Between

MAB was established in 1972, but has been in operation under various names since 1947.

Critics see MAS as a relic of a bygone era which is unable to compete with ruthlessly efficient low-cost modern airlines.

Those include Malaysia-based upstart AirAsia Group Bhd, which had captured nearly 55% of Malaysian passenger traffic in 2018 and has expanded worldwide.

According to the Centre for Aviation chief analyst and chief representative for South-East Asia Brendan Sobie, six of Malaysia’s seven carriers were unprofitable in 2018 and the seventh, AirAsia, generated its smallest operating profit in four years.

“An uncertain future for MAB is a destabilising feature.

Passenger growth at Malaysia’s flagship airport, the Kuala Lumpur International Airport (KLIA), slowed from 11.2% in 2017 to 2.4% in 2018.

“The growth in the overall Malaysian market slowed from 10% in 2017 to 3% in 2018,” he said in a report.

Sobie said growth is likely to remain in the low to middle digits in 2019 as profits continue to be under pressure and overcapacity is once again a concern.

He added that AirAsia and AirAsia X Bhd currently has an approximately 50% share of total capacity in Malaysia, including overseas affiliates, while MAB currently has a 23% share of seat capacity in Malaysia, including the regional subsidiaries FlyFirefly Sdn Bhd and MASwings Sdn Bhd.

While MAB has long imbued Malaysians with a sense of national pride, others said the case for sentimentalism has become a harder sell as the losses stack up.

Analysts foresee even a strategic partnership with any other domestic or foreign airlines is not possible as it is too hot a mess to handle.

Given MAB’s current quagmire, the countless change of management has been given a huge amount of resources, but has fallen short in terms of delivery.

Captain Izham Ismail (picture) is the fourth person to hold the MAB CEO title in less than three years, taking up the reins last October following the resignation of Peter Bellew after just over a year on the job.

Before Bellew, Christoph Mueller, who had helped turn around Ireland’s Aer Lingus, was hired to carry out the restructuring of the new Malaysia Airlines.

However, he left in mid-2016 after just a year on the job. Prior to that, Ahmad Jauhari Yahya had served as CEO of the old MAS from 2011 to 2014.

Each time the leadership changed, so would the airline’s strategy. Ahmad Jauhari and Bellew’s strategy was to focus on driving load factor, while Izham, like Mueller, is focused on delivering yield improvement.

MAB woes could be traced back to the failed privatisation of the airline in 1994 to Tan Sri Tajudin Ramli, who was its executive chairman till 2001.

To recap, MAB, then known as MAS, was privatised to Tajudin after the latter purchased a 30% share via his listed vehicle, Naluri Bhd for about RM2 billion.

This translated to about RM8 per share, which was a premium to the RM6 it was trading at.

Post-privatisation, the airline began a downward spiral that it has never truly recovered from, which was made worse by the Asian financial crisis (AFC) in the late 1990s.

The AFC had a serious impact on airlines across the region and not on MAB alone. However, in the subsequent period, the others recovered, unlike MAB.

In 2001, MAB under private management had posted losses for three consecutive years. Losses were in the RM400 million region when the government stepped in and took ownership of the flag carrier once again.

The government paid RM8 per MAB share despite the fact the airline’s stock was trading at RM3.

By comparison, some state-owned national airlines are starting to look damagingly outdated.

For example, in South Africa, government-owned flag carrier South African Airways (SAA) has been operating at a loss for six years straight, while the government keeps it afloat and the airline goes through round after round of restructuring attempts in search of profit.

Yet, even SAA’s new CEO Vuyani Jarana, who took over in 2017 to “stop the bleeding”, had said the airline would maintain poor-performing long-haul routes like its service to Hong Kong, to preserve its sole foothold in Asia.

Economic Reality vs National Pride

After decades of national pride that is tied to an airline brand, seeing it disappear can be a humiliating prospect.

As Dr Mahathir considers on whether to shut down the country’s floundering flag carrier, his predecessor Datuk Seri Mohd Najib Razak countered in March, emphasising that “almost every country has its own national airline, so we must have our national airline, too”.

In some cases, failure of a national carrier could work out well in other related areas. For instance, almost seven years since Hungarian national airline Malév Ltd went bankrupt, the Budapest Airport seemed to be doing exceptionally well in just a short time.

A quick look at passenger numbers show not only that Budapest managed to survive the fall of Malév, but prospered from 8.5 million passengers in 2011. The number went to 13.1 million passengers six years later. Eager rivals leap in over the still-warm corpse of Hungary’s flag carrier.

Most of industry observers believe that the likelihood of a similar scenario could occur to Malaysia, should MAB cease to exist, given the existence of other local airlines.