Cover Story: Malaysia Airlines still not out of the woods

This article first appeared in The Edge Malaysia Weekly, on September 10, 2018 - September 16, 2018.
Cover Story: Malaysia Airlines still not out of the woods
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WHEN sovereign wealth fund Khazanah Nasional Bhd unveiled a turnaround plan for the country’s flagship carrier in August 2014 that saw the rebooting of Malaysian Airline System Bhd (MAS) into a leaner Malaysia Airlines Bhd, there were high hopes it would achieve success similar to that at Japan Airlines (JAL).

JAL filed for bankruptcy in 2010 after a decade of losses, but managed to turn around and return to the stock market in less than three years. This followed a government-backed restructuring under which the airline shed a third of its workforce, cut unprofitable routes and received support from a quasi-government entity, which provided ¥300 billion in fresh capital.

It is now four years to the day Khazanah put into motion a five-year plan for Malaysia Airlines to achieve sustained profitability by the end of 2017 and to relist between then and the end of 2019. The airline has also used up more than half of the RM6 billion capital injected into it by its sole shareholder but a turnaround remains elusive.

At the current pace of progress, any turnaround would be two years away, according to Malaysia Airlines group CEO Izham Ismail.

The 57-year-old former pilot has pushed the plan to make the airline profitable by another year as rising fuel costs, foreign exchange (forex) volatility and a weak pricing strategy derail its recovery. It now hopes to break even in 2019 and become profitable by 2020.

“We were making good progress in 2016 but we fell back slightly in 2017 due to headwinds, being rising fuel prices and weakening currencies. This was compounded by a strategy that focused on driving passenger load factor rather than yield, which put us a few steps back from [what we had achieved in] 2016,” he tells The Edge in an interview.

“After the ‘reset’ of Malaysia Airlines, we are proud to say that our cost base is comparable to those of our full-service peers like Singapore Airlines and Cathay Pacific but it has been creeping up because of rising fuel prices and the impact of forex,” he adds.

It is noteworthy that fuel accounts for 36% of Malaysia Airlines’ total costs, while 70% of its costs is billed in US dollars. Fuel prices have risen about 13% since the beginning of the year and was at US$87.68 per barrel at the time of writing. The ringgit has lost 3% of its value against the US dollar so far this year to close at 4.1440 last Friday.

And the frequent changes at the top did not help matters. Izham is the fourth person to hold the Malaysia Airlines 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 also 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 did the airline’s strategy. Ahmad Jauhari’s and Bellew’s strategy was to focus on driving load factor, while Izham, like Mueller, is focused on delivering yield improvement.

“I am cognisant that when I focus on yield, load factor is likely to take a beating. But if my decision results in the airline’s load factor hovering at 76% to 78% and a strong yield, I am fine with that. It’s better than having a high load factor of 85% to 90% but the yield is screwed up,” says Izham.

He adds that for the airline’s low-cost rivals, a key growth factor is passenger volume. But for network carriers such as Malaysia Airlines, the emphasis should be yield.

Malaysia Airlines recorded a yield of 21.4 sen in the second quarter of this year (2Q2018), a slight increase of 0.3% from 21.3 sen in 2Q2017 but a decrease from 22.6 sen in 1Q2016.

Load factor for 2Q2018 rose to 78.1% from 77.8% a year ago. However, the total number of passengers carried fell by 5.6% to 3.4 million in 2Q2018 from 3.6 million in 2Q2017.

The airline’s turnaround target is also being derailed by a serious shortage of commercial pilots, resulting in a loss of revenue to the airline. “We did not anticipate the attrition rate of pilots working at the airline to be so high,” Izham says, adding that the impact of the pilot shortfall was felt in June. “It’s a phenomenon that is impacting not just Malaysia Airlines but also all global airlines.”

He explains that the airline has been forced to cancel flights as a result of the pilot shortage, dismissing as “untrue” reports that it was doing so to reduce costs. “The reason behind this is that we didn’t have enough pilots [to keep up the schedule]. We had to pull back and cancel some flights until the end of the year when more pilots will join the airline and fill the vacancies. Thus, it will be extremely challenging to break even this year.”

