MAS and AirAsia Shares Swap

[alberttky 0]

Why is the CEO turnover at MAS so high?

 

The airline's new boss needs to stick around for a bit

 

FOUR captains in ten years. That's way too many changes to a pivotal seat for a company that can ill-afford leadership volatility. Malaysia Airlines.

 

When a company has seen a change of guard four times in ten years, two of whom were asked to leave, it begs the nagging question is the board making the best choices in selecting its CEOs? Note one of the most important jobs of a board is to pick the CEO.

 

First, a quick recap of the changes at the helm of MAS over the last decade. Post Asian Financial crisis 1998, MAS buckled under pressure from huge debts. Long-serving executive chairman Tan Sri Tajudin Ramli stepped down in 2001. In swooped seasoned banker Tan Sri Md Nor Yusof as managing director of the airline on Feb 14, 2001. But he left three years later (end-March 2004) to take up the post of Securities Commission chairman but not before putting in place a radical restructuring. During his time on the saddle, MAS underwent a Widespread Asset Unbundling (WAU) plan which true benefits till today remain a hot topic for debate.

 

Md Nor was succeeded by Datuk Ahmad Fuad Dahlan whose reign was unusually cut short (April 2004-August 2005). The vigorous and thankfully short search for a new CEO to helm MAS proved rewarding. Datuk Seri Idris Jala emerged, silencing critics who had slammed the much-hyped government-linked companies (GLC) reform process for failing in its ability to court fresh blood as most of the management changes largely involved a game of corporate musical chairs within the same talent pool.

 

Armed with a penchant for details and his trademark “lab” approach, it didn't take long for Idris to plug the gaps in the airline's operations which suffered one of its biggest losses of RM1.2bil in FY05. A year later, the losses narrowed substantially and in the ensuing year, the airline swung back into profitability. But challenges remained.

 

Sadly, Idris didn't stay on to ensure continuity of his Business Transformation Plan. Instead he got a higher calling he was appointed Minister Without Portfolio in the Prime Minister's Department and CEO of Performance Management and Delivery Unit (Pemandu). Succeeding him was Tengku Datuk Seri Azmil Zahruddin, a familiar face in the airline industry. Two years later, this Aug 9, he vacated his post and made way way for a major shareholder, board and management shakeup. (In early August, the major shareholders of MAS and AirAsia Bhd carried out a share swap, creating an alliance between the rival carriers).

 

This is as good a time as any to remind MAS' controlling shareholder Khazanah Nasional Bhd to take heed of its own advice. One of the points acknowledged in its Catalyst of Framework for Reform is that the short tenures of CEOs inhibit GLCs' performance. No other GLC lends credence to this more than MAS.

 

Another point wrapped up in its “Green Book” on best practices for boards to fulfill their roles and responsibilities is the need to oversee the development of future leaders which includes a robust CEO succession plan.

 

In spite of such clearly articulated guidelines, MAS has today found itself without a CEO and desperately, needing to place a capstone on its corporate pyramid again. One wonders if Tengku Azmil had remained in his seat till a suitable candidate was identified, would the hunt for a CEO appear less dire? If the urgency is reduced, the board's ability to conduct a wide and intense search is somewhat less curtailed, not withstanding the existence of an interim executive committee.

 

One would think that the glorious position of a CEO of a national airline would be a much-vaunted seat. Truth is, very few (the bold and daring type) would want to be faced with the possibility of having a sunken ship under his or her belt (not exactly a sweet addition to one's otherwise striking resume). Then, there's also the string of operational, regulatory and political headwinds that the CEO would have to put up with (think rising fuel cost, brutal competition and answering to a highly experienced, hence intimidating board).

 

For that reason, most external candidates may dodge the tough seat, although there may be many takers among internal candidates.

 

Let's face it MAS' CEO spot is not a gig for someone who wants to strike it rich. It's a gig for someone who wants to strike it good (read: “national service good”).

 

For that reason, MAS may or may not be able to draw the A-list candidates.

 

He or she need not be an industry lifer. After all, versatility and range of skills far trump industry-centric knowledge as Md Nor, Idris and even Tengku Azmil have proven. The new CEO will also have to wrap his head around this that if he proves his mettle, he will need to stay around for a bit longer to ensure continuity. Given MAS' current predicament, he should not be someone who simply fits into the culture but one who is a transformative leader.

