It’s a tough pull for MAS

MALAYSIA Airlines (MAS) is perhaps the only Malaysian company that has undertaken the most number of restructuring exercises over the past decade to try to get back on its feet.

A decade ago its books were severely tainted with red ink and had to be cleaned up via the Widespread Asset Unbundling (WAU) exercise where it became an asset light airline. But 10 years later it is still in dire straits and appears not too far from where it was a decade ago.

This Wednesday the new boss of MAS, Ahmad Jauhari Yahya, after coming in one-and-a-half hours late for the media briefing, threw in yet another plan to put it back on course. The theme is “right sizing'' and it involves cost cuts to spinning-off businesses.
Ahmad Jauhari says the theme of his plan is ‘right sizing’.

Some analysts were quick to say the plan “is yet another exercise to cut cost and sell assets to show profits. This is the fourth in a decade after WAU, Business Turnaround 1 and Business Transformation 2.''

“The same people who crafted WAU are back. Had they put in place a long-term plan then, would MAS be in this state?'' ask Standard & Poor's senior aviation analyst Shukor Yusof from Singapore.

To him, the new team “has taken a short-term view of MAS when they should have engaged with the experts from within to get to the root of the problem as the plan to him does not address that.''

Brendan Sobie, the analyst at CAPA Centre for Aviation adds: “MAS has an unenviable track record of failed turnarounds and transformations, its rivals will be watching closely as MAS takes a stab at yet another new strategy.''

The question is no longer about whether it can do it, but about confidence.

New plan, same story

At a glance, the plan is no different from the previous ones that focused on cuts and asset sale to remove the red ink from its books in the short term.

A Maybank Investment Bank Bhd analyst describes the 43-page business plan document as a “fairly good academic paper, full of comparisons, but lacks critical details on exact execution plans which is key for investors to decide'' if the turnaround story is bankable.

Of the 17 brokerages tracking the stock, according to Bloomberg data, only two are still maintaining a “buy” call while 12 have a “sell'' recommendation and five “hold'' with a target price of RM1.30 a share. Yesterday MAS closed at RM1.31

But Ahmad Jauhari, who declined to be interviewed for this article, contends that there was a recovery plan that focused on “right-sizing'' to address the bleed, and a growth plan for sustainablity.

He says MAS is in a “deep crisis'' due to lack of focus on the premium segment and its quality of product fell. Basically the attraction waned because of its pricing, an ageing fleet, a stale product and it was not as fast as its rivals to adopt change.

Ahmad Jauhari believes that by replicating the “playbook used by Japan Airlines (JAL) and Garuda International'' to turn around MAS, there will be success.
Mohd Rashdan is not unduly worried about the financing or cash reserves.

But not to Shukor.

“It is naivety at its highest order to do that. JAL's recovery plan was based on making the Boeing 787 as the workhorse of its fleet, and slashing 16,000 employees 30% of its workforce. What is MAS prepared to do? The airline has close to 20,000 workers; will the company lay off a third of them now that it is downsizing?''

He also warns that downsizing is not the best way to address MAS' problems when it wants to be considered a serious premium player and is going to add five 500-seater A380s in 2012.

It will open itself to “predators, and there is no shortage of them in the region from Jetstar, LionAir, Singapore Airlines (SIA), Cathay Pacific and many others,'' Shukor adds.

Ahmad Jauhari contents that, if nothing is done, in terms of a fundament re-engineering, the losses could balloon to RM2bil. For first nine months, MAS reported a net loss of RM1.2bil.

More cuts needed

Under the new plan, MAS will shrink its network by 12% to grow.

In 2012, it will suspend flights to loss-making routes such as Dubai, Johanesburg, Cape Town and Buenos Aires which make up only 5% of total international available seat kilometer (ASK). Sobie says MAS needs to cut 25% of its capacity to European cities (probably Rome and Frankfurt) to make up for a 12% system-wide cuts.

“This figure could be reduced slightly if MAS opts to also trim back its Australia/New Zealand operations,'' he adds.

Some experts say the Singapore-Langkawi route will go, and so will the long-haul routes out of the Kota Kinabalu hub, whose future as a hub appears dim.

“It is surprising they find the Dubai route loss-making when its rivals can make money from it,'' says the expert.

When a particular route is suspended, the rights go back to the government and here is where AirAsia or AirAsia X (AAX) can apply for them.

