MAS must cut cost (doH!)

[Edwin P K 0]

Pretty good read from the Star biz section, not sure if already posted...

 

MAS must cut costs

 

Tan Sri Dr Abdul Aziz Abdul Rahman left Malaysia Airlines more than a decade ago but he remains passionate about the airline where he spent 20 years of his career. He was among a core group of about five who were enlisted in 1972 to help the Government set up MAS after the split from Malaysia- Singapore Airlines. His involvement in the first 10 years was on the legal side and in 1982 he was promoted to managing director, a position he held until 1992. Those are often said to be the strong years of the airline, which had not just expanded but remained profitable despite high fuel prices and the onslaught of the Gulf War. Aziz, in an interview with StarBiz deputy news editor B.K. SIDHU, talked at great length of his journey at MAS, the domestic operations, and what MAS would need to do to get out of its current state of affairs.

 

STARBIZ: Tan Sri, what was your biggest challenge as MD of MAS?

Aziz: The Gulf War (in 1991). Fuel prices shot up, we had to divert flights, and that gave me sleepless nights. There were no warning signs of the war, and due to that we had to cut services. But we did not retrench. Demand for travel in Asia remained good, but Europe and the US suffered. We scraped through with a profit that year. When I took over as MD, MAS was in the red due to high oil prices but we recovered the same year with a profit. Throughout the 10 years, MAS remained profitable even though we expanded (aggressively).

 

If you have left the airline in good stead, what do you think had gone wrong so much so that the Government has to regain control of the airline?

Over expansion of routes; miscalculation of growth; capacity expansion; too much outsourcing; too many consultants appointed (and that cost money); buying too many aircraft at one go; and using the wrong hubs for the cargo business. These and some wrong investments in hotels and the cargo business have caused the airline to make losses and the Government has to come in to solve the problem. The 1997-98 financial crisis did not help either.

 

CHALLENGEs NOW AND THEN

 

You knew about the challenges then. Were they similar to those faced by MAS now?

The main challenge then was competition. Airlines put in too much capacity, forcing them to drop fares to promote travel and this had resulted in severe competition. Getting traffic rights in some countries such as Japan, Britain and China was difficult as every country wanted to protect its rights. Fuel prices were high, but not (as high as) today’s levels. At that time, the challenge was to improve on the skills of people, as we had to compete against airlines that were more advanced. We had spent a lot on training pilots, engineers and others, besides building infrastructure such as hangars and offices, and even on buying equipment and aircraft. Today, managing high fuel prices is a challenge for airlines globally. Overcapacity remains an issue and there is a new threat from the low-cost carriers.

 

Your views on the rationalisation of the domestic sector?

I think the Government has, in its wisdom, made a decision that AirAsia takes all the domestic routes and MAS takes four routes initially. But MAS asked for more and was given 19 routes. If you ask me, whether four or 19, MAS will continue to lose money simply because they are in competition with an LCC. MAS operates a full-service flight at a higher cost. Given the profile of our domestic passengers, whereby only 5% travel on business class, 20% on economy and the remaining 75% who are price-sensitive travellers, even a RM10 difference in price will make them change their mind, MAS will continue to lose money as its breakeven factor would be 90% and AirAsia will take the bulk of the passengers. The Government might as well give it all to AirAsia rather than to allow MAS to lose money. MAS’ argument is that it needs the domestic routes for connectivity of their international passengers. But when you bring a tourist on a low yield, you may be carrying him free on the domestic sector; then it would further erode your revenues.

 

MAS’ FUTURE

 

What is in store for the airline?

From what I see, MAS will continue to have problems. Cash-wise, they are trying to sell assets to raise cash for working capital. They are even selling the headquarters along Jalan Sultan Ismail, which I vehemently oppose. I understand MAS has to borrow RM3bil to RM4bil and that would continue to burden the airline. But why did MAS spend RM740mil to refurbish its first and business class? (That money could be used for other things.) MAS' argument is that it needs to upgrade to get the premium-class passengers as it has been losing them to Singapore Airlines (SIA). To me that is a wrong belief. Even with our (current) standards, we would not get the premium customers, as they would want to use SIA.

 

Singapore is a different market. It is a hub, a financial and commercial centre, and carries transit passengers where all airlines want to go. We depend entirely on Malaysians and have not had a captive Malaysian premium market all these years, even during my time. We depended on low yields and leisure travellers, not first or business class. In theory, airlines are to sell the front-end of the aircraft to get the revenues, but we really have to be realistic. Where is our rice bowl? Although the first class is a good rice bowl, we are not able to access that, so why should we spend so much on the refurbishment?

 

Now there is no point harping on that. MAS should look at its real market, the leisure travellers, which are in the price-sensitive segment. I understand that MAS wants to raise yields in the face of competition and high oil prices. To me, it would have a negative impact if they raise their fares when other airlines are not.

 

So, the way I see it, MAS is in a dilemma. It has done well by reducing some services on the international sector but it has to raise yields very carefully. Look at your competitors before raising fares. I have heard in the marketplace that some people are running away from MAS because of high fares. I am not sure if this is true. But with so much competition from regional airlines, if they were desperate, they would do silly things.

 

YIELDS

 

Will raising yields help MAS?

MAS has taken steps to cut costs; it has no choice on that. Its argument is that its costs are not high – they are lower than other airlines – but yields are lower than those of other airlines too. Can you bring your yields to your (competitors') level? You cannot; you would lose money because people would not travel with you. MAS still has to look at cutting costs. Globally there is competition on certain routes, and now MAS also has to compete with the LCCs into Indonesia and Thailand. Now it is AirAsia, later there would be other LCCs on these routes. MAS is lucky that the Governments of Malaysia and Singapore do not allow LCCs to operate the KL-Singapore sector. If that is allowed, I think the impact would be terrible.

 

Should the Government pump more money into MAS?

These days the Government is treating everything as a business and wants to see returns. Then, it should let the airline operate on its own. It has to be a commercial organisation. MAS has to look at its routes, cut costs and retrench. I think MAS is lucky as its parent, Penerbangan Malaysia Bhd (PMB), pays the retrenchment costs. If MAS had to pay for the mutual separation scheme, it would face a problem.

 

Where do you see fuel prices headed?

Not lower than US$55 a barrel. Even at that price, it would be difficult for airlines to survive. They are comfortable at the US$35 to US$40 a barrel range. A traveller is also burdened with inflationary pressures and he will only travel if he has surplus money. Airlines like MAS are dependent on passengers who have surplus funds, i.e. leisure travellers, so the way I see it, things are going to be difficult.

 

What should MAS do?

Find other sources of revenue and reduce costs further, expand cargo operations and increase