MAS RESTRUCTURING

mas-a380-1

In light with the recent development of MAS, I re-edited my article written five months ago, which I believe might be relevant in today’s context. Kindly read.)

To begin with, there aren’t many government-owned airlines in the world. There is none in the United States and such entities are becoming rarer in Europe. Sooner or later, that trend will spread to Asia, inevitably in Malaysia. Maybe only in the rich Gulf countries such airlines can exist.

Malaysia is not as rich as Gulf countries where money is almost unlimited. Therefore the people, especially the taxpayers have plenty of reasons to be mad at the loss-making GLC’s. There is no genuine excuse for their losses. MAS is one of the blue-blooded Malaysia GLC’s that put prestige far above profit. However, such practice is unbecoming considering the losses can be billions of Ringgit. Maybe they think- why should they care since it’s not their money.

For the last 7 years, the national carrier has made three cash call exercise for the amount of RM7.3 billion only to accumulate losses RM4.1 billion in three years’ time.

This has happened in spite of in 2013, the pilots are flying more and the planes are flying 12 hours daily from eight hours previously. MAS achieved its best ever load numbers (81%), even beating rival SIA (79%). MAS flew additional 4 million passengers last year, making the total passengers of 16 million.

So basically, they have added 20% more capacity and passengers whilst using the same number of aircraft and people, and therefore the staff productivity is up by 20%.

Therefore, It is mind-boggling to see MAS has incurred losses amounting RM 5 million per day. To make things worse, more than 1000 flight cancellations have been made since the tragedy of MH370.

No Wonder lately there are several options being proposed to restructure the airlines. On top of that- should the company file for bankruptcy, then operate under a new company and with the same name just what Japan Airlines (JAL) and American Airlines did?

Admittedly, bankruptcy is one of the fastest ways to turn it around. But it is not as easy as it sounds. When the JAL filed for bankruptcy, It has shed all its jumbos, cancelled unprofitable routes, reduced staff by a third, persuaded its unionised pilots and staff to take big pay cuts, and slashed its pension payouts by up to half.

Given the politically sensitive government at the helm, obviously this is not an option as far as political backlash is concerned. In fact, MAS has the glaring disadvantage of having several unions which can hold the company to ransom. Do you expect these unions to be happy if they are being told that the destruction of their jobs will be good for the company in the long term? How do you tell a man being devoured by a tiger that he is really helping to preserve a treasured species?

Historically, the unions  can even force the government to rescind the share-swap agreement.

Therefore, it is the only right thing for MAS to have a gradual and sustainable recovery model through harnessing the assets and keeping the people that they have.

Well, how do you that? When a business is faced with stiff competition, it can either increase prices or reduce the cost. However price can only be increased to a certain extent. MAS can’t price itself more than Emirates and SIA because if they do, then no one will fly with them.

In fact, MAS has to dump its fare to ensure they will not be out of the race. Already their market share in KLIA was slashed by half from 54% to 28% and they are not the No 1 carrier in their home country.

Given such scenario, it would be better to reduce costs and minimise the increase in price. All its cost can be examined to determine which are truly necessary, which cost can be reduced, which service can be curtailed or modified etc,etc.

For any restructuring plans to work, serious problem must be addressed first. MAS must cut off the cancerous arms and treat the bleeding organs before undertaking any prescriptions.

There must be something wrong with MAS’ cost structure given for every available seat per kilometres, they lose 5.6 cents.

MAS’s organization is said to be convoluted by having 11 divisions, 210 business divisions and more than 100 senior executives. Clearly, wastage happened at the senior management level.

Next, wastage at the supplier level. The issue of lopsided procurement contracts obviously referring to the catering contract and the practice of preferred contractor must be dealt with. We were told by terminating a catering contract, MAS can save about RM300 million per year.

Some might say MAS is overstaffed. MAS with about 100 aircraft has almost 20,000 employees while AirAsia with 300 planes has only 9,000 staff. The reason is, the number of pilots and cabin crew can’t be the same between these two companies since the working rules are different.

Due to this, some of these airlines can afford to outsource their front end services and engineering works. On the other hand, MAS do most of them and that is why the headcount gets big.

But essentially, it is about getting maximum output from the 20,000 people. We must realize that being big is not the cause of MAS’ problem. The size of the workforce, connectivity, and network may actually be one of MAS most important strengths.

The best way to restructure MAS is not through financial engineering such as asset stripping or de-list and re-list exercise. MAS has enough cash or capital. Khazanah, being the owner, may not necessarily have to invest more money. It would be better if they restructure the allocation of resources by tweaking MAS’ business model.

The most radical yet sensible approach is to split up MAS to become two entities. Currently Firefly is not a serious competitor to AirAsia or Malindo. Unless Firefly is being transformed from a mere community operator into a formidable low-cost carrier with large fleets and huge connectivity, then MAS can consider splitting the current airline into a hybrid domestic/regional airline like Malindo Air and a premium international airline.

The market has changed for the past 10-15 years where 80% of air travellers want to fly budget. The growing middle-income class in Malaysia and Asean region is very price sensitive. Therefore, it is not surprising to see that Malaysia’s air transport premier market is very small.

For that reason, MAS has to cater the 80% market rather than squeezing its yield in the 20% market. There is no way that MAS can compete against Air Asia, at least domestically and regionally. While it may be true Air Asia enable more people to fly, but it does at the expense of MAS passengers.

The ‘split-up’ move is also necessary because you can’t have two cost structures under one business entity and it is foolish to have a different brand proposition under one name/brand.

The icing on the cake from this move is that, by splitting up MAS, it will eventually split up the ‘powerful’ unions. MAS could enjoy the same advantage like profitable airlines such as Air Asia, Emirates and SIA that have no unions. MAS will be able to run the business uninterrupted by the demanding unions. For the record, MAS currently has 7 unions.

Imagine a hybrid low-cost domestic airline that flies within three-hour radius destination together with MAS hospitality and experiences to compete with Air Asia. And this hybrid airline can become a feeder airline to the premium international airline. Since both airlines are flying from KLIA and KLIA2, the possibility is endless.

MatRodi

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One thought on “MAS RESTRUCTURING

  1. Sam says:

    “Next, wastage at the supplier level. The issue of lopsided procurement contracts obviously referring to the catering contract and the practice of preferred contractor must be dealt with. We were told by terminating a catering contract, MAS can save about RM300 million per year.”
    Salam,
    According to MAS 2013 report, they spent RM270 million on airline catering, which comes to 1.8% of their total expenditure. So if they terminate the contract, they will save that amount. At the same time, what will they serve on board the flights? What would be an acceptable number to pay for airline meals?
    Their expenditure on catering expense has been consistently below 2% for the last 10 years. How can this be an issue now?

    I contend that the farming out of MAS Catering was a success. The last year before it was sold, in 2002, they catering division was running at a loss of RM35 million. MAS was still paying about the same (2% of expenditure) to the catering division, but yet that division was losing money.

    The catering company is now fully a Malaysian company that is doing well. Let’s not vilify it just for the sake of it.

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