Malaysian Airlines Case Study

Abstract

Malaysian Airlines (MAS), a government-owned airline monopoly in Malaysia, was privatized in 1994 when Bank Negara Malaysia’s 32% controlling stake was sold to Tajudin Ramli through Naluri Berhad. MAS experienced profits in the initial three years following privatization, but in 1998, during the Asian financial crisis, the airline encountered significant losses. These losses led to a debt of RM9 billion for MAS, with one-third of it attributed to the devaluation of the Malaysian currency. MAS’s debts were predominantly raised internationally. By 2005, MAS incurred a loss of RM1.3b and faced challenges in meeting fuel expenses and operational requirements.

Idris Jala was appointed as the new CEO of MAS on 1 December 2005. On 27 February 2006, a plan was announced to turn around the business and bring MAS back into profit within two years. The plan included controversial steps. This case study provides data from 2003 to 2007, before and after the announcement of the turnaround plan. Students are required to analyse the facts and assess the plan’s success. They should also apply financial statement analysis techniques and propose alternative solutions to MAS’s cash flow problem.

The main topics of this text are the Corporation Sector, Corporate Governance, and Management.

Introduction

Idris Jala was appointed as the new CEO of Malaysia Airlines (MAS) by the Government of Malaysia on 1 December 2005. His main priority was to address the company’s cash flow issues so that it could meet its fuel bills and operational requirements by April 2006. On 27 February 2006, a business turnaround plan (BTP1) was announced with the goal of restoring MAS to profitability within two years. Some of Idris Jala’s measures were controversial, such as the proposed sale of the building housing MAS Headquarters in Jalan Raja Chulan, which faced opposition from the Senators Club. Despite this, Idris Jala proceeded with his plan and the building was eventually sold in 2006 to Perbadanan Nasional Bhd (PNB), another government-linked company (GLC), for RM130 million. Despite challenges like fluctuating fuel prices and the global economic crisis, MAS achieved profits for two consecutive years by the end of 2008.

Idris Jala became Minister in the Prime Minister’s Departmentii on 27 August 2009, which many viewed as a promotion. This move involved leaving MAS and taking up a senator’s position in the Malaysian Government’s cabinet led by Dato’ Seri Mohd Najib Tun Abdul Razak. Meanwhile, the future of MAS raised public concern due to its reported losses in the first and third quarters of 2009iii. Both analysts and the public questioned whether Idris Jala effectively revitalized MAS during his time there.

In 2005, Malaysian Airlines System (MAS) recorded a loss of RM1.3b, raising doubts about its ability to cover fuel expenses and operational needs by April 2006.

On July 6, 2006, Tajuddin Ramli, the former CEO of MAS, claimed in a countersuit for RM13.46 billioniv that he was obligated to follow the decisions of the Government of Malaysia (GOM) regarding various important matters, such as re-branding, asset disposal, human resources restructuring, international and domestic route policies, and investments. Idris Jala acknowledged in his Business Turnaround Plan 1 (BTP 1) that MAS was restricted in its ability to freely alter destinations, routes, and pricing within the domestic sector. Additionally, while there were no explicit constraints on international routes, MAS may not have had complete flexibility to make changes to destinations, schedules, or pricing. In spite of these restrictions and constraints, Jala successfully proposed a Mutual Separation Scheme (MSS) for a significant restructuring of human resources and announced a restructuring of routes for MAS. The market was impressed by his ability to present such proposals. Jala stated, “I had to be honest with the staff about the situation. People want the truth. I informed them that if we did not make changes, there would be no funds for salaries and fuel by April. Panadol could not fix this problem; we needed surgery.”

1. There had been a slowing of growth in its Global Revenue Passenger Kilometre (RPK). With increasing capacity with new aircrafts and players coming into the market throughout the airline industry and rising factor costs, there was stiffer competition and lesser ability to increase prices due to a fear of losing market demand.
2. The BTP! Reported that observations from the European and US markets showed that ‘winners [would] make dramatic staff cuts fuelled by massive increases in labour productivity’ where ‘lean manufacturing techniques in areas such as maintenance had allowed airlines to increase unit productivity by over 30% by redesigning how basic tasks [were] done.” The BTP1 called for the alteration of the mix of full-time, part-time and temporary employees. In addition, the plan sought to revise the automation of non-value activities such as check-ins and the outsourcing of non-core activities such as maintenance and call centres.
3. The company’s product design needed to be rethought, where investments would no longer centre around a customer’s wants or network structures based on a customer’s fancy, but rather around services and network structures that were profitable.
4. MAS would be in competition with the US, European and Australasian carriers with their lower cost structures, leaner processes and faster decision cycles. It was concerned that these would prove to be greater competitors particularly when there were more open skies agreements2 with multi-national bargaining units
5. Because of the gradual expansion of markets and increase in investments in the air travel industry, it gave birth to intense low-cost competition (e.g. Air Asia, Tiger Airways) at the regional level.

