Strategic investor in Malaysia Airlines should be an airline, says CEO

This article first appeared in The Edge Malaysia Weekly, on June 10, 2019 - June 16, 2019.
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THE strategic investor in Malaysia Airlines Bhd should be an airline, its group CEO Izham Ismail insists, even as the government considers the pros and cons of shutting down, selling or refinancing the ailing national carrier.

“Naturally, it should be an airline because they know the business. As the CEO, I can give my recommendations,” he tells Malaysian journalists on the sidelines of the International Air Transport Association’s (IATA) recent 75th annual general meeting in Seoul, South Korea.

“Because if you marry someone and it doesn’t work out, it is going to be an ugly divorce. So before we go into [a marriage], both parties must be really real about what the future entails, what are the challenges and what is the current state of Malaysia Airlines and that of the investor, whether it has the appetite and capacity to take the airline forward.”

He declines to say how much of a stake Malaysia Airlines plans to relinquish “as long as the organisation can help bring the carrier to the next level in the form of funds, knowledge and experiences”.

Still, it is the board of sovereign wealth fund Khazanah Nasional Bhd, which the prime minister chairs, that ultimately decides Malaysia Airlines’ fate.

Although the carrier has received several propositions, Izham notes, “We have not gone to opening our books yet, but just having conversations.”

In the interim, Malaysia Airlines has its sights set on partnerships that will make it more competitive in delivering a full-service product. “Like [in terms of growing our] passenger revenue, we are collaborating with Japan Airlines Co Ltd (JAL). There are many more airlines we are in conversation with,” says Izham.

“Partners can come in many forms. But selling 100% of the airline’s shares is equivalent to shutting down Malaysia Airlines. [And as an investor,] are you brave enough to take on all liabilities of Malaysia Airlines? That would be so stupid. So, an organisation would [probably] take a small risk first and help us build the business. As the business improves, then the investor will show a willingness to invest more,” he says, pointing out that shutting the carrier down would be the “wrong move”.

Several private groups have shown interest in acquiring a stake in the carrier. On June 2, JAL president Yuji Akasaka was quoted as saying that it was too early to say whether JAL would consider an equity investment but that future discussions were possible.

 

Profit remains elusive

Notwithstanding a bailout and privatisation exercise by Khazanah in 2014, the odds remain firmly stacked against Malaysia Airlines achieving a turnaround anytime soon as overcapacity, higher fuel costs and a depreciating ringgit keep yields from rising.

Izham says the overcapacity, driven by aircraft orders from Thailand, Malaysia and Indonesia, has resulted in “irrational pricing”, which has hurt the carrier’s yields.

Calling for intervention, Izham says a consolidation is needed to prevent airlines from dumping seats in the market. “You have to control the market. While a free market to a certain extent is good, it can be damaging,” he adds, noting that the recent grounding of Boeing 737 MAX planes and India’s Jet Airways brought some respite to the market.

New routes for domestic and international connectivity from Malaysia are currently subject to approval by aviation regulator Malaysian Aviation Commission, but airlines are at liberty to place their aircraft orders.

 

Asean a price-sensitive market

Izham says it is unfair for critics to compare the airline’s performance today to that of 15 to 20 years ago as the operating environment, particularly in Malaysia and Asean, has changed dramatically. “The business has changed. Past successes don’t guarantee the future.”

For Malaysia Airlines, the situation is made worse by the emergence of low-cost carriers (LCCs), which account for 30% of the total scheduled traffic in Asia-Pacific, while full-service carriers (FSCs) have a 50% share.

“In Asean, LCCs account for more than 60% [of market share] and FSCs, 20%,” he says.

Izham, who took over in December 2017, points out that since the reset of Malaysia Airlines in 2015, the airline had tried to emulate its fellow oneworld alliance member JAL, which had successfully turned around within two years of bankruptcy in 2010.

But a key distinction is that the carriers operate in different markets. “Malaysia’s domestic market differs considerably from Japan’s. Japan is well-positioned as a premium market, while Malaysia and Asean are price-sensitive markets. That’s why the turnaround of Malaysia Airlines hit a snag.”

Izham notes the average fare for a 45-minute flight between Tokyo and Osaka costs about RM2,000, and a Seoul to Jeju ticket, about RM1,900. “However, it costs RM99 to fly from Kuala Lumpur to Penang. This is crazy and does not make sense,” he laments.

 

Navigating global headwinds

It doesn’t help that the international aviation community isn’t optimistic about the sector either.

On the home front, a proposed departure levy for passengers flying out of Malaysia, which is expected to be introduced in September, will disadvantage Malaysia-based airlines, IATA regional vice-president for Asia-Pacific Conrad Clifford says, adding that the levy “doesn’t make sense”.

“This [levy] is not good for Malaysia Airlines and AirAsia Group Bhd because you are putting them at a disadvantage to their counterparts in the region. We think it needs a rethink,” he told Malaysian journalists. A RM20 charge will be levied for flights within Asean, and RM40 for all other international destinations.

On the global front, IATA sees headwinds for the sector. Over the weekend, it slashed its net profit forecast for the sector this year by 21% to US$28 billion from an initial US$35.5 billion it had projected in December 2018.

Its director-general and CEO Alexandre de Juniac says airline margins are being squeezed by rising costs such as labour, fuel and infrastructure. “Weakening of global trade is likely to continue as the US-China trade war intensifies. This primarily impacts the cargo business, but passenger traffic could also be impacted as tensions rise,” he adds.

Global air cargo volume reached 63.3 million tonnes last year, and IATA chief economist Brian Pearce anticipates growth will be flat in 2019 due to the impact of higher tariffs on trade.

“We are seeing the trade dispute between the US and China leading to a collapse in world trade. It could get worse. We are hoping that it won’t,” he says, dismissing recession worries this year.

 

 

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