Rising from the ashes

Following unprecedented back-to-back disasters that rocked the world, Malaysia Airlines is facing up to drastic restructuring in its fight for survival

Jennifer Meszaros
September 15, 2014
Rising from the ashes

First came the freakish disappearance of MH370. Then, just four months later, MH17 was shot out of the sky over rebel-held territory in the Ukraine. The double tragedy has not only confirmed Malaysia Airlines as the world’s most unfortunate airline, it has also thrust the flag carrier into a tailspin and raised questions as to whether it can survive.

“No airline in the history of aviation has had to go through what Malaysia Airlines is going through right now,” said Mohshin Aziz, an aviation analyst with Maybank Investment Bank. “Malaysia Airlines was not a strong airline even before both disasters. They were losing money at $1.5 million a day – things were really bad. When you compound it with these two disasters, I think they will probably run out of capital by the end of the year.”

Malaysia Airlines is acutely aware of the need to restructure and to do so quickly. In May, the airline reported a net loss of $137m in the first quarter of this year, marking the fifth consecutive quarter in the red for the carrier. While the net loss was not unexpected, it was further exacerbated by the overall slow-down in passenger numbers following the disappearance of MH370. 

In June, Malaysia Airlines CEO Jaunhari Yahya acknowledged that the company would not survive if it continued to make only incremental improvements. “Our only option at this point in our business evolution is radical or sweeping change,” he said in a statement.

If MH370 accelerated the urgency for radical change, MH17 has pushed the carrier over the edge. In response, the nation’s sovereign wealth fund, Khazanah Nasional, has stepped in with a rescue plan that includes delisting shares in the company, buying out minority shareholders and taking the airline private. Khazanah, which holds a 69.4% stake in the airline’s parent, Malaysian Airline System (MAS), will pay MYR0.27 ($0.08) for each share, representing a 29% premium to the airline’s average share price over the past three months. The proposal is expected to be completed by the fourth quarter of this year, pending approval from the High Court of Malaya, the Securities Commission of Malaysia and all relevant parties.

 Malaysia’s Prime Minster Najib Razak, who chairs Khazanah, described the buyout as “the first step needed to return [the] national carrier to profitability”. He said that the “government and Khazanah are in the final stages of completing a comprehensive and holistic restructuring plan” that includes “painful steps and sacrifices from all parties”. 

 What this entails is anyone’s guess.  According to the Centre for Aviation (Capa), Malaysia Airlines has restructured multiple times over the past several years, only to be met with political interference alongside union opposition. In 2011, the airline agreed to a tie-up with competitor AirAsia in a controversial share-swap. The deal would have seen key executives from both companies sitting on one another’s board of directors and involved Tune Air Sendirian – a corporation representing the AirAsia Group – acquiring a 20.5% stake in the national carrier. In return Khazanah was to reduce its share in Malaysia Airlines while taking a 10% share in both AirAsia and AirAsia X. 

In 2012, the MAS Employees Union – which represents about 20,000 employees – successfully blocked the move, reporting that the equity deal resembled a takeover by AirAsia. Malaysia Airlines and AirAsia were later fined $3m each after the Malaysia Competition Commission ruled that both firms were in violation of the country’s 2010 Competition Act for striking a deal that would inevitably lead to a monopoly of domestic air routes by both companies. 

The share-swap was part of a larger review set out by Malaysia Airlines in an attempt to regain its financial footing while re-establishing itself as a premium carrier. Although there were brief periods of profitability, overall MAS has racked up significant losses to the tune of more than $1.4 billion over the past three years. The carrier has since acknowledged that its initiatives did not go deep enough to achieve the desired results.

According to Aziz, Malaysia Airlines’ current financial struggles are largely attributed to heightened competition, high operational costs, rising fuel prices and the weakening of the Malaysian ringgit. Still, the airline is hardly alone. Several regional and global carriers have had to restructure over the years to adapt to challenging market conditions. The AirAsia Group recently sold off six aircraft, deferred seven others and is now considering scaling back on routes. Like Malaysia Airlines, the AirAsia Group also posted a reduction in operating profit for the first quarter of this year, as did other carriers, including Singapore Airlines, whose operating profit dropped by 52%. 

Competition has notably intensified across the region in the past decade, leading to overcapacity in most markets. Relying on its status as a premium carrier, Malaysia Airlines has sought to capture the high end of the market and has been quite successful in increasing passenger traffic in Malaysia. According to Capa data, the carrier was the largest driver of growth at Kuala Lumpur International Airport in 2013, “increasing passenger traffic by 29%, including 27% in the domestic market and 30% internationally, making it one of the fastest growing flag carriers in Asia”.

Malaysia Airlines directly competes with AirAsia on domestic trunk routes and to a lesser extent against newcomer Malindo Air – a low-cost carrier that commenced operations in March last year. AirAsia leads on the domestic front, capturing roughly 56% of the total market share, followed by Malaysia Airlines with 40% and Malindo with 4%.

The carriers are catering to a relatively solid market as well, with Malaysia posting some of the world’s fastest passenger growth rates, driven by rapid capacity expansion by all three domestic airlines. In May, a new low-cost terminal opened, signalling the expectation that growth will continue.

While Malaysia’s aviation landscape continues to shift, the next few months will be critical in determining whether Malaysia Airlines can keep up. Aziz believes the answer lies in scaling back operations in order to become a domestic-only airline. 

“Malaysia Airlines [should] forget and abandon international routes altogether… It is a big surgical amputation, so to speak,” said Aziz. “Under normal circumstances, nobody would want to do this. It is just too much to swallow. But bear in mind we are in very extraordinary circumstances, so it does require an extraordinary solution.”

While it is not uncommon for airlines to scale back on routes and frequencies to increase profitability, Chris Yates, a UK-based aviation analyst with Yates Consulting, disagrees.

“At the end of the day, Malaysia Airlines is a national carrier, a flag carrier. The Malaysian government will always want to wave its flag in whichever way it can. One of those ways is to have a flag carrier fly in and out of the major destinations in the world. I think it will rebrand. I think it is a certainty now,” said Yates.

“Here we have an airline that has been a five-star airline along with only six others in the world,” added Dr Paul Bates, head of Griffith University’s aviation programme in Australia. “A five-star airline rating is awarded to airlines achieving the highest overall quality performance. It is essential for Malaysia to continue to have a strong and reliable flag carrier [and] continue the great traditions of Malaysia Airlines into the future. They should offer the lowest possible fare, restructure their fleet and invest in making themselves different to others. Malaysia Airlines needs to stand on its great legacy.”

Aziz said that whatever option the airline chooses, the Malaysian people would inevitably support it: “We grew up with it. It is part of our identity… we like what it represents.” However, the Malaysia-based analyst is not entirely confident that the airline can win back its international customers.

“At the end of the day, people saw pictures of an aircraft completely disintegrated, bodies strewn all over the Ukraine and that is the lasting image they have in their minds,” said Aziz. “To overcome that takes a long time.”

Keep reading:

“Up in the air” – Liability questions loom as the search for the missing Malaysia Airlines plane continues

Read more articles