This hampered the airline’s revenue per available seat kilometre (RASK) for 2Q2018, which grew a marginal 2% year on year compared with 3.5% in 1Q2018.

According to Izham, the pilot shortage is driven by an “irrational marketplace”.

“Today, aircraft manufacturers are producing planes faster than people are buying them. People in the emerging markets in the region, notably China, are also travelling more than ever before. About 40% of the total worldwide aircraft production is for Asia-Pacific such as China, Asean, Australia and India as airlines like AirAsia, VietJet Air, Chinese and Indian carriers and Emirates are banking on new fuel-efficient planes to keep costs low.

“Thus, the pilot oversupply situation experienced about five years ago has reversed. Malaysia Airlines put in place an extensive pilot training programme in August last year but pilot training does take time. So, the industry is heading towards a very unstable state with regard to resources,” he says. Boeing’s Pilot & Technician Outlook 2018-2037 projects a demand for 240,000 new commercial pilots in Asia-Pacific over the next 20 years.

Malaysia Airlines has since revisited its salary package to match that at rival airlines and has recruited nearly 100 pilots. “The recruitment drives are gaining traction and we are quite confident that we will stabilise this [shortage] by the fourth quarter of this year and be back at full steam in 2019 in deploying aircraft to attain our profit target,” says Izham.

The airline currently has 13,000 employees but can scale up to 14,000 under the Malaysia Airlines Recovery Plan (MRP), he adds.

 

‘Still in transformation mode’

Izham concurs that his job, which has been termed “one of the toughest jobs in aviation”, is indeed challenging as he still faces a long road ahead in putting the airline on the path to sustainability.

“We are not out of the woods yet. I do not want to paint a beautiful picture and say it is a bed of roses at Malaysia Airlines. We are still in transformation mode,” he says.

“There is still a lot of work to do such as improving the overall culture and raising employee morale. This is compounded by escalating fuel prices, forex volatility and stiff competition in the domestic market. Take the capacity at the Kuala Lumpur hub — it is 1.9 times greater than demand. There are four [Malaysian] airlines operating out of this hub — Malaysia Airlines, AirAsia Group Bhd, AirAsia X Bhd and Malindo Airways Sdn Bhd — all fighting for you (passengers). That’s the challenge for me to comprehend.

“I’d be kidding myself if I said that Malaysia Airlines is now on a clear path [to profitability]. This industry is so complicated. Today, if you say you are already stable, things like 9/11 and SARS could suddenly happen and turn the industry upside down. So, I am very cautious about making such statements,” he adds.

Izham has stuck to the 12 pillars of growth set out in the MRP, whose combined delivery was to enable Malaysia Airlines to achieve sustained profitability within three years of delisting.

“The MRP was designed in [2014]. It was a business plan that was formulated based on forecasts best known at that time. Has anything changed? A lot has changed. So, while we hold on to the MRP, the airline must also be cognisant and adjust itself to the current marketplace, economic situation and change of government.”

While Izham says he has the liberty to make changes to the MRP as CEO, he is quick to add that running the airline is not a “one-man show”. He will need to secure the support of the 13,000 employees, board of directors, management, Khazanah and the prime minister. “We see what the best fit for the business is. It is a team effort. I don’t make the decisions alone.”

 

Driving customer experience to win back customers

Izham has brought back the “MH=Malaysian Hospitality” brand campaign, which was first introduced in August 2013 when Datuk Seri Idris Jala was managing director and CEO at the old MAS. The value proposition of MH was to “treat our customers as we would treat guests to our own homes and to deliver a seamless travel experience all the way”.

“When I took over the office, we formed a new division called Customer Experience to focus on customer experience across all touchpoints. I feel very strongly that for us as a premium airline to gain a share of the market, driving customer experience will give us the edge over our competitors,” he says.

To this end, Malaysia Airlines has seen its Customer Satisfaction Index increase by four percentage points to 76% so far this year, from 72% a year ago.

Another area that the airline aims to improve in is the mishandled baggage rate, which Izham blames on the baggage handling system at the Kuala Lumpur International Airport. “At the end of the day, people will not blame the airport but the airline for mishandled bags. Thus, we are in talks with Malaysia Airports Holdings Bhd to address this issue.”

