SEPANG: Malaysia Airlines Bhd (MAB), the new legal entity taking over loss-making Malaysia Airline System Bhd’s (MAS) operations minus its liabilities, unions and legacy problems, is looking to cut the number of suppliers by two-thirds, as part of its plans to further reduce its unit costs.

“Our cost side [of doing business] is not competitive. We believe that our cost is 20% higher [than what it should be], both in terms of unit cost and factor cost, and that is mainly attributable to a non state-of-the-art procurement process,” said MAS chief executive officer (CEO) Christoph Mueller in his first media conference yesterday since taking up the job on May 1. Mueller is also CEO of MAB, which began trading yesterday as a legal entity, wholly owned by Khazanah Nasional Bhd.

“The big task is to bring down our costs ... we need to buy better and we need to buy cheaper.

“There are currently about 20,000 suppliers in MAS, resulting in a very fragmented base. [But] an airline of our size should get along with [only] 2,000 to 2,500 suppliers. So, a professional procurement regime with more transparency and more opportunities to get more rebates is absolutely necessary,” he said.

Describing MAS as “technically bankrupt”, Mueller said the new airline’s business model will be based principally on commercial terms.

Mueller said the restructuring plan for MAB involves three phases.

“The first phase is to stop the airline’s bleeding, which will take the remainder of this year and a bit of 2016. This will involve a more painful exercise [where] we will have to take off [aircraft] capacity and eliminate certain sources of losses. The [reduction of 30% of its] headcount and rightsizing are happening today (yesterday), and will happen in certain phases over the next 18 months,” he said.

MAS has sent out termination letters to its 20,000-odd staff as part of Khazanah’s RM6 billion exercise to revamp the ailing national carrier.

At the same time, MAB sent out 14,000 offer letters to MAS staff yesterday, while another 6,000 won’t be receiving the letter.

“Also, the administrator (Datuk Mohammad Faiz Azmi) will help us renegotiate certain key vendors’ contracts, including with leasing companies and airport services providers [to reduce the airline’s expenses]. We had recently successfully renegotiated over a new catering agreement with Brahim’s Holdings Bhd. More of that to come,” Mueller added. The new contract saw Brahim’s accepting a 25% haircut to its contract value.

Mueller said 2016 and 2017 will be “restructuring years” for MAB.

“We are about to structure more than 40 projects over the next three months, which will enable us to go back to a cost level that is competitive and allows us to offer cheap fares and still make money.

“And in 2017 and 2018, we will start growing again. But we can only do that if we have a competitive cost base,” he added.

Mueller expects MAB to break even by 2018, emerging as a leading airline in Southeast Asia. The group will regain market share via cost competitiveness, offering the best network, having a competent revenue management and employing industry-leading technology, he said.

MAB will be subdivided into three main groups: operations, support functions and learning and development. The airline will have 12 subsidiaries, including Firefly and MASwings.

Mueller also refuted reports that the new airline is going to be reduced to serve only regional routes within Asia. He said MAB will continue to be a full-service international carrier, serving routes that connect continents.

For starters, Mueller conceded that Australia is a major market for MAB, thus the airline’s routes serving the continent will remain intact. MAS currently serves Perth, Adelaide, Melbourne, Sydney and Brisbane in Australia, and Auckland in New Zealand.

“London has always been MAS’ flagship route to Europe. We have the best schedule, with one flight in the morning and another in the evening. We will retain London, but will look at whether serving the route with the Airbus A380 is the best option,” said Mueller.

Mueller also gave an assurance that there will be no capacity reduction of the domestic network run by MAS and its subsidiaries, Firefly and MASwings.

He said the domestic network of the airline will “remain intact”, adding that MASwings will fully concentrate on the rural air services, while Firefly will continue to operate its turboprop operations out of Subang.

He also said MAB had applied for an airline operators’ certificate with the Department of Civil Aviation Malaysia.

“MAS will stop trading on Sept 1, 2015,” said Mueller, adding that the MH code will be transferred from the old company to the new one.

On its capacity-rightsizing initiative, Mueller said it is too early for MAB to decide whether the group will sell off the six A380 superjumbos that it owns. Various reports have suggested that Turkish Airlines is looking at either leasing or acquiring outright MAS’ A380 fleet.

“The world has changed since these aircraft were ordered, and I believe I might not be the only one saying this, but I think a couple of airlines’ CEOs are scratching their heads whether this aircraft size is still appropriate,” said Mueller.

He indicated that the routes served by the A380s could be deployed using the Boeing 777s, in which MAS operates 13. These 777s were delivered in 1997. Prior to the renationalisation of MAS by Khazanah, they were up to be scrapped but a replacement type had yet to be found.

This article first appeared in The Edge Financial Daily, on June 2, 2015.