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BC Tam

Moment of truth for MAS

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Moment of truth for MAS

 

SINGAPORE, Feb 24 – 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

 

copied from here

 

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1) FY 2008 : Break even or small profit. They had managed to rake a profit of RM 198 million for the first 9 mths, so I doubt in 3 mths, the company can wipe out that much profit.

 

2) Yields are going to go down further in 2009. I think for FYE 2009, MAS will be under severe pressure to deliver profits. But i think shareholders should be able to understand if they don't. Notwithstanding that, if MAS does its best to keep costs under control, the company should be able to weather this downturn with a smoother landing.

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1) FY 2008 : Break even or small profit. They had managed to rake a profit of RM 198 million for the first 9 mths, so I doubt in 3 mths, the company can wipe out that much profit.

 

That will depend on how they treat those losses incurred from fuel hedging.

 

 

2) Yields are going to go down further in 2009. I think for FYE 2009, MAS will be under severe pressure to deliver profits. But i think shareholders should be able to understand if they don't. Notwithstanding that, if MAS does its best to keep costs under control, the company should be able to weather this downturn with a smoother landing.

 

Don't worry, as the favourite child, PMB is always supportive and forgiving to MH.

 

:drinks:

 

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Last year while AK was aggressive with their expansion plan, both with their fleet and their network, MH was quietly making money. This year, AK's additional A320 as well as A330 will continue to land in KLIA but whether these flights will be full is a big question. In the end AK may have expanded too much that the earn little or even lost money.

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And being MH....

if they post profit in 4Q and FY2008, I doubt they'll be applauded cause AK might post more.

if they post losing in 4Q but profit in FY2008, they'll be condemned for shrinking frequencies and networks.

if they post losing in both 4Q and FY2008, they'll be someone urging MD Idris to step down.

 

simply said... it's hard being MH.

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That will depend on how they treat those losses incurred from fuel hedging.

 

 

 

Don't worry, as the favourite child, PMB is always supportive and forgiving to MH.

 

:drinks:

 

Sounds about rite KK.

 

Ya true KK. Just wandering, if MAS wants to minimize losses from fuel hedging, what sort of accounting treatment are they able to do to minimize the impact on paper?

 

Edited by Azreen

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It's all making sense now... Toyota, not Mercedes. All that, and the LCC-esque seats and meals fit nicely into the idea of aiming to be the Toyota of the airline industry. Would we be seeing the removal of First Class soon? Coz F class is more like Lexus/Benz than Toyota.

 

As for serving porridge instead of Lamb Biryani, was this really the feedback from passengers...cos Chinese would at most take porridge for breakfast, and not for all meals... I hope this isn't another one of those "93% love our snackboxes" thingy.

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It's all making sense now... Toyota, not Mercedes. All that, and the LCC-esque seats and meals fit nicely into the idea of aiming to be the Toyota of the airline industry. Would we be seeing the removal of First Class soon? Coz F class is more like Lexus/Benz than Toyota.

 

As for serving porridge instead of Lamb Biryani, was this really the feedback from passengers...cos Chinese would at most take porridge for breakfast, and not for all meals... I hope this isn't another one of those "93% love our snackboxes" thingy.

 

 

I disagee with IJ's statement; Toyota is a brand that is consistently being enriched ( with increasing superior products @ more affordable prices ) to... sooner or later be a BMW or Mercedes. I think our MH is something worse then a proton ; even SKoda is far better thesedays! :-( big dissapointment !

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Given the small parameters in which IJ can move about, I reckon he has done a fantastic job, proving that profitability is possible in MH. It's just that the profits so far has yet to balance up the losses in the past years.

 

I'd say he deserves a pat in the back.

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Given the small parameters in which IJ can move about, I reckon he has done a fantastic job, proving that profitability is possible in MH. It's just that the profits so far has yet to balance up the losses in the past years.

 

I'd say he deserves a pat in the back.

 

IMHO, a good pat in the back for a service industry CEO's ( including Airlines and Hotels) would be the Abilitiy to have an excellent product whilist making good finanncial returns ... yes it is not easy !;

 

Good P&L , with compromised standards does not deserve a star.