Open skies is an international policy concept that aims to liberalize rules and regulations in the international aviation industry, specifically commercial aviation. The concept is implemented through a multilateral air services agreement, which allows airlines from multiple countries to operate commercial flights, transporting passengers and cargo. This agreement can involve a group of companies or countries, and allows airlines from the contracting parties to negotiate the rights to transport passengers and cargo to or from a host or third country that has an existing open skies agreement with the contracting states.

The increasing expenses of maintaining aging aircraft and the necessity for investing in new aircraft were a burdensome issue for MAS. Weaknesses in pricing and revenue management, sales and distribution, brand presence in foreign markets, and alliance base contributed to poor pricing power. Additionally, MAS’ current and future fleet and product lines did not align well with its strategic position, as the markets in and around Malaysia were comparatively small while its routes primarily utilized larger aircraft in its class.

Idris Jala openly discussed the issue by stating that in 2005, a majority of MAS routes were not making a profit (60%). He highlighted the particular case of the Kuala Lumpur-Manchester route, which he referred to as highly dysfunctional, requiring it to be at 140% capacity in order to break even. His overall point was that filling seats alone was not enough; it was crucial to price them appropriately in order to maximize profits, also known as “yield.” Yield was measured as Revenue per Revenue Passenger Kilometre (RRPK), which represented the volume of passengers carried by an airline. A revenue passenger-kilometre was defined as when a revenue passenger traveled one kilometre and paid the airline for that service. This measurement excluded passengers who obtained special fares exclusively available to airline employees, as well as babies and children who did not have their own seats. The RPK of an airline was calculated by multiplying the number of revenue passengers on each flight stage by the distance covered, providing the total number of kilometres traveled by all passengers.

One of the actions taken by management to turn around MAS under BTP1 was:

1. Idris Jala instituted an austerity drive where a Mutual Separation Scheme (MSS) aimed to ‘right-size’ the staff
2. Steps were taken to tackle the problem of low yield. In 2006, with the consent of the Government, MAS increased domestic prices for the first time in 13 years, implemented an Administration Fee (RM14 per person) as practiced by Air Asia (its competitor), and pursued cost reduction programmes.
3. Major cost reductions were made for fuel consumption, manpower, inflight services, and maintenance, enabling the achievement of an identified profit target in 2007, a year earlier than planned. Idris Jala stated that when “we cut that (turnaround time) by five minutes, MAS can free one whole 737 for flights”. He also said that “when passengers are a “no show” half an hour before take-off, some aircraft fuel is sucked out to save weight (a lighter plane is cheaper to fly)”. Full meal trays had been replaced with meal boxes, as they were easier to handle, thus saving on time and staff strength.
4. MAS sold its Headquarters building in Kuala Lumpur to PNB for RM130 million. It later moved its headquarters to Subang.
5. One of the major BTP1 steps was to improve MAS’ network. Idris Jala noted that MAS had made the grievous “strategic mistake” in not joining a global airline alliance, the way Thai Airways and SIA had done. His solution became one to change MAS’ strategy from a ‘point to point’ carrier to a ‘hub and spoke’ strategy. To do this, MAS had to adopt regional alliances, such as how KLM (Northern Europe), Alitalia (Southern Europe), Virgin Blue (Australia) and South African Airways (SAA) had done. This “hub and spoke” strategy allowed alliance partners to “feed” passengers to MAS regional hubs such as Amsterdam and Johannesburg, thus saving MAS from spreading itself too thin flying all over. MAS subsequently pursued code-sharing agreements with other airlines, specifically, KLM for North Europe, Alitalia for South Europe, Virgin Blue for Australia, South African Airways for Africa, China Southern Airlines for China. MAS signed up 25 code-share partnerships to expand its network and reduce the cost of flying into destinations with low-load factors.
6. On 17 March 2007, MAS launched its new low-cost community airline, Firefly. Firefly commenced operations with 2 Fokker 50 aircrafts from its Penang base on 3 April 2008 to four domestic (Langkawi, Kota Bahru, Kuala Terengganu and Kuantan) and two regional (Phuket and Koh Samui) destinations. For the rest of 2008, the Malaysian Government gave approval for Firefly to operate a total of 32 domestic and 41 regional routes from four hubs, namely, Penang, Subang (Kuala Lumpur), Johor Bahru and Kota Kinabalu. Firefly went on to add an additional Fokker 50 to its fleet in December 2007 to operate another four domestic destinations (Penang, Langkawi, Kota Bahru and Kuala Terengganu) from Subang.
7. MASWings, Malaysia’s first commuter airline, was officially launched on 1 October 2007. Serving a network of 22 destinations with 660 weekly flights, MASWings was to cater to the air travel needs of Sabah and Sarawak’s traveling population.

