I am not a fussy traveller when it comes to in-flight services. As a journalist, the main task is to get on with the job and to reach the destination — be it Rio de Janeiro, Tashkent, Tripoli, Copenhagen, Seoul or Stavanger — cover the assignment, and get back safe to tell the story.
Don’t expect sterling in-flight services when flying Aeroflot, but during the Soviet era, before Airbus and Boeing dominated its fleet, the Russian national carrier, flying its own Russian-built aircraft, had one of the best safety records in the aviation industry.
Still, when you are tired, you really appreciate excellent service provided by the cabin crew, such as that on board Malaysia Airlines (MAS), which has over the years been consistently voted the best in the world.
Travelling as a media guest of the national carrier’s inaugural Airbus A380 flight to London on July 1 further strengthens my belief that MAS provides services befitting a premier airline.
This was aknowledged at the Farnborough International Airshow last week, when MAS was awarded Skytrax “5 Star Airline” status and won the “World’s Best Cabin Staff” and “Best Airline Signature Dish” awards. The new A380 aircraft — the world’s largest passenger plane — is the first of six ordered by MAS and is a statement of intent that it is indeed a five-star airline and will continue to remain one.
The second plane, which is to be delivered next month, complete with new livery, was Airbus’ showcase A380 at Farnborough and attracted the attention of British Prime Minister David Cameron, among other visitors.
MAS’ new aircraft, upgrading of its lounges, the well-attended functions commemorating the inaugural flights at the Kuala Lumpur International Airport and Heathrow, and its excellent cabin crew, in-flight and ground services, seem to indicate a well-run and profitable airline. But sadly, it is not.
MAS is a carrier in financial distress, and has been fluttering in and out of this state since the Asian financial crisis hit our shores in 1997. MAS is still looking for that “elusive” and right business model in a cost-sensitive industry with razor-thin margins.
Profit and cash reserves can be wiped out within a year when the economy slows down, resulting in a reduction in the number of passengers. Airlines are also adversely affected should the price of jet fuel escalate and foreign debts shoot up due to an unfavourable exchange rate environment.
The national carrier has to find a business model that is sustainable over the long term and ride the expected turbulence in the aviation industry. Financially, the managers know where the problem lies — its costs have not matched up with revenue and it needs to carry more passengers and fill up the seats.
The gap between cost and revenue currently stands at 7.3 sen, based on its revenue per available seat km (RASK) of 18.5 sen and cost per available seat km (CASK) of 25.8 sen. Its immediate target is to bring costs down by 20% and push RASK up by 10%. But a high cost factor is not something new to MAS.
The airline faced the same problem when it was rescued by the government in late-2000. Then, privately held MAS was borrowing heavily to finance a fleet expansion programme that allowed it to fly to more international destinations, including unprofitable routes like New York. However, it was caught by the impact of the Asian financial crisis and its aftermath, which saw the ringgit-dollar exchange rate ballooning.
Then managing director Tan Sri Md Nor Md Yusof — now its chairman — was quoted in 2001 as saying that “the company was facing financial problems … owing to an unsuitable business model. Taking into account its financial standing, liabilities and other factors, I saw we could not operate using the old ways. MAS’ operational costs were higher than those of its competitor.
I would liken MAS to a house that was supposed to be a double-storey but instead has five storeys. Its business position was untenable.” Since then, MAS has undergone various restructuring programmes including the widespread asset unbundling plan (WAU) in 2002, which turned it into an asset-light carrier by transferring all its aircraft from the balance sheet, together with liabilities, to a new company, Penerbangan Malaysia Bhd.
WAU worked for a while but faced with an escalating fuel price, higher operating costs and uncompetitive yield, MAS plunged to a then record loss of RM1.3 billion in 2005. While WAU was effective in managing the debt and liability burden, it was never a long-term answer to the carrier’s operational problem.
A new management under Datuk Seri Idris Jala went in and effectively restructured MAS’ operations, putting it back on the profit track. Under its business turnaround and transformation programmes, MAS’ losses were reduced to RM136 million in 2006. In 2007, it registered a record profit of RM851 million. The airline saw operational improvement and RASK increase by 45% within three years.
A route profitability exercise was implemented to halt not-profitable routes like Langkawi-London, KL-Manchester and KL-Kuching-Perth. But profits took a hit in the next three years. The world went into a recession in 2008 and crude oil prices peaked at US$147 barrel. Since then, the price of crude oil has mostly remained above US$100 a barrel.
Costs increased and yield as reflected by RASK went down, indicating that MAS has not been able to maintain healthy capacity utilisatiion. At a time when commercial aviation is going through difficult times, MAS has been slow to recover from the recession, and equally slow in cutting unprofitable routes.
In FY2011 ended Dec 31, it announced its largest loss in corporate history of RM2.52 billion, including provisions. With the MAS-Air Asia share-swap agreement — which was supposed to help it solve its operational problem but was strongly opposed by the union and some politicians — now history, MAS, under group CEO Ahmad Jauhari Yahya, is putting in place its latest business turnaround plan.
Will it succeed this time? Can it be sustainable in the longer term? Will the current business model prove to be more resilient and able to withstand economic and business vagaries? The new A380 and the A330 aircraft will be at the forefront of MAS’ turnaround plan.
The carrier’s aircraft modernisation programme will see it take delivery of 23 new aircraft, and retire its fleet of 747s. This will reduce its average fleet age from the current 12.2 years to 7.7 years — among the youngest in the world. That means it will now have a more cost-efficient fleet. The A380 for example, burns 17% less fuel per passenger per km. Fuel and oil cost make up the airline’s biggest expenditure.
The A380, which will carry about 150 more passengers than the 747, will be used to ply the KL-London, Beijing, Tokyo and Sydney routes — saturated destinations where flight frequency cannot be increased. But the challenge here is to fill up the additional business and economy seats by getting the right price structure for these markets and for its other major routes in Asean and Asia.
It has to find a balance between meeting the needs of premium travellers and those who want cheaper tickets. MAS also aims to maximise its assets and resources by boosting capacity on selected routes — notably within a six-hour radius — and increase the utlisation of its planes from nine to 11 hours.
It has also cut about 9% of its non-profitable routes, such as to Rome, Dubai, South America and South Africa. It is set to become a full member of Oneworld Alliance by year-end, which will improve its global coverage and connectivity. MAS has also worked out its financing needs by securing RM1.5 billion bridging loan and issuing a RM2.5 billion sukuk.
It is also in discussion with the Ministry of Finance on setting up a special purpose vehicle to fund its six A380 and two A330 purchases.
All seems to be in place now, with further operational cuts expected.
Jauhari, who travelled economy class during the A380 inaugural flight to London, says there are no more excuses for MAS not to perform. For the majority shareholder, which is the government, MAS should not be allowed to be in the position of being “too big to fail”.
Azam Aris is managing editor at The Edge