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Given the small parameters in which IJ can move about, I reckon he has done a fantastic job, proving that profitability is possible in MH. It's just that the profits so far has yet to balance up the losses in the past years.

 

I'd say he deserves a pat in the back.

 

1) I'm with u there Tony, IJ has done a stellar job thus far at MAS.

 

2) I'm stressed out trying to make things work in a company with a fraction of a turnover of MAS. They have 100k over P&Ls, i have only to juggle 3 P&Ls at any one time.... so I salute the guy!!

 

3) When u become a leader, u realise that u can't please everybody. U make decisions based on facts gathered as good as they can be and have a very clear conscience about them. Sometimes u make good, at times u fall short... but that's life.

 

4) And so happen when u lead MAS, u're in the public eye too... even more pressure.

 

5) Even husband and wife don't see eye to eye at times.

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Ya true KK. Just wandering, if MAS wants to minimize losses from fuel hedging, what sort of accounting treatment are they able to do to minimize the impact on paper?

 

 

Don’t think you can minimize losses literally but you can either bet further in the oil market, realise the losses in one go, spread them over a few quarters, or delay as long as you can and hope things get better at the end. If PMB really wanted to help, MH can sell those hedging at original price or at slight discount to PMB or Petronas.

 

:drinks:

 

 

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Don’t think you can minimize losses literally but you can either bet further in the oil market, realise the losses in one go, spread them over a few quarters, or delay as long as you can and hope things get better at the end. If PMB really wanted to help, MH can sell those hedging at original price or at slight discount to PMB or Petronas.

 

:drinks:

 

KK, Sorry i'm not an accountant, so have the following qts for you:-

 

1) I understand the concept of charging out the losses in one go, which straight forward accrual concept which ties in with your spreading over a few quarters idea, right?

 

2) So it's only a matter of cashflow management. I assumed if MAS had presented a profit scenario for the first 9 mths and showed a healthy cash position, then is it fair to say that MAS is in fairly healthy financial position? Assuming that they only charged out a portion of the fuel hedging losses but they still had to pay for the fuel COD rite?

 

Do i make sense?

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Any suggestion on how IJ should run MH?

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Any suggestion on how IJ should run MH?

Do as he has done for past few years - results are there to be seen and applauded :good:

 

However, it would not hurt to cut down, if possible eliminate, the volume of spins and half truths spewed out by the PR department. Though I do realize that would be the very reason for existence of a PR department to start with :)

 

 

..... what sort of accounting treatment are they able to do to minimize the impact on paper?

Oh yeah Azreen, you've got Mr Lee in his element there :rofl:

Edited by BC Tam

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“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.”

 

darn, being a "toyota" isn't exactly 5 star :(

 

Would be happier if MH wanted to be a BMW 3 series rather than a 7series :p

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Do as he has done for past few years - results are there to be seen and applauded :good:

 

However, it would not hurt to cut down, if possible eliminate, the volume of spins and half truths spewed out by the PR department. Though I do realize that would be the very reason for existence of a PR department to start with :)

 

 

 

Oh yeah Azreen, you've got Mr Lee in his element there :rofl:

 

Ya BC, by the way he answered, it was clear he's in the financial line...

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Any suggestion on how IJ should run MH?

Improve product offerings ASAP ! Compare with SQ / CX / EK / EY .... as they are your most direct competitor ; no point of comparing European / American carriers.

 

Just like Proton must be comparable to Toyota / Honda / Kia in Malaysia - ASEAN region.... not GM/ Chysler / Lincoln that are being sold in the states!

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Improve product offerings ASAP ! Compare with SQ / CX / EK / EY ....

But I think these airlines are not 'Toyota'. Clearly when Dato Seri Idris Jala mentioned 'Mercedes', that is indirectly refers to SQ.

 

By the way, I am waiting for the full year financial result anticipatedly!

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IMHO they can do 2 things. Neither of them will actually cause any harm to them but maybe some of us will complaint about it in the future.

 

They can adopt a defensive stand. Why not? Everyone else is doing that by reducing frequency, grounding planes, requesting bailout from government etc. That way MH can retreat and concentrate on weathering this storm. Some companies had opted to cut cost by firing people, although I have yet to see this happen in MH. Or,

 

They can opt for an all out offensive by mounting a challenge to SQ, EK, CX by trying to grab those market that these few fellows had abandon. This is a tough move considering these are established aviation company, and apart from that they still have to contest with AK's aggressive marketing. But this is a safe move, providing the government can provide the funding in the event of bailout, which will indirect come from our pocket.

