Published by Malay Mail, Business Today, Focus Malaysia, Astro Awani, Biztech.asia & PUON Tribune, image from Focus Malaysia.
Malaysia Airlines Berhad (or MAB, but still commonly referred to as MAS) has undergone several bailouts and multiple leadership change. Additionally, it weathered through MH370 and MH17 tragedies and is now a victim of the pandemic. With the government’s debt and contingent liabilities totalling at about RM1.2 trillion, worsened by the pandemic-related economic crisis, Malaysia has to be prudent in spending public resources. MAS is a national pride but it’s probably time to think of a different narrative for the struggling airline.
Instead of the extremities between a total bailout or a complete shutdown, it’s worth seriously considering a merger, with renewed management consisting of experts, new governance process with no political interference, new innovative business plans supported by indirect government aids and minimal direct aids.
According to a reply by Finance Minister Tengku Dato’ Sri Zafrul Tengku Abdul Aziz to Dewan Rakyat, a whopping RM28 billion has been injected into MAS by its owner Khazanah Nasional. That’s already substantial but what about the years before Khazanah came in?
Clearly Khazanah has done its part to help sustain the company and MAS management had many chances for a turnaround alongside several bailouts. Most recently, business news portal The Edge Weekly reported financial aid amounting to RM2.1 billion was being sought by MAS from its owners. It was only in July that the Edge Markets reported a US$300 million (RM1.28 billion) worth of new funding – likely a government grant – was secured by MAS to support it through the pandemic.
Last year, it was reported that Khazanah would require RM1 billion worth of annual capital to sustain MAS operations under the current structure. Khazanah has done more than enough. It’s clear that MAS is not sustainable and these injections and bailouts have proven non-viable.
The National Union of Flight Attendants Malaysia (Nufam) president Ismail Nasaruddin reportedly opined that the term ‘bailout’ is only valid when public resources are used to save companies in trouble due ‘mismanagement and financial misconduct’.
Whatever the terminology may be, how would previous losses and troubles by MAS be explained by Nufam? The fact is that MAS has struggled to be profit-making even in the past years before the pandemic. Surely there must be issues or weaknesses in management, strategies, and governance.
For example, despite a reported RM6 billion injection by Khazanah in 2014, MAS has been in the red from 2015 to 2018 with a total loss of RM4.3 billion, according to Finance’s Minister’s reply to Dewan rakyat. Reportedly, MAS attributed 2018’s poor performance to “crew shortage, intense competition, oversupply of capacity and volatility in fuel prices and foreign exchange”.
Observing the troubles MAS was facing in those years, it was reported in 2018 that the late Tan Sri Dr Abdul Aziz Abdul Rahman – remembered as a great man who successfully helmed MAS in the 1980s to early 1990s and soared MAS to the heights it once was – suggested the formation of a team of experts to review MAS’s operations. Abdul Aziz pointed to examples of operational issues in MAS contributing to high expenditures such as high salaries to pay the top foreign talents and senior management as well as a bad investment decision in the purchase of Airbus A380 aircrafts which were mostly grounded at that time.
Managerial incompetence leading to poor strategies and decisions could be another factor. Unlike the pandemic which hit all airlines, The Edge Markets compared 2018 performance by MAS to Singapore Airlines’ profit of S$284 million despite the challenging conditions.
According to Endau Analytics – a consulting company led by an industry expert – MAS “is beyond rehabilitation and saving until and unless certain hard-nosed decisions are made. That means the immediate removal of those who are incompetent and inept”.
However, political interference can waste even the best talents and may have contributed to the failure of past turnaround efforts. Two foreign CEOs were brought in supposedly for their expertise but the back-to-back resignation of both CEOs points to other problems at the top instead of just market forces or managerial incompetence.
Centre for Aviation (CAPA) chief analyst and chief representative for Southeast Asia Brendan Sobie informed The Edge that “the airline could potentially take another crack at reducing its costs but this can only be effective if there is no political interference”.
In line with the structural changes that needs to happen, it’s advisable to conduct the necessary forensic audit. Loopholes in governance such as weak or questionable procurement processes that can cause leakage in funds (and increase costs) must be identified and removed.
Despite the obvious difficulty in keeping MAS afloat, a shutdown with no revival plans is the least favourable because a lot of jobs are stake. According to the International Air Transport Association (IATA) report in 2018, air transport and tourists arriving by air supported an estimated total of 450,000 jobs in Malaysia. Reportedly, MAS itself has around 12,500 employees at stake.
Of course, the global situation affects not only MAS but other local airlines such as AirAsia. Given that MAS was reported to mention ‘intense competition’ as one the reasons for its poor financial performance in 2018, a merger with a competitor may be conceptually sound.
That being said, brokers of this deal must ensure that the merger is fair, resulting in a structure free of political meddling, and ensure the least repercussions to employees. Similar lines of concerns were also reflected by Nufam.
Should this fail, then a sell-off – reminiscent to what happened to Proton – may be considered. But why go down this road if there is a capable Malaysian partner for a merger?
A sell-off in the current environment with a rather challenging future outlook may risk a ‘fire sale’. Furthermore, it’s well understood that aviation business is not like the automotive business. Experts from the Institute of Air & Space Law at McGill University mentioned airline industry as a ‘tough business’ with small profit margins, high fixed costs and big capital expenditures.
Additionally, McKinsey & Company pointed to the evolving aviation technology ‘post-crisis’ towards ‘smaller long-range aircrafts’ which has the potential to bring about the “retirement of very large wide-body craft designed for hub operations, such as A380s and 747s”. How competitive will MAS’s fleet of superjumbos be in the future and how will that be reflected in its valuation?
Thus, the government may still need to play a supporting role through guidance on national strategic directions and through both direct and indirect financial aids, especially in promoting a sustainable merger between Malaysia-based airline companies and in preventing further layoffs.
We are likely to find out more on how this might look like in the coming weeks, but what can be established is that these consecutive perpetual bailouts have proven unfeasible and a more permanent solution is needed.
If any union, such as Nufam, remains unsatisfied or have their own ideas that could help, then perhaps they should be brought in any future discussions to provide their proposal on workable solutions as well.
Ahmad Ameen Mohd Kamal is Head of Science and Technology at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.