 

Finding him/her will be the first test of MAS' newly-installed bench.

 

http://biz.thestar.com.my/news/story.asp?file=/2011/8/27/business/9379156&sec=business

[alberttky 0]

Malaysia Airlines' short-term outlook bleak despite new alliance with AirAsia

 

Malaysia Airlines (MAS) reported a heavy loss in 2Q2011 (three months to 30-Jun-2011) as soaring costs, led by fuel, weighed on the result. The 2Q2011 loss is MAS’ second-consecutive quarterly loss and the carrier expects to remain in the red for the rest of the year.

 

MAS reported a net loss of MYR525.8 million (USD177.7 million) in the second quarter, seasonally its weakest. Aggressive capacity deployment, under-performance from its revenue management and sales teams and increasing competition from regional and Gulf-based rivals also hurt the 2Q2011 result. The net result was a slight year-on-year improvement, but the airline’s operating loss swelled to MYR412.5 million (USD139 million) from MYR285.6 million (USD95 million) in the same period last year.

 

The deteriorating operating performance reflects the sharp increase in operating costs, led chiefly by fuel, which surged 41% in the period, and a weaker cargo performance, which pushed the airline deeply into the red. MAS’ operating margin for the quarter was -12.0%.

 

Various initiatives will be undertaken to reverse MAS’ woes. Most notably, MAS has announced a tie-up with Malaysian LCC powerhouse AirAsia and its long-haul offshoot AirAsia X, the airline grouping largely responsible for MAS’ struggles over the past decade.

 

MAS said its board “has identified immediate priorities to focus on in the short-term”, aimed at stemming losses. “Working with the new executive committee…recovery initiatives will be implemented to turn the company’s fortunes around and to start rebuilding cash reserves,” which have fallen sharply in 2011. Immediate initiatives will include, among others, more prudent capacity management, implementing new dynamic pricing to improve yields and revenues and a review of products and brand positioning.

 

Revenue up, but costs neutralise gains

 

MAS recorded an 8.5% increase in top-line revenue to MYR3,429 million (USD1.17 billion). Revenue gains were, however, neutralised by soaring costs, which increased 11.4% in the period to MYR3,897 million (USD1.31 billion), which pushed the airline deeply into the red for the quarter.

 

Passenger revenue increased 9.1% to MYR2,086 million (USD698 million) and revenue from fuel and administration surcharges rose 45.2% to MYR495 million (USD166 million).

 

Cargo revenue however was much weaker in the period, reflecting the lower year-on-year trade volumes seen in the region, which was skewed by the replenishing of global restocking of inventories in early 1H2010 following the global financial crisis. Total cargo revenue fell 16%, led by a 24% fall in belly and freighter revenue. The cargo segment’s fuel surcharge, which increased 6.6% to MYR145 million (USD48.5 million), helped mitigate the sharp fall in cargo revenue.

 

But spiralling costs significantly outweighed revenue growth. Operating costs increased 11.5% to MYR3,987 million (USD1.31 billion). Fuel, unsurprisingly, led the rise in costs. Fuel costs surged 41% in 2Q to MYR1,550 million (USD519 million), to account for 40% of total operating costs, up from 30% in 2Q2010. The sharp fuel price rise masks what would otherwise have been an impressive cost performance in 2Q2011, with non-fuel operating costs down 2%, reflecting MAS’ aggressive and consistent cost control measures.

 

ASKs increased 10% and RPKs increased 12%, pushing average loads up 1.5ppts to 75.5%. The stronger load factors and other various yield-supportive measures, such as fare increases and fuel surcharges, saw yields increase 1% to 24.2 sen (USD8.16 cents), with RASK up 3% to 18.2 sen (USD6.14 cents).

 

Strategic shake-up aimed at ending MAS’ woes

 

Since the end of 2Q2011, a major strategic development has taken place as MAS forged earlier this month a tie-up with rival AirAsia, which has moved aggressively into MAS’ short-haul, regional, and more recently, its long-haul markets. Khazanah, a national investment vehicle and majority shareholder in MAS, purchased a 10% stake in AirAsia from Tune Air, as part of a cross-equity deal. Khazanah will also purchase a 10% stake in AirAsia X. Tune Air, the largest shareholder in AirAsia and the investment vehicle of CEO Tony Fernandes, acquired a 20% stake in MAS from Khazanah.

