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Will AJ’s game plan for MAS work?
BY B.K. SIDHU
IT came as no surprise when Malaysia Airlines (MAS) announced it was pulling out from the Americas, a route it had been plying for 30 years.
The scissors had been out for similar routes to South Africa and Dubai some years ago. The reason for the cuts is a lack of profitability on these destinations. But a savings to MAS is a loss in terms of trade from the country’s perspective, convenience from the traveller’s perspective and its own branding consistency. From the airline’s own financial perspective, it is a move to minimise damage, given its mammoth losses.
Competition is intense on these routes and other Asian carriers such as Singapore Airlines and Thai International Airways have also withdrawn, but not totally cutting their connections. MAS is cutting its last link to the Americas by withdrawing its four weekly flights to Los Angeles from April. But this will see just over a 5% reduction in weekly available seats.
Notwithstanding this, the withdrawal will shrink the national carrier’s network. Not only will it lose its own traffic, but also transit traffic to the United States. A window of opportunity will be lost. Normally, airlines subsidise loss-making routes with profitable ones unless all are non-profitable.
This brings us to the question: Was the closure well thought-out?
Cutting and reinstating flights has become a norm for MAS. For instance, after having suspended flights to Dubai, the airline reinstated them because it realised it was missing a link to the Middle East. Restarting means virtually starting from scratch.
In Singapore, there is an airline hub community that looks at every aspect of trade before any route can be axed, as it has to study the implications for the country first, then the airline.
Did MAS consider all this?
MAS chief executive officer Ahmad Jauhari Yahya, or AJ, is bent on a new strategy of filling seats at the expense of yields - something that has been hugely criticised because it is not the norm in the industry.
But for most of last year, the airline enjoyed an over 81% load factor as opposed to 74.7% a year ago. In December, its loads peaked at 93%.
While impressive, the capacity push is not bringing in the money. For every new seat the airline puts in, there is a cost, and if it cannot earn as much, then it would simply be a loss-making effort. Hence, there will be a mismatch between the revenue per available seat kilometre (RASK) and the cost per available seat kilometre (CASK).
MAS’ RASK for full-year 2013 was down by 6% to 23.5 sen from 25 sen in 2012. CASK was also down 4% from 25.8 sen to 24.7 sen.
What the flag carrier needs to do is boost RASK while bringing down CASK so that it can be in a position to command pricing. To keep up with competitors who are selling at lower prices, MAS has dropped fares on many destinations, including Dhaka, Mumbai, Delhi and even Sydney. As a matter of fact, there is over-capacity on the Sydney route given the number of daily flights out of the KL International Airport (KLIA).
Essentially, the airline needs to do two things – reduce cost and increase market share.
MAS has lost considerable market share of flights out of KLIA since 2005, from 58% to 28% in 2011. The good news is that the momentum is picking up with its strategy to fill up seats. As at the end of last year, its share was up to 32%. It’s not rocket science to drop fares to fill flights. Anyone can do that, but can it lead to profits?
Further cost cuts is what AJ is looking to do this year.
He wants to bring the unit cost down by 10% and boost capacity by 20%, hoping to sell more seats and recover some money.
A push for higher productivity, renegotiating procurement contracts – something he has been trying to do since he came on board – and phasing out old aircraft are all part of AJ’s strategy.
AJ has been on the job since 2011, seeing the airline rack up a net loss of RM1.17bil last year, somewhat rattling investor confidence. Its share price has taken yet another beating and analysts are as pessimistic on the stock as they have ever been. Even the product needs to be refreshed. Some have suggested that the only way out for the airline is bankruptcy, a route that Japan Airlines had taken.
MAS can cut capacity, add capacity or do whatever it likes, but if it does not have a lower cost base and market share, then it will not have the pricing power its competitors enjoy. So, it is questionable whether its cost cutting and filling aircraft at the expense of yield strategy will bring any meaningful results, unless of course AJ is given full authority to cut cost.
Essentially, AJ’s strategy of filling up planes at the expense of yields is a double-edged sword. If it works, then kudos to him, and if it does not, then it will fall flat and the airline can expect more losses.
For now, even AJ can’t say when MAS will return to profitability, least of all whether its earlier profit timelines can be met in 2015.

 

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^^^ Weird article. Don't really know what was being analyzed.

 

 

Her articles are very vague and confusing. Product knowledge limited from my point of view.

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I would not call the article weird per se, I say, it is kicking in wide open doors.

Industry related people know all this already so, the question is, at which audience the writer has targetted it.

If it was to the aviation industry, no need, all is well known.

If it was intended for the gullible readers of the newspaper one could ask, for what reason?

As a precursor for more information to come from the government on how and why MAS, will, can, must, should restucture and by whom?

 

I dont know the writer, never read articles by this writer before so i try to be unbiased as far as it gets, but one advise i can give the writer,

"Try to frequent this Malaysianwings board for some common sense insights into MAS troubles". Many a times contributers on this board have a better understanding of the Malaysian Airline Industry than all these bank and investment house analysts in their ivory towers.

 

With best regards.

Art

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