MAS and AirAsia are now partners by virtue of the share swap deal in August, and to facilitate the working relationship, a comprehensive collaborative framework (CCF) exists so that both can work together in many areas in a bid to reduce cost and MAS is looking at RM100mil savings a year. But the bigger aim is really to prepare the players for the onslaught of competition with liberalisation of Asean's air sector by 2015. Here is when any airline in Asean can fly to any city and pick up passengers, and having a strong home carrier is therefore key.

The CCF also means there will be sharing of flights to save cost, though the airlines have not made it clear how this will work.

But Ahmad Jauhari did say that “we are close to finalising a connecting-service that will enable passengers on either airline to seamlessly connect between carriers and non-overlapping routes.”

While AirAsia's group CEO Tan Sri Tony Fernandes has declined comment on this issue, the market has gone on to speculate that AirAsia X may be looking at giving up some routes, such as Mumbai and the European routes, in exchange for Sydney and some China routes. AirAsia X has been fighting to get Sydney for a long time.

Premium equation

To get back at the premium market where rivals such as SIA, Cathay Pacific and Emirates reign, MAS has to do a total revamp of its approach to branding, distribution, customer loyalty, product and the works in order for these high-fare paying customers to re-look at MAS.

It would be a tough battle and shrinking its network puts it back a few notches in the premium game where frequency and connectivity is king, says an industry expert.

“It is not just frequency, but the right product, a top-notch frequent flyer programme and knowhow to treat the customer right. SIA, Emirates and Qatar Airways know best how to treat the customer, they even know what toilet paper their high-paying travellers use. That is premium service. Is MAS willing to go down that route?'' asks an industry expert.

The good thing is it will have 23 new more fuel-efficient aircraft plus the six A380s which will be its star product. It will use the jumbos for the London route.

However, Sobie says that the KL-London-KL routes where MAS has double daily flights had suffered over the last several months from low load factors and yields. With the A380, there will be more capacity at a time when market conditions in Europe are worsening. But MAS hopes to woo more premium passengers after noticing the impact of the A380 from other carriers in attracting new clients.''

To offer premium services, Shukor points out that MAS needs a reservoir of premium passengers and KL is not considered a premium city. Still, others think MAS' entry into the oneworld air alliance provides some reprieve in linkages and volume, though small.

MAS also wants to re-focus on South-East Asia and Greater China, But others are also zooming in on Asia, such as Qantas, British Airways, SIA and even Emirates.

There will be more capacity added into the region by existing players and new players, and that points to more competition. Next year, SIA's long haul low cost carrier Scoot enters the market, Emirates will fly its A380 into Kuala Lumpur and Qantas will set up an Asian hub.

International Air Transport Association director-general Tony Tyler predicts Asia will do better than most regions amid the gloom and doom due to the eurozone crisis that threatens to throw the global economy into a tailspin. CAPA says the overall Asian market is poised to grow at a much faster rate of 10% per annum, to reach 900 million passengers (excluding China) by 2020.

MAS wants to launch a regional airline by the first half 2012 to tap into Asia but analysts warn of the execution risks of doing so.

“Ten years and the problem at MAS still persists. Now they want to adopt a new baby, perhaps they should re-look their strategy,'' an analyst says.

The regional airline, yet to be named, will give MAS the needed traffic as it will act as a feeder airline to MAS and more importantly yields, while MAS will focus on long haul routes.

The existing Firefly turboprop operations will also remain as a feeder to MAS.

MAS is targeting to increase its revenue per available seat km (ASK) by about 20% to 22.3 sen from an estimated 18.7 sen this year, and decrease its cost per ASK by 27% from 22.4 sen to 22.3 sen.

But more interesting is the talk that MAS, Qantas and British Airways may work together. It is mere speculation at this stage. If it does materialise, there is a good chance that Ahmad Jauhari will succeed in turning MAS around.

“Something is certainly brewing with Qantas, and BA may be involved,'' said an expert.

Qantas, on its own, wants to set up an ultra-premium carrier airline to be based either in KL or Singapore. A report from Australia yesterday says that Qantas is keen to work with MAS and “discussions are continuing with relevant parties about the establishment of a premium carrier. Qantas remains very much committed to this,” a report citing Qantas' government relations chief, Olivia Wirth, as saying, adding that any future activity between the two fliers “would be complementary” to MAS' plans for a new short-haul carrier.

They could collaborate on scheduling, interlining, pricing and revenue management or just interlining. Whatever they do they have to move fast.