 

A Joint Collaboration Committee (JCC) was formed on 09-Aug-2011, which will look into key areas for collaboration to realise synergies and cost efforts, MAS says. MAS and AirAsia aim to cooperate in areas such as engineering and ground support, aircraft purchasing, catering and training and cargo services.

 

The Malaysian government said the agreement would end cut-throat competition between the airline groups, allowing them to grow together and more profitably than would otherwise be the case. Mr Fernandes said the deal allows his airline to focus on growing the business, “as opposed to spending a lot of time on politics and fighting unnecessary battles”. The collaboration should also boost yields for both airlines.

 

Better market segmentation should also be achieved under the deal, with one partner targeting the low-cost, leisure market and the other, the higher-yielding and premium market. Firefly, MAS’ LCC subsidiary, also recorded heavy losses in 1H2011 and will be re-structured to focus on the short-haul premium travel space using turboprop equipment. MAS said a longer-term solution for Firefly would be developed by the management team to put the airline on course for sustained profitability.

 

While Firefly will retain its ATR-72s, the carrier's B737 fleet is expected to be transferred to the new regional, full-service airline, Sapphire. But it remains unclear how MAS, which also has a regional carrier unit in east Malaysia with ATR-72 operator MASwings, will juggle so many brands. Of particular interest will be how the Sapphire unit differs from MAS' existing regional narrowbody services.

 

MAS, in releasing its 2Q2011 earnings, also said its multi-year re-fleeting programme will be accelerated. As of mid-Aug-2011, the airline has taken delivery this year of five new B737-800s and five new A330-300s. Over the next four months, MAS will take delivery of six more aircraft – two B737-800s, two A330-200Fs and two ATR-72s. Excluding these aircraft, MAS’ order book comprises 38 B737-800s, ten A330s, six A380s and two A330-200Fs. The airline said its fleet delivery schedule would be accelerated in the next few years, adding that all required financing activities for 2012 have been completed.

Weak result matched by gloomy outlook

 

MAS expects a weak second-half due to elevated fuel prices and sovereign debt fears in key markets which will continue to weigh on consumer confidence and economic growth. The airline’s forward bookings indicate challenges in the European, US and Japanese markets, with “normal” trends for other regions. The third quarter will be soft owing to the month of Ramadan, when travel is seasonally slow.

 

In response to the challenging outlook, MAS will moderate its capacity growth in 2H2011. The airline will also review its route network and adjust capacity accordingly. MAS will retire two B747-200Fs, one B747-400 and three B737-400s by Oct-2011.

 

The airline will also have a heavier focus on yield management, with new revenue systems to be introduced in 2H2011. MAS aims to enhance its yield performance through front-end business class initiatives, implementation of fuel surcharges and step up its yield/revenue management.

 

A loss in 2H2011 is still expected, though MAS said it would be less severe than 1H2011, due to these initiatives.

 

MAS’ most significant turn in fortunes is likely to come from its tie-up with AirAsia, a deal that effectively neutralises a major competitor and a leading cause of losses in recent years. Under the agreement, MAS also gains two successful and experienced aviation executives on its board, in Tony Fernandes and AirAsia deputy CEO Kamarudin Meranun. This expertise at senior management level should help MAS overhaul its network, alliance and fleet strategies and navigate the flag carrier through some more desperate times.

 

http://www.centreforaviation.com/news/2011/08/27/malaysia-airlines-short-term-outlook-bleak-despite-new-alliance-with-airasia/page1

[Cheng Long 0]

 

It would appear that MH's new management is getting its focus right - they are now talking about the product. Product has been neglected by MH in recent years and even the latest B738 and A333 got mixed reception. So it is good that the new management is focussing on the product now so as to be able to reposition the airline in the premium market segment.

 

 

Too early to praise them.. Apart from broad statements, they haven't mentioned anything specific. I haven't seen anything yet apart from flip flop regarding alliance and ridding of Firefly Jet..

[Ashraf 0]

Too early to praise them.. Apart from broad statements, they haven't mentioned anything specific. I haven't seen anything yet apart from flip flop regarding alliance and ridding of Firefly Jet..

 

how to reduce costs when some executives recently purchased Volkswagen passat, etc....when you are not serious about this, nothing can be saved!

[Rob 0]

how to reduce costs when some executives recently purchased Volkswagen passat, etc....when you are not serious about this, nothing can be saved!