 

Airline in cautious mode amid global headwinds

Izham has put Malaysia Airlines in “cautious mode” to weather the multiple headwinds in the aviation sector.

“We will not invest unnecessarily in new aircraft, but we are cognisant that our airplanes will eventually age and will need to be replaced. That’s why we have issued a request for information (RFI) from aircraft makers for new generation wide-body aircraft. The RFI did not specify the number of aircraft we want as it is up to the aircraft makers to advise [us on] the fleet we [would] need to further develop our network going forward.

“We are now evaluating information from all manufacturers and if we need to make a decision, it would be [by] the end of 4Q at the earliest. I’m not going to rush [our decision] because our Airbus A330s wide-body aircraft are still young and we have just received six A330-200s,” he says.

The airline has also gone down the route of leasing aircraft in order to fill the gaping holes in its flight schedules. It is leasing six A350-900s from Air Lease Corp under a 12-year lease agreement.

Meanwhile, Izham says the memorandum of understanding entered into by Malaysia Airlines and Boeing Co during a visit to the US with former prime minister Datuk Seri Najib Razak in September last year has lapsed. Under the MoU, the airline was to potentially add eight wide-body Boeing 787-9 Dreamliners to its fleet, as well as choose the new and larger 737-MAX10 aircraft for 10 out of the previous firm order of 25 737-MAX8.

Izham says the airline has yet to decide whether to take the MAX8 or the MAX10. “We are still ironing out our network — whether we need the MAX10s or not. But we will firm up the delivery of 5 or 10 of the MAX8s first, which are expected to join the airline from 2020. These 737-MAX aircraft are intended to replace the existing 48 737-800s, whose average fleet age is currently 8 to 10 years.”

He points out that with the current fleet, Malaysia Airlines would still be able to deliver a 3% to 4% growth in capacity, as measured by available seat kilometres (ASK). “The strategy is for us to grow sustainably, not rapidly. We are looking at a 3% to 4% ASK growth on a yearly basis and maybe 4% to 6% post-2020.”

Izham says he will also grow the airline’s network cautiously, either by rolling out new destinations or boosting its flight frequency on existing routes.

“We have completed our overseas expansion for the year, with Chongqing, Surabaya and Brisbane. We will probably add three more stations next year, but first as CEO I need to be convinced that these sectors can make some money. Otherwise, I’m going to deploy the new capacity through increasing flight frequency,” he says, adding that Malaysia Airlines will remain focused on the Asia-Pacific market while relying on the oneworld alliance to reach out to the four corners of the world. “Our strategy is to know who our customers are, what our customers want and what network we should fly to deliver what they want.”

 

Izham lays out succession plan

One month shy of his first anniversary in the job of running Malaysia Airlines‚ Izham, who has spent his entire 39-year career at the airline, has already mapped out a succession plan, noting that “more than three potential successors” are being groomed to eventually replace him.

“Rest assured that I am not here to warm the seat for my successor. I am here to turn around this airline, to make it efficient and hopefully profitable. But I want to set the stage for the next CEO to take it to the second base. My job now is to take the airline to the first base.

“He or she will not be able to guide Malaysia Airlines further if I cannot set it on a path towards sustainable profitability [during my tenure]. I might not be the CEO that makes this company profitable or strongly profitable, but my purpose is very clear, that is, to stabilise this organisation, boost morale, drive efficiency, stop all the breakages that impact our customer experience and land on the first base,” he says.

Changes at the top in government-linked companies and government-linked investment companies have been prevalent following the 14th general election, which saw the Pakatan Harapan coalition forming a new government. Khazanah, owned by the Minister of Finance Inc, also saw a leadership change with the departure of its managing director Tan Sri Azman Mokhtar in July. He was replaced by Datuk Shahril Ridza Ridzuan, the former CEO of the Employees Provident Fund.

Not letting things that are beyond his control worry him, Izham expressed his readiness to step down to pave the way for his successor if asked, noting that he was already getting ready to retire prior to taking on his current role.

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