“MAS can be the link into intra-Asia, South East Asia, BA for Europe and US points, and Qantas for Australasia. By combining to scale they can beat Emirates and even SIA,'' says the expert.

In the black

Despite all the cuts, MAS will remain in the red this year and the next. Ahmad Jauhari estimates the net loss for 2011 to be RM1.32bil and his “base case'' net loss for 2012 is RM165mil. The light at the end of the tunnel will only shine in 2013, and by 2016, he expects MAS to report RM900mil in net profit.

That projections are a bit conservative, says Maybank, which expects a RM903mil net profit for 2013. By 2016, the expectation is that it should report RM2bil in net profit, provided of course it is able to turn around as per the business plan.

“The one thing they are doing right is cutting loss-making routes that has not been possible previously,'' says a Maybank analyst.

“Whatever they do, it will take a while before any research house will turn bullish on this stock.”

MAS also needs to conserve its RM1bil cash in its coffers and raise RM12bil in financing for its aircraft, but a cash call is not on the cards.

MAS deputy CEO Mohd Rashdan is not unduly worried about the financing or the cash reserves for he feels it can roll into next year and the airline can raise about RM5bil worth of funds from banks, credit agencies, and leasing arrangements of its new aircraft.

“We have our funding mix plan for aircraft purchases and another RM1bil will come from the return of pre-delivery deposits from the aircraft manufacturer.''

The move to spin off its ancillary units and getting strategic investors may also raise some funds for the airline.

“Selling assets or stakes to raise money to show profits has been done before, and AirAsia is a potential buyer,'' says a source.

AirAsia recently formed a joint venture with Canada-based CAE International Holdings Ltd to set up an aviation academy to provide training for pilots, cabin crew, engineers, guest services, ramp handlers and aviation management. And since MAS wants to spin its pilot training unit, it could end up with CAE and AirAsia, says the source. Ahmad did not name the potential strategic partners that may end up having stakes in the ancillary units that it wants to spin off.

Job cuts

Will there be job cuts since MAS is downsizing?

Ahmad Jauhari says that will be the last resort.

AmResearch says any workforce downsizing and change in performance-driven incentive mechanism could face hurdles especially with the unions.

“It would only be fair to make it very clear to the staff, instead of talking in riddles about job cuts. It is their livelihood and don't blame them for MAS' misfortunes,'' says an industry expert.

Sympathy is not what many employees are looking for. They want straight answers and not answers like “work in progress,'' says another industry expert, who adds that “During Tan Sri Idris Jala's time, we knew exactly what was happening but now we are clueless. We don't even know if there will be layoffs and who will be affected... it is utterly confusing.''

The issue of jobs cuts could send another wave of uncertainties when the unhappiness over the share swap and CCF is still fresh. Many parties have lambasted MAS and AirAsia over the CCF and share swap.

Labour is the second-biggest cost item after fuel and oil for MAS.

“The larger issue on cost side is inadequate labour productivity. In the months ahead, there will be a need to overhaul our organisational structure,'' Ahmad Jauhari warns.

“Following the share swap and board revamp, Fernandes and Datuk Kamarudin Meranun of AirAsia were appointed directors of MAS. Ahmad Jauhari was head hunted for the job and joined the airline on Sept 15 on a three-year contract.

Shukor felt MAS must do more to develop and nurture its own set of managers to run the company in future. It is a sad day for MAS that, in the past decade, it can't even produce a single individual from its own rank and file who has the ability to steer the airline now. You can't parachute leaders when there is a pool of talent within waiting to be recognised.''

While some in MAS feel that the CCF should not be there, the feeling is mutual for some at AirAsia.

“Many have questioned Fernandes on the need for the share swap and CCF, but his answer is “do you want to go on fighting for routes or do this for the greater good,'' says an insider.

Fernandes when contacted said “they (those at AirAsia) are quite indifferent, they are willing to go (for the change).''

Fleeting chance

The odds are lesser than previously as the biggest challenge previously was an ageing fleet. With the new deliveries, MAS will have one of the youngest fleet in the region and the partnership with AirAsia will hopefully drive cost savings as promised. More importantly, the partnership is intended to make them into stronger entities in a liberalised environment.

But like in all restructuring exercises, the “devil is in the execution'' and whether Ahmad Jauhari can pull the airline across to safe grounds remains to be seen. One thing for sure, the market is not going to believe any more stories if this fails. It has become a confidence issue