 

Little off topic but VW Passat isn't that good, nowhere near the luxury car status.

[Ashraf 0]

Little off topic but VW Passat isn't that good, nowhere near the luxury car status.

 

 

what's wrong with camry or accord?

this typical type of thinking is the reason why costs can't be reduced.

[Mohd Azizul Ramli 2]

And the truth prevails LOL!

 

Investors think that I'm focussed on MAS not airasia. How crazy is that. - Tony Fernandes

 

http://tmi.me/f3SlU

[jani 0]

In my opinion, the typically "pandai cakap" Tony, didn't say something too smart there. I don't know, just an observer..

[JuliusWong 0]

I won't say Tony Fernandes 'pandai cakap', as evident with his success story with AK.

 

The public perception now is that TF may cut MH down to its products and services to its bare, just like AirAsia. However, if you read theStar interview with TF on 13th August, he stated very clearly that AK and MH are in different league. And he won't be doing final decision apart from feeding strategy and business idea to the new management.

 

Therefore, the ultimate decision to refurbish current A330 and B777 fleet, retire B734 and B744 fleet and buy B77W and more A333 all boils down to the new management.

 

At least TF way of managing airline is much better than all those airheads appointed by government over the years. AirAsia's success story has been proven over and over again. We cannot deny TF and his team of their management skills. (Yes, I know we hate all the surcharges, but its LCC we are talking about.)

 

MH has been in ICU, CCU and whatever U for many many years already and keep whining oil price, this and that for losses, excuse you our neighbours north and south are reaping in profits after profits!!! Some more receiving bailout after bailout~~ and sold everything they own.

 

Just a matter of time everything would blow up: the time is NOW!

Edited August 27, 2011 by JuliusWong

[flee 5]

Well at the AirAsia Group, the corporate structure is rather flat. People are empowered to make decisions. TF only looks after strategy and the general direction the company is heading.

 

Like I said earlier, he has already made his presence felt. He is giving MH some sense of direction and purpose. So MH needs to focus on these things first.

 

His tweet is nothing new, he has always maintained that all it needs to get MH in the right direction is a good MD - he has praised the Garuda CEO for a good job turning Garuda around.

 

Another example is that he entrusted Thai AirAsia CEO to oversea the Vietnam AirAsia project. Thai AirAsia CEO has also done well. So his tweet merely tells us that once you get the right CEO for the company, things will start to turn around. So we just wait for MH to announce their new CEO.

 

Of course, with MH it is not so simple because they got to get rid of their old corporate culture and govt. interference.

 

I think the media also needs to get used to the new management. The reports on OW and A380 were somewhat misleading. I am sure that all the new management is trying to tell investors that all of MH's operations and previous management's decisions will be scrutinised and reviewed with the aim of improving the situation.

 

It will be a very interesting 12-18 months ahead for MH and us keyboard warriors!

[Josh T 0]

Thanks for the very nice summation on the state of play, Azizul.

 

It would appear that MH's new management is getting its focus right - they are now talking about the product. Product has been neglected by MH in recent years and even the latest B738 and A333 got mixed reception. So it is good that the new management is focussing on the product now so as to be able to reposition the airline in the premium market segment.

 

If the future aircraft deliveries come fitted with cabins that are capable of serving in the roles the new management envisages, the ability of MH to attract more premium travellers may be higher. Lets see what happens.

Couldn't agree more with this. That's why not having flat beds on the new A333 was a huge mistake. If you want to attract premium passengers, you have to be ahead of the pack. Hardly any of the big airlines are offering flat beds on regional routes or on flights up to 8 hours. MAS would have been seen as a leader/innovater. Another (huge) missed opportunity was not installing angled beds on the B738, which they're using for thin international routes and regional routes. No airline has lie-flat seats on the B738 and this would have been another opportunity for MAS to be an innovater. Instead of the 4 rows in business class that they have now, it could be 3 rows with the lie-flat seats. This would enable MAS to compete with wide-body aircraft on routes that they're using the B738 on. And those seats fit on the B738. The upper deck of the B744 fits 4 across and the width of the upper deck cabin is the same as the B738.

[jackch747 0]

Malaysia is behind in everything, I guess. Don't compare MAS with other premium airlines. Like the locals say, MAS is always better than the red airline.

