Special Report: Malaysia Airlines turnaround journey enters last leg

This article first appeared in The Edge Malaysia Weekly, on January 22, 2018 - January 28, 2018.
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AFTER three CEOs, six thousand job cuts and over RM4 billion in funds invested in its five-year turnaround effort so far, national carrier Malaysia Airlines Bhd (MAB) is now flying into the last leg of its journey towards profitability.

Its sole shareholder, Khazanah Nasional Bhd, sees a clear path forward to that promised land. Last Friday, Khazanah managing director Tan Sri Azman Mokhtar said he expects the airline to be profitable by mid-2019 at the latest.

While the original target was end-2017, the ringgit’s weakness in recent years has set the airline back by about 6 to 12 months, he adds. “That is not an excuse, just the facts.”

Driving the recovery will be new planes coming in, which will add capacity and boost revenue, says Jiv Sammanthan, Khazanah executive director and its representative on MAB’s board.

The expansion marks the next stage for MAB after capacity cuts over the past two years that sought to refocus its resources on core markets.

“It had significantly reduced capacity to focus on its core markets, raised its fares and created a clear demarcation between full-service and low-cost carriers,” says Maybank Research on Jan 11.

“Whether other carriers want to admit it or not, the biggest reason why the (aviation) sector had performed so well in 2016-2017 is thanks to MAB’s restructuring efforts, in our view,” the research house added.

International Air Transport Association data indicates MAB has lost domestic market share in the process — going from 42% in 2016 to 34% as at Sept 30, 2017.

The strategy indicates a recognition that MAB should not be competing head-on against low-cost carriers such as AirAsia on pricing, which was what it did during the intense price war prior to its privatisation in 2014 that saw it bleed as much as RM2.5 billion annually.

And the approach retains importance moving forward as its competitors are also adding capacity.

According to Maybank Research, AirAsia is adding seven new planes this year while AirAsia X is taking three. Batik Air (formerly known as Malindo Air) will add 5 to 10 planes depending on whether its new route applications are approved, it says.

On the demand side, Malaysia Airports Holdings Bhd has laid out expectations of slower passenger volume growth this year.

In a nutshell, the skies ahead are shaping up to be potentially turbulent as a supply expansion could outpace demand growth.

That means that where MAB channels incoming capacity would be critical. North Asia and Australia are becoming key markets again for MAB — for example, it is resuming the Kuala Lumpur-Brisbane route in June with four flights a week.

MAB no longer discloses its financial performance in its quarterly updates. According to Companies Commission data, it recorded a RM438.87 million net loss from RM8.57 billion in revenue in the financial year ended Dec 31, 2016, compared with a RM1.13 billion net loss from RM3.14 billion in revenue the year before.

In the meantime, key cost components may be rising further. Jet fuel prices, for example, have been rising in tandem with recovering crude prices and are now well above US$80 per barrel, based on S&P Global Platts data — levels unseen in three years.

MAB’s fuel hedging position is unclear, although Azman says the airline does some hedging. AirAsia and AirAsia X hedged 15% for the first half of 2018, says Maybank Research.

While the ringgit has strengthened to nearly RM3.90 to the US dollar this month, it could return to 4.30 levels as the greenback strengthens in the coming months, DBS Bank said last week.

Further weakening of the local currency may translate into more speed bumps in MAB’s pursuit of sustainable profitability.

“Typically, US dollar cost makes up 65% to 70% of operating cost for the LCCs and 55% to 60% for MAB,” says Maybank Research.

For perspective, Khazanah’s five-year turnaround plan for MAB had assumed the ringgit to trend between 3.90 and 3.95 against the US dollar. Its subsequent crash to as low as 4.40 last year hit MAB’s bottom line directly, to the tune of RM500 million, says Jiv.

“The airline industry has always been difficult, but we have to recognise that this is what the industry is and that airlines need to compete. What it shouldn’t do is compete in places where it shouldn’t be competing,” he adds.



Key events in Malaysia Airlines restructuring



March 8 — Flight MH370, carrying 227 passengers, disappears en route to Beijing from Kuala Lumpur

July 17 — Flight 17, flying from Amsterdam to Kuala Lumpur, is shot down over eastern Ukrainian airspace, killing 294 people on board

Aug 8 — Khazanah announces a RM1.4 billion takeover of Malaysia Airlines to take the carrier private, three weeks before the airline posted a net loss of RM750.4 million for the first six months of 2014 financial year ending Dec 31

Aug 29 — Khazanah announces a 12-point Malaysia Airlines recovery plan to revive the airline and return it to “sustainable profitability”. Key components include 6,000 job cuts, which would reduce its workforce by a third,  RM6 billion in expenses and capital injection,  and transfer of assets and business from the existing company (OldCo) into a new entity (NewCo), which is targeted for relisting by 2019.

Dec 31 — Malaysia Airlines delisted from Bursa Malaysia



March 27 — The prime minister tells Parliament that Malaysia Airlines has identified 4,000 contracts for renegotiation under its recovery plan

April 30 — CEO Ahmad Jauhari Yahya steps down after 31/2 years at the helm

May 1 — Christoph Mueller officially begins work as Malaysia Airlines’ first non-Malaysian CEO

July 1 — Malaysia Airlines completes the transfer of assets and operations from OldCo to NewCo



April 19 — Mueller says he will vacate the CEO post in September 2016, citing “changing personal circumstances”

July 1 — Chief operations officer Peter Bellew takes over as Malaysia Airlines group managing director and CEO



Oct 17 — Ryanair announces that Bellew will rejoin the Irish airline in December 2017 as the low-cost carrier grapples with mass pilot strikes. Bellew confirms the move later.

Oct 21 — Malaysia Airlines names Captain Izham Ismail as the new head effective Dec 1



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