Business Turnaround Plan 2 – BTP 2 (2008-2012)

A second Business Turnaround Plan (BTP2) was launched on 1 February 2008 to cover the period of 2008 to 2012. MAS aimed to increase its profit by 50% to RM1.5bil by 2013. The MAS management team identified several trends that continued to erode profits, including capacity additions in 2009, the highest ever orders for Airbus and Boeing, the popularity of low-cost competitors like AirasiaX and Jetstar cornering the Malaysia-Australian route, rising fuel costs, increased public scrutiny on environmental issues leading to reserved costs for compliance, and the global economic crisis from 2008-2009. The liberalisation of Asian aviation policies allowed for intensified competition with foreign players.

The BTP2 strategy, also known as the Five Star Value Carrier (FSVC), aimed to attract customers who were not solely focused on price when choosing carriers. This allowed MAS to differentiate itself from low-cost carriers. Their marketing approach shifted to prioritizing brand and customer loyalty. They also shifted their focus from being business-oriented to catering to both leisure and business customers. They changed their pricing strategy by offering affordable standard packages with optional service fees, rather than fixed-price packages. Additionally, they reconfigured their fleet design to increase the number of seats in economy cabins and reduce the size of premium cabins, which helped lower costs per seat while maintaining a certain level of comfort. In terms of operations, the BTP2 strategy included plans to optimize MAS’ procurement by balancing cost and value.

The BTP2 outlined that if suppliers aligned with MAS’ goals, they would benefit from the airline’s growth and be preferred partners. MAS aimed to increase capacity by reducing turnaround time and maximizing aircraft utilization. This would be achieved by freeing up aircrafts for more flights. MAS committed to improving productivity in on-time arrivals, baggage handling, and customer experience, such as shorter queues and greater consistency, to eliminate wastage, variability, and error. Idris Jala stated that efforts to reduce aircraft turnaround time by five minutes and introduce meal boxes could generate an additional RM50 million in revenue for MAS annually.

During the launch of BTP2, MAS faced challenges including the increase in fuel prices. To address this, MAS developed a fuel strategy outlined in BTP2 (see Figure 1) to effectively manage the volatility of fuel prices. In the first quarter of 2009, MAS reported a loss of RM695 million. However, in the second quarter, they recorded a profit of RM876 million. Despite stabilizing oil prices in the third quarter (Figure 2), MAS reported another loss. The majority of the net loss of RM299.6 million was attributed to a derivative loss of RM202 million. Additionally, there was a pre-tax loss of RM297.1 million, compared to a pre-tax profit of RM19.7 million in the same quarter of 2008, while turnover decreased from RM4.1 billion to RM2.96 billion. As of 30 September 2009, MAS had cash and negotiable deposit balances amounting to RM2.5 billion.

Conclusion

Hopes were high for the turnaround of MAS as the national flagship air carrier. The goal was to transform MAS into a profitable and independent entity, eliminating its identity as a government-owned organization. This would enable it to fully embrace privatization. The Malaysian public was growing more critical of any perceived waste of public funds and bureaucratic inefficiency. The shifting political landscape in Malaysia provided an opportunity for national privatization efforts to become more transparent, efficient, and free from political interference.

However, MAS still has the public’s expectation of serving national needs, including operating unprofitable routes while providing high-quality service at a low cost. The question remains whether MAS can maintain the positive trend initiated by Idris Jala after his departure, or if the losses reported during that time indicate future difficulties. Is MAS genuinely experiencing a successful turnaround, or was it a temporary success?

References

1. Barry Berman. Business Horizons, Volume 48, Issue 2, March-April 2005. pp 169-179. Victoria C. P. Chen, Dirk Günther and Ellis L. (2003) Solving for an Optimal Airline Yield Management Policy via Statistical Learning.
2. Johnson Journal of the Royal Statistical Society. Series C (Applied Statistics), Vol. 52, No. 1, pp. 19-30
   
   Doganis, R. The Airlines Business in the 21st century. Routeledge London. 2001, Retrieved from http://www.panam.org/newhist1.asp.
3. Spinetta, 2000, quoted in Doganis, 2002 quoted in the following: aviationexplorer.com/airline_industry_overview.htm
4. http://www.aviationexplorer.com/airline_industry_overview.htm.
5. http://www.aviationexplorer.com/airline_industry_overview.htm.
6. The Guardian Newspaper (4 December 2009) Exploring airline opportunities through code share pact. Exane SA at www.exanebnpparibas-equities.com.