[flee 5]

Ahmad Jauhari tipped to be new MAS CEO

 

PETALING JAYA: The new Malaysia Airlines' management line-up seems to be shaping up, with Ahmad Jauhari Yahya tipped to become the full-service carrier's next chief and MAS' newly-appointed executive director Mohammed Rashdan Yusof as the number two.

 

Sources said that Ahmad Jauhari had agreed in principle to helm the airline while Rashdan, who was one of the key individuals behind MAS' wide asset unbundling exercise in 2002, would come in as his right-hand man (possibly deputy CEO) given Rashdan's experience with the airline's re-structuring exercise.

 

Ahmad Jauhari was appointed to the board of Malaysia Airports Holdings Bhd earlier this year. He has previously served as the managing director at several companies, including Malakoff Bhd, Malaysian Resources Corp Bhd and Time Engineering Bhd.

 

Attempts by StarBiz to contact Ahmad Jauhari were unsuccessful.

 

It is believed that the MAS board has yet to extend the official offer letter to Ahmad Jauhari.

 

“The board will have to endorse the appointment first,” the sources said.

 

The board effectively decides on the appointment of the new chief for the airline, although MAS' interim executive committee is said to have narrowed the search to the best-suited candidate.

 

The Star

[jit 0]

from his cv, a true blue bn man... looks like our govt is still not comfortable letting someone outside the 'circle' to helm MH.

Not expecting any earth shattering changes from him..

[alberttky 0]

from his cv, a true blue bn man... looks like our govt is still not comfortable letting someone outside the 'circle' to helm MH.

Not expecting any earth shattering changes from him..

 

Yawn... zzzzZZZZZ.....

[KK Lee 5]

from his cv, a true blue bn man... looks like our govt is still not comfortable letting someone outside the 'circle' to helm MH.

Not expecting any earth shattering changes from him..

 

Old wine in new bottle

[BC Tam 2]

Apologies for a rather lengthy cut and paste, but a quite interesting read

Obviously some points raised within are debatable

 

AirAsia-MAS share swap: The barbarians have entered the gates — William Leong

September 01, 2011

 

SEPT 1 — In the 10-year war for control of the Malaysian skies, while a besieged MAS was desperately fighting for survival, someone opened the gates for the barbarians to enter.

 

Barbarians at the gates

 

The AirAsia-MAS share swap reminds me of the takeover saga of RJR Nabisco. The company was a merger of RJ Reynolds, the tobacco company selling “Camel”, “Winston” and “Salem” cigarettes and Nabisco, the biscuit company selling “Oreos”, “Ritz Crackers” and snacks.

 

The financial firm of Kohberg Kravis Roberts & Co (commonly referred to as “KKR”) made a hostile takeover bid for the company. There was a fierce battle for control of the company. The board, in protecting the company’s and shareholders’ interest, drove KKR and the other bidders to increase their bids several times until KKR won with a bid of US$31.1 billion (RM93.3 billion). It was the largest leverage buyout in history and the record stood for 17 years. RJ Reynolds was subsequently spun out of RJR Nabisco due to tobacco legislation. Nabisco is now owned by Kraft Foods. The RJR Nabisco leverage buyout was considered to be the pre-eminent example of corporate and executive greed. The events were chronicled in a book called “Barbarians at the Gate: The Fall of RJR Nabisco”.

 

The fight for control of the Malaysian skies has been an uneven battle from the beginning. In the end those responsible for MAS’s defence not only did not put up a fight but opened the gates to allow AirAsia into MAS’s management. The share swap has given rise to concerns on the pricing and whether it will benefit the public-funded MAS.

 

Pricing issues

 

One of the favourite sayings of corporate raiders and businessmen is “OPM”, that is to operate using “Other People’s Money”. In the case of the AirAsia-MAS share swap, it is the people’s money because MAS is funded by taxpayers.

 

The pricing of the share swap has raised eyebrows. The parties, in using the August 5 closing market price of both airlines as the basis for the share swap, have raised several concerns.

 

Datuk Seri Anwar Ibrahim, in his August 10 article “MAS-AirAsia share swap deal raises serious concerns over effective control and governance”, referred, among others, to issues of insider trading and asset stripping.

