Ambitious plan to turn round Malaysia Airlines, but will it work?

Mas 2

Malaysia Airlines (Mas) is to undergo a six billion ringgit (approximately 1.9 billion US dollars) restructuring programme, in a last-ditch bid to save the beleaguered carrier. It is the company’s fifth – and most radical – restructuring exercise so far.

Mas is reeling after two aviation disasters in less than five months: the unexplained disappearance of flight MH370 on March 8, with 239 people on board; and the shooting down of MH17 over Ukraine on July 17, with 298 people on board.

While these two tragic events have had a negative impact on people’s willingness to fly with Malaysia Airlines, it was already in serious financial difficulties long before. Mas last made an annual profit in 2010, since when it has lost a total of 4.9 billion ringgit (approximately 1.55 billion US dollars).

Mas 3

The company’s majority shareholder, Khazanah Nasional  (Malaysia’s main sovereign wealth fund), has outlined a 12-point turnaround strategy, called Rebuilding a National Icon – The Mas Recovery plan. Here are the main points:

  • Khazanah, which owns 69% of Mas, is to buy out the minority shareholders at a cost of 1.4 billion ringgit.
  • Malaysia Airlines is to be taken off the stock exchange by the end of 2014.
  • The carrier’s assets and liabilities are to be transferred to a new company, set to begin operations on July 1 2015.
  • Ahmad Jauhari Yahya, the airline’s outgoing chief executive, is to hand over to his successor when the new company starts.
  • Staffing levels are to be cut by approximately 6,000, from the current total of 19,500.
  • Supplier contracts are to be reviewed, with some facing renegotiation or cancellation.
  • The airline’s headquarters is to move from Subang to Kuala Lumpur International Airport (KLIA).
  • New Mas is to focus on the Asian region, cutting back on less profitable long-haul destinations.
  • Bond holders are to be encouraged to swap debt for equity, in a bid to reduce the airline’s crippling interest payments.
  • Retrenchment and restructuring are to cost an estimated 1.6 billion ringgit, while a further three billion ringgit is to be invested gradually in the new company.
  • If all goes to plan, new Mas is expected to achieve profitability by the end of 2017, and to be re-listed on the stock exchange, between 2018 and 2020.

Khazanah’s managing director, Azman Mokhtar, is confident that the package of measures will succeed, unlike the four previous restructuring exercises. But he admits that success is not in any way certain:

“While funds have been made available, they come with strict conditions, so as to ensure that Mas truly resets its business model and cost structures. Success is by no means guaranteed. The plan calls for all parties to close ranks and work together to enable the permanent reconstruction of our national icon.”

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Both Mokhtar, and his ultimate boss, Malaysia’s prime minister, Najib Razak, deny that the plan is yet another taxpayer-funded bailout. But they tacitly acknowledge that the more than seven billion ringgit (over 2.2 billion US dollars) that Khazanah has pumped into Mas since 2001 is unlikely ever to be recovered.

While the latest turnaround exercise is the most radical so far, we believe it still fails to address the main underlying causes of financial weakness in Malaysia’s national carrier. At best the plan will achieve a brief return to profitability, but it will do little to secure long-term sustainability.

The principal issue facing Mas is the quality of it employees, at all levels of the company. This is the natural result of having a recruitment policy which hires people on the basis of ethnicity (Malay), and connections, rather than competence, experience, honesty or hard work.

Mas 5

Laying off 6,000 staff will do nothing to address the quality issue. In fact, as the retrenchment programme is voluntary, it will make the situation even worse. The minority of competent, honest, hard-working employees are likely to see redundancy as an opportunity to move onto fresh pastures, while the lazy, incompetent majority will hold onto their cushy jobs as long as possible.

The only way for the quality of staff to improve is for a wholesale change in recruitment and promotion policies. That means absolute equality of opportunity, regardless of ethnicity, religion or gender. Rather than voluntary redundancy, all existing staff and management should have to justify their continuing employment, or be laid off.

A related problem is the poor level of customer service, particularly when compared to regional rivals such as Cathay Pacific, Singapore Airlines and Thai Airways. In our experience, even budget carrier Air Asia treats passengers better than Mas, despite much cheaper tickets.

Mas 01

Malaysia Airlines has for years been run principally for the benefit of its staff, its management and its well-connected suppliers (see below), rather than for that of its customers. For a full service carrier, the only way to survive in the current climate is to offer excellent service, at competitive prices.

Another major issue is the way that contracts are awarded to suppliers. At present, the tendering process – if it can even be called that – rewards well-connected Malay-owned companies, rather than those offering the best service, for the most economical price.

Khazanah needs to bite the bullet and cancel all existing contracts, paying out the minimum possible compensation, and referring the most suspect deals to the Malaysian Anti-Corruption Commission. New suppliers should be chosen on the basis of quality and value for money, with no favour shown to Malay-owned businesses.

With inefficient work practices and a system of crony contracts, its no wonder Mas has such uncompetitive ticket prices. It is not just more expensive than budget airlines, but also a host of full-service carriers. Throw in mediocre customer service, and it is easy to see why Malaysia Airlines is losing both passengers and money

Although Mas was largely blameless for this year’s twin disasters, it has still suffered serious damage to its reputation. The airline’s management – as well as the Malaysian authorities – have appeared more concerned with denying any responsibility, rather than convincing potential passengers that safety is paramount.

The airline’s name may still retain some positive connotations for Malaysians, but internationally it will always be associated with two high-profile aviation disasters. The carrier should have a fresh name, and also a new ethos which puts safety above all other considerations.

Malaysian Airlines plane

In the cut-throat world of international aviation, only the most efficient, customer-focused airlines, with impeccable safety standards, will survive. This latest taxpayer-funded programme will do little more than delay the eventual demise of Malaysia Airlines.

If you enjoyed this piece, then you may well like How safe are South East Asian airlines? and Goodbye LCCT, hello KLIA2: Kuala Lumpur’s new budget airport.