Could the global economic meltdown unravel the remarkable recovery achieved by Malaysia Airlines (MAS) over the past three years?
It is a question which could be answered on Thursday when the airline unveils its full-year results for 2008. The results could also be a verdict on managing director Idris Jala’s efforts to put it on a stronger footing through drastic measures over the last three years.
Plucked from global energy giant Shell and brought on board in December 2005 – when the airline was bleeding to the tune of RM1.7 billion (S$736 million) with barely enough cash to survive beyond four more months – Idris has surpassed even the most optimistic expectations. He has piloted the airline back into the black within two years.
Bigger challenges lie ahead, though.
“It is going to be tough,” Idris said in a recent interview with BT. “Load factors and yield will be down more than 5 per cent this year.”
The airline posted a profit of RM198 million during the first nine months of last year.
But with travel demand collapsing in the October- December period, analysts forecast full-year earnings at only between RM190 million and RM210 million – implying almost zero bottomline growth during Q4 FY08.
This is far short of the airline’s own profit target range, made last year, of RM400 million to RM1 billion.
Still, the fact that MAS will remain in the black at all this year is vindication of Mr Idris’s efforts to boost yield, cut inefficient routes, raise productivity and bring costs under control – goals he outlined in his now-famous Business Turnaround Plan (BTP) in 2006.
The key objectives were to survive financially in 2006, register a small profit by 2007, and achieve sustainable growth by 2008. It met all three targets.
By December 2006, barely a year after he took over, the airline achieved a massive RM1.8 billion turnaround, cutting losses to just RM134 million. And in 2007, it posted record earnings of RM851 million, thanks to a whopping 28 per cent improvement in yield in just 24 months.
And it had a cash hoard of some RM4 billion (including RM1.55 billion from a rights issue in 2007) at end-September.
Going forward, Idris says MAS will remain focused sharply on the profit and loss account.
“We started this when I came on board, and we now have 110,000 P&L accounts, covering every single flight,” he said. “It is hard work and the level of attention to details is incredible. But this process enables us to drill down to costs and yields on each flight.”
Cost cuts of more than 7 per cent are also on the cards this year.
These range from cutting head office operations which do not have a direct impact on P&L, to customising meals to suit customer profiles.
“For example, we found passengers on our Hong Kong flights preferred rice porridge, which is cheaper, to the rather expensive lamb biryani we were serving. They are happier, and we save money.”
Idris says he foresaw the current crisis last year.
“With some 400 new planes coming into the Asia-Pacific, we knew the industry would face excess capacity, and pressure on yields. We also anticipated an eventual recovery in fuel price, and higher costs from environmental legislation. So we have been planning for a confluence of negative factors which could lose us some RM1 billion by 2012, if we don’t act fast.”
Meanwhile, MAS is pushing ahead with its rebranding exercise.
“We are positioning ourselves as a Five-Star Value Carrier,” he explained. “It is about providing value, but at very affordable fares. We want to be a Toyota, not a Mercedes.”
Central to this is its new MHValue programme, where customers can choose from an array of four ticket-price categories on each domestic flight, depending on the amount of frills and flexibility they want.
“Value is defined by the individual, and in a recessionary world, it is best to allow customers to choose,” Mr Idris explained. “Instead of standardising products, we customise them to suit their preferences. If you are a retiree with lots of time on your hands, you can buy the zero-flexible MHLow fare ticket, for which you pay 70 per cent less than the full-fare MHFlex ticket. This is the principle of finding the sweet spot.”
After cutting 6.3 per cent capacity in 2008, MAS could slash another 7-10 per cent this year. But there will be no changes in the delivery schedule for 35 B737-800s arriving from late 2010 through 2012, and six A380s from 2011.
Idris also does not rule out the possibility of strategic alliances with other players.
“The airline industry will consolidate,” he said. “There are too many players, too much capacity, and too much pressure on yields. But there is also too much regulation preventing mergers. For us, any alliance has to be based on synergies.”
Last week, MAS signed a code-share and Frequent Flyer partnership with India’s Jet Airways. It also has MRO (maintenance, repair and overhaul) tie-ups with Qantas and a joint-venture start-up at JMR Hyderabad International Airport in India, where Jet could become “anchor customer”.
Analysts have given MAS and Idris a thumbs-up for the remarkable recovery so far.
“In an extremely challenging environment for MAS, we think the astute management team, exceptionally strong balance sheet and a restructured business model has well positioned the carrier to take on the key challenges ahead,” Morgan Stanley noted recently. “More importantly, we believe MAS is a niche regional play that will survive in the highly competitive environment.”
Aviation Week, in its Top Performing survey, has ranked MAS second among global airlines best placed to face the current crisis in the industry.
MAS has come a long way in just three years. – Business Times Singapore