 

A look at the price charts of the two companies for the past six months supports Datuk Seri Anwar Ibrahim’s concerns. The MAS share price fell sharply on May 30, 2011 to RM1.34. It continued to be in the doldrums until August 5, the date of the share swap announcement. AirAsia’s share price was on a steep and sharp climb from May. It surged to a height of RM4.20 on August 4, 2011. This is on the eve of the announcement.

 

There may be good reasons for the share prices of the two counters moving the way they did. However, it seems improbable for this to be coincidental. AirAsia’s price was trading around its highest and MAS among its lowest when the share swap took place. AirAsia’s price fell immediately after the announcement. It could be that those who held AirAsia shares did not like the deal. It could be whoever was playing up the AirAsia shares stopped doing so. There is therefore cause for investigations to be made.

 

Others have raised concerns with the price. Khazanah exchanged 20 per cent of MAS at RM1.60 per share for 10 per cent of Air Asia at RM3.95 per share. They believe the price should not have been based only on the closing market price of the two counters on August 5. They point out that MAS in fact is worth more than the price traded because it is an asset-backed corporation. It has a paid-up capital of RM3.34 billion represented by fixed asset value at RM8.4 billion, net asset at RM6.92 billion. AirAsia, on the other hand, is a debt-laden company. It has borrowings of RM7.7 billion. MAS’s cash position is RM2.086 billion while AirAsia’s is RM1.7 billion. Those who approved the deal will need to justify the pricing.

 

One other issue on pricing is the timing of the deal. The share swap was announced on August 9. This was within 30 days before both AirAsia and MAS announced their respective 2nd quarter financial results on August 23. Under the Bursa Malaysia Listing Requirements, this is known as the “closed period”. Those in possession of the financial results during the closed period are not allowed to deal with the shares until the results are announced. This is to prevent insider trading by those with possession of price-sensitive information. Those who trade in the shares with such information will be taking unfair advantage of the public who are unaware of the situation. Paragraph 14.08 of the listing requirements allows principal officers who do not possess the information to deal during the close period by giving the requisite notification. Although the listing requirements allow such dealings, it would have been more prudent not to enter into the share swap during the closed period.

 

If the share swap was made after the financial results of both airlines were announced, the market price may have given a better reflection of the share price of both airlines. This may be seen from the share price of AirAsia after the results were announced on August 23. Although AirAsia announced it made a profit, it was 48 per cent less than the previous year. The AirAsia share price fell to RM3.57 at 9.04am on August 24, the day after the results were announced. Those involved will have to explain why the share swap was done before the 2nd quarter results were announced.

 

Opening the gates for the barbarians

 

Unlike the RJR Nabisco takeover where there was a fierce battle for control of the company, in the fight for control of Malaysia’s skies, AirAsia were allowed to enter the MAS gates without hindrance. The gates protecting MAS’s control of Malaysian skies were opened wider and wider for AirAsia over the past 10 years due to inconsistent government policies.

 

Regulation determines airlines’ fortunes

 

International air transport operates within the framework of the 1944 Chicago Convention for International Air Transport. Governments enter into bilateral agreements setting out the landing rights, restrictions on capacity and pricing. Sectors within a single country are normally denied to foreign airlines. This restriction is called cabotage. It is recognised that cabotage is the prerogative of the domestic carrier. The system of bilateral agreements between two governments has led to the aviation industry to be highly regulated. There has since been a change towards deregulation and liberalisation. Nevertheless, the industry remains one where regulation plays an important role.

 

Regulation is thus a critical determinant of an airline’s performance. It can determine how competitive the market is as well as constrain an airline in its choice of fares, capacity and frequency. Most governments impose entry controls which are usually applied to particular routes. Most governments usually permit one airline to operate a route. The government therefore plays a critical role in determining the fortunes of an airline by deciding on the routes to be given to the airlines.

 

Golden service takes a beating

 

MAS’s finance and operation problems to a significant extent are due to the government’s inconsistent and contradictory air transport policy. Such decisions gave the MAS Golden Service a beating while AirAsia became the Golden Child.

 

The main asset of any airline is its route networks. The government first allowed AirAsia to compete with MAS and then gave MAS’s domestic routes to AirAsia and had its route networks reduced while AirAsia increased theirs.

 

MAS’s social and political obligations

 

In the fight with AirAsia, MAS had a handicap. As the national carrier it had to compete against a private-owned pure commercially-motivated AirAsia.