 

So there is no problem if MH choose to be defensive or offensive during this trying times. Ordinary Malaysian taxpayer will pay the price.

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Improve product offerings ASAP ! Compare with SQ / CX / EK / EY .... as they are your most direct competitor .....

Take a cue from Datuk IJ's quote on Toyota vs Mercedes - it is NOT going to happen during his watch :)

 

MH has had decades worth of effort in formulating and refining "five star" service offerings, and been very successful at times too. However excellent the product was though, they have not managed to make it a profitable exercise. The puddles of red ink splattered along MH's financial trail bear testament to this :(

 

We can perhaps debate no end as to why this is so; ingrained corporate culture, market not able to sustain and so on and so forth. But fact remains that premium cannot generate profit in MH's case. Well, fact borne out by past history anyway

 

So, why not try something different ? Go after another market. Which is the polite term for downgrading MH's product

Sadly in the process, many customers who continue to demand top notch premium products will be (have been) lost. Admittedly, criticisms will fly from all directions (heh heh ;) !) But when the correct niche has been inhabited, the bleeding will stop and profits flow, as has been happening already

 

I suppose once we get round to realization that the MH/Premium/Profitable combination has been beyond anyone's capability thus far, the ride in the Toyota doesn't seem too shabby after all :)

 

(that is not to say the next guy/gal to occupy Datuk IJ's seat will not attempt another Mercedes coup, and another cycle will commence)

:)

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The Star online

Published: Thursday February 26, 2009 MYT 5:40:00 PM

 

MAS' net profit declines 81%

By Yvonne Tan

 

 

PETALING JAYA: Malaysia Airline System Bhd’s (MAS) net profit declined 81% to RM46 million for the fourth quarter ended December 31, 2008 (Q4) compared to the same quarter in 2007 due to the challenging economic environment.

 

Revenue came in at RM3.70 billion.

 

For the corresponding period, it had reported a net profit of RM241.92 million on the back of RM4.07 billion in revenue.

 

The company reported Thursday that the challenging environment was compounded by volatile oil prices and slowing demand.

 

MAS said Q4’s profit was the tenth quarter of profits for the airline after it instituted changes backed by dynamic pricing, managing costs and innovation.

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The financials: Quarter Ended 31/12/2008

 

RM ‘000

Operating Revenue 3,764,132

Operating expenses (3,800,197)

Other Operating Income 102,304

Gains on sale of properties 13

Profit from operations 66,252

Finance Cost (20,058)

Share of results from assoc comps 3,647

Profit before tax 49,841

Taxation (3,219)

Profit after Tax 46,662

 

 

Operating Profit/Loss by Business Segments

RM’000

Airline Operations 93,815

Cargo Services (14,148)

Catering Services 610

Others (350)

Total before Eliminations 79,927

Eliminations (13,675)

Post Eliminations 66,252 - This should tie up with the Profit from Operations figure above

Edited by Sing Yew

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These are the interesting bits:

 

Operating Revenue 3,764m

Operating expenses (3,800m)

Other Operating Income 102m

Gains on sale of properties 13m

 

If not because of 'other operating income' + 'gains on sale of properties', if would have been a LOSS.

Edited by Naim

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Other info worth noting:

Profit for the year ending 31/12/2008 was RM 245.7 mil as compared to 31/12/2007’s RM 852.7 mil.

 

Cash and cash equivalents declined by RM 0.86 billion to end year (31/12/2008) with RM 3.57 billion.

 

As at 19/2/2009:

Entered into various fuel hedging transactions for periods up to 31/12/2011 in lots totalling 17,350,000 barrel.

 

 

These are the interesting bits:

 

Operating Revenue 3,764m

Operating expenses (3,800m)

Other Operating Income 102m

Gains on sale of properties 13m

 

If not because of 'other operating income' + 'gains on sale of properties', if would have been a LOSS.

 

Yup. Which is something that goes unreported in the news at times. They just see the profits as profits.

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