Does Malaysia really need a national airline? That’s the question many are asking as Malaysia Airlines (MAS) comes under rising pressure to revise its growth strategy and profit plan after consecutive years of poor performance.
The loss-making flag carrier has struggled to stay afloat after being privatized in 2014 by Khazanah Nasional Berhad, the Malaysian government’s sovereign wealth fund.
A five-year recovery plan was unveiled soon after the state investment arm became the airline’s sole shareholder with an aim of returning the carrier to profitability within three years.
Despite a six billion ringgit (US$1.47 billion) capital injection and retrenchment of some 6,000 staff, MAS has yet to break even and recently failed to meet its March 2019 target date for re-listing on the local bourse.
Last year, Khazanah posted its first annual loss in more than a decade, with nearly half of its registered 7.3 billion ringgit ($1.78 billion) impairment loss attributed to keeping the airline afloat.
The state fund has yet to indicate if it will inject additional funds into the airline and recently called on the company’s management to produce a new strategic plan to produce better returns.
But calls for a bigger shakeup are getting louder as Khazanah, now chaired by Prime Minister Mahathir Mohamad, launches a fire sale to liquidate “non-strategic assets,” including stakes in telecom firms, banks and properties, to reduce the national budget deficit and an estimated 1 trillion ringgit ($245 billion) debt load.
The iconic national carrier, some analysts suggest, could be next on the chopping block as the government moves to cancel or defer several major infrastructure projects launched by the previous Najib Razak administration, including a China-backed high-speed rail and several gas pipelines.
“I love MAS. I want MAS to be a national airline, but it looks like we cannot afford it,” Mahathir told reporters earlier this month upon announcing that his government is now mulling whether to sell, refinance or terminate the troubled carrier.
MAS was established in 1972, but has been in operation under various names since 1947. Critics see MAS as a relic of a bygone era which is unable to compete with ruthlessly efficient low-cost modern airlines.
Those include Malaysia-based upstart AirAsia, which captured nearly 55% of all Malaysian passenger traffic in 2018 and has expanded worldwide.
While MAS has long imbued Malaysians with a sense of national pride, others say the case for sentimentalism has become a harder sell as the losses stack up.
Asked if another bailout was on the cards, Economic Affairs Minister Azmin Ali, one of the Khazanah’s directors, recently told reporters that the government is not in a position to extend a lifeline to the ailing airline. Finance Minister Lim Guan Eng, however, gave his assurances that MAS would not be closed down.
Analysts foresee a deeper restructuring or strategic partnership with a domestic or foreign airline as the most likely outcomes to MAS’ current quagmire.
They note the example of Chinese car manufacturer Geely’s 2017 acquisition of a 49.9% stake in Proton, Malaysia’s flagship national car, as a potential profitable way ahead.
“Historic methods [which] have always been refinancing, give them another lifeline, give them something, will no longer be recycled. That’s not going to be replicated,” Mohshin Aziz, a regional aviation expert and associate director of Maybank Kim Eng Securities, told Asia Times.
“It’s probably a case of selling small stakes, some units and perhaps a partnership with foreign companies. From a strategic point of view, it would have to be another airline – they are the ones who would probably see value in this and be able to decipher what needs to be done or what changes are required while having the resources to do so,” he said
Daim Zainuddin, head of the country’s Council of Eminent Persons advisory body and Mahathir’s influential advisor, recently told reporters that several foreign companies, including in Europe, Asia and the Middle East, are keen to acquire a stake in MAS, which he said would benefit from foreign capital and expertise.
“The foreign participant would definitely want to be on the controlling seat or at least some part of it and for Khazanah to take a less commanding role in the entire organization,” Mohshin says, pointing to Hangzhou-based Geely’s partnership with Proton. “They [Geely] came, pumped in a lot of money and now the CEO is a Chinese national.
“MAS needs an honest assessment of where it is actually relevant. You have to look into their entire operations and ask basic questions about each and every part of their business, down to each flight,” Maybank’s Mohshin said. “The management has been given a huge amount of resources but has fallen short in terms of delivery. The net results speak for themselves.”
Aviation experts and analysts have long taken hard aim at the composition of MAS’ board of directors, which includes Khazanah appointees and current and former civil servants with questionable business acumen. Others believe private sector acquisitions of MAS business units through an open and competitive tender could boost Mahathir’s ruling coalition’s popularity.
“Something needs to be done urgently,” Ismail Nasaruddin, president of the National Union of Flight Attendants Malaysia (Nufam), told Asia Times.
The union represents some 2,000 MAS flight attendants and has for years urged the government to investigate allegations of financial mismanagement, leakages and wastage.
“If MAS is going to be sold off to whichever party or buyers, what really concerns us is another round of downsizing and reduction of manpower will be undertaken. We are concerned that if and when such exercises take place, workers will be the number one factor that they would want to reduce,” he said.
MAS, which once boasted 24,000 employees, has maintained a 13,000-strong workforce since the airline was downsized in a restructuring exercise that saw a sweeping retrenchment, fleet reductions and long-haul routes discontinued in a bid to reduce losses.
It also scaled down a profitable maintain, repair and overhaul (MRO) unit, which had been a third-party maintenance outfit.
“We have urged the government to form a task force to identify the real situation and we have made some efforts to put it clearly to the government that the airline should be managed by itself without any political inference,” said Ismail.
Nufam has previously called for a new board of directors to ensure it is helmed by accountable and credible figures.
Khazanah has been accused of micromanaging the carrier and overriding the administrative decisions of its board. Malaysian media have speculated in the past that such interference prompted the early departures of two successive foreign chief executives within three years, allegations the state investment arm has consistently denied.
Izham Ismail, a former MAS pilot, became the flag carrier’s chief executive officer in 2017. In an interview with the New Straits Times last October, he noted that MAS has shown progress by recording a double-digit compound annual growth rate of 21% for the past three years, but said that a profitability turnaround would still take time.
To be sure, MAS isn’t the only regional carrier struggling to break even. Despite an Asia-Pacific aviation boom, a study by the Sydney-based CAPA Center for Aviation found that only six of the 20 publicly traded Southeast Asian airlines were profitable in the last reported quarter due to falling fares, as budget airlines move to expand their market positions in the region.
Nineteen airlines posted profit declines from the same July to September period a year before, according to the study’s author, CAPA chief analyst Brendan Sobie, who links falling profits with the aggressive fleet expansion of low-cost airlines and falling fares in a heated competition with established full-service carriers.
MAS has yet to file its financial statements for 2018, but blamed its poor financial performance on crew shortages, intense competition, an oversupply of capacity and volatility in fuel prices and foreign exchange rates.
Sobie told Asia Times that MAS will find it difficult to turn to profitability in the near term given prevailing market conditions. The flag carrier’s “original [profitability] targets were overly ambitious and not realistic,” he said.
“Market conditions have indeed become very difficult including intensifying competition. The restructuring was deeper than prior restructuring attempts but didn’t go deep enough. Political intervention continues to be an issue.”