 

When Malaysian Singapore Airline (“MSA”) split, the Malaysian government formed Malaysian Airline System (“MAS”). MAS, as the country’s national carrier provided domestic flights at government-controlled prices. In performing its social and political obligations, it flew commercially unprofitable domestic routes. One of them is the rural air services. The airline suffered losses as a consequence. In return it made money in the lucrative international flights. Thus the international routes were a form of cross subsidy for the domestic sector.

 

It was thus assumed that MAS, as a national carrier performing national service, will enjoy exclusive rights to both domestic and international routes.

 

However, the government allowed DRB-Hicom to establish AirAsia to operate international flights. The original AirAsia management lost money. The present management of AirAsia then obtained approval from the government to take over the airline and to operate domestic and international services as a low-cost carrier.

 

This caught MAS by surprise because MAS never imagined that the government will allow such competition. In the absence of a clear policy MAS assumed it would operate domestic services subject to fares being controlled by the government. Idris Jala said in the MAS Business Turnaround Plan (“BTP”) that studies showed incumbent airlines suffered a 30 per cent revenue decline when low-cost carriers were allowed to enter the market. What MAS did not expect was that the government would not allow MAS to mount an effective challenge to the low-cost competitor. The government did not allow MAS to lower its fares. As a result, AirAsia gained market share with its low-cost strategy. This continued until 2007 when MAS was allowed to determine its domestic fares. By then the red ink had sunk in.

 

Idris Jala warned in the BTP that political and social obligations presented the most overwhelming and significant constraints to MAS’s ability to transform. As a government-controlled airline, MAS does not always have the freedom to act according to pure market principles. MAS is constrain from freely changing destinations, routes and pricing within the domestic sector. Even though there are no explicit constraints on international routes, MAS does not have the flexibility to make changes to destinations, schedules and pricing. Idris Jala said that while MAS was fully committed to serve the nation’s interest, this did not necessarily fulfil MAS’s commercial interest. At the time of the BTP, 66 of the 114 international routes were unprofitable and 114 of the 118 domestic routes were making losses.

 

Under the BTP, MAS proposed to the government that it be allowed to run the domestic routes and be given a free hand to operate them like AirAsia. The government, however, on March 28, 2006 chose instead to allow AirAsia to share 19 trunk routes with MAS while AirAsia was given 96 domestic routes to operate exclusively. This was called the domestic route rationalisation plan. Tan Sri Chan Kong Choy, the transport minister at that time, said the government wanted two national champions. The minister forgot that the aviation business is a tough business. There are no different divisions like a football league. There is only one where the fittest survive. In the battle for survival only one is finally standing.

 

MAS would have a tough time to implement the BTP but the domestic route rationalisation plan did not help. AirAsia was given 96 routes which included the rural air services. When the rural air services proved difficult to operate, AirAsia gave up and MAS was asked to resume the operations after one year. MAS had handed over to AirAsia the planes used for operating the rural air services. When MAS resumed operations, four out of seven Fokkers and one out of five Twin Otters were not airworthy. They were cannibalised and cost RM40 million to be repaired. MAS will always be called upon to undertake routes that commercial firms will not touch.

 

MAS had to perform social and political obligations and will be required to do so in the future. AirAsia, being a private-owned entity with the objective of making maximum profits for its shareholders, does not operate under such constrains. The government, in changing policies and priorities without taking into consideration the difference between the two entities, is forcing MAS to compete under a handicap. This is part of MAS’s perennial financial and operation problems that have required three government bailouts.

 

Air transport policy needed

 

It cannot be denied that MAS has many problems and not all of them are due to government policy. It has a high cost structure, poor productivity yield and bad corporate culture. The latest results show the transformation talked about in the BTP has not occurred or had taken root. AirAsia’s management has done very well in running a low-cost operation, employing a highly motivated workforce and operating an efficient organisation.

 

The government, in making its policies, must take into consideration that MAS, being government-owned, is financed by taxpayers’ money. Public funds should not be put at risk in requiring a national carrier having to serve social and political commitments to compete with private carriers serving purely commercial considerations. The government must have a clear-cut policy. There is thus an urgent need for the government to come out with a comprehensive and transparent air transport policy. The policy should provide clear directions for the efficient development of the airline industry without imposing undue burden on the taxpayers and consumers.

 

The government, having allowed a rival airline to compete with MAS, cannot abdicate its responsibility to ensure that they are able to compete on a level-playing field. It cannot run away from this responsibility by forcing the two competitors enter into an unstable alliance. The AirAsia-MAS alliance is in truth an artificial solution to an artificial problem. The government needs to work with both MAS and AirAsia to resolve the issues which the government created. The government must remember it is not operating on OPM. It’s the people’s money.

 

* William Leong is the member of Parliament for Selayang.

 

from here

[Josh T 0]

Thanks for posting that article. I've always known that MAS was at a disadvantage when competing against Air Asia.

[flee 5]

Before AirAsia became an LCC, MH was also making losses. It was not in the same league as sister airline SQ in terms of financial performance (it has already lost the inflight service battle).

 

MH is just looking for scapegoats to blame its poor performance on.

 

It has the same UMNO/BN culture - everyone else except itself is to be blamed for its failures.

[Ahmad M 1]

A friend from MH engineering told me recently that at least 55 of AK's planes are approaching their C and D checks. Then the share swap happened and bookings have been made to have the checks done by MH. Anybody guessing whether they will be paying the normal rate for the services?

 

Highly convenient, isn't it.

[Izanee 0]

well, the secrets will all come out before long. Tony is not there to save the day as he likes us to believe. He is there for the MONEY.

55 planes for C&D checks will be quite expensive.

i thought AK always sent their planes to SIN for maintenance. interesting ..

[KK Lee 5]

A friend from MH engineering told me recently that at least 55 of AK's planes are approaching their C and D checks. Then the share swap happened and bookings have been made to have the checks done by MH. Anybody guessing whether they will be paying the normal rate for the services?

 

Highly convenient, isn't it.

 

There are 2 sides to a coin, either MH is offering very competitive price and terms to AK or AK is 'advised' to support MH

[Lock SH 0]

Ahmad Jauhari tipped to be new MAS CEO

 

PETALING JAYA: The new Malaysia Airlines' management line-up seems to be shaping up, with Ahmad Jauhari Yahya tipped to become the full-service carrier's next chief and MAS' newly-appointed executive director Mohammed Rashdan Yusof as the number two.

 

Sources said that Ahmad Jauhari had agreed in principle to helm the airline while Rashdan, who was one of the key individuals behind MAS' wide asset unbundling exercise in 2002, would come in as his right-hand man (possibly deputy CEO) given Rashdan's experience with the airline's re-structuring exercise.

 

Ahmad Jauhari was appointed to the board of Malaysia Airports Holdings Bhd earlier this year. He has previously served as the managing director at several companies, including Malakoff Bhd, Malaysian Resources Corp Bhd and Time Engineering Bhd.

 

Attempts by StarBiz to contact Ahmad Jauhari were unsuccessful.

 

It is believed that the MAS board has yet to extend the official offer letter to Ahmad Jauhari.

 

“The board will have to endorse the appointment first,” the sources said.

 

The board effectively decides on the appointment of the new chief for the airline, although MAS' interim executive committee is said to have narrowed the search to the best-suited candidate.

 

The Star

 

 

AJ is a great guy who is really down to earth. Have known him personally more than a decade ago when he was in Malakoff and politely declined any title award (Datoship/TanSriship etc) ever since. He is not only a gentleman who have passion towards flying and possessed a Private Pilot Licence, he is also would like to spend his free time by polishing his flying skill and taking parts in most of extreme outdoors activities.

 

I wish you all the best AJ.

 

[Sri Ramani K. 0]

There are 2 sides to a coin, either MH is offering very competitive price and terms to AK or AK is 'advised' to support MH

 

Have to agree to the many sides of a coin. There is already an ongoing MoU between AK & SAE (Sepang Aircraft Engineering). It's not just that easy to ditch a MRO who's business is only about maintaining your planes. Unless someone can proof in black and white that the HMV/OMV contract have been given to MH E&M, better not to point fingers unnecessarily.

[Ikman Ikreza 0]

AJ is a great guy who is really down to earth. Have known him personally more than a decade ago when he was in Malakoff and politely declined any title award (Datoship/TanSriship etc) ever since. He is not only a gentleman who have passion towards flying and possessed a Private Pilot Licence, he is also would like to spend his free time by polishing his flying skill and taking parts in most of extreme outdoors activities.

 

I wish you all the best AJ.

 

 

Hope AJ will success bring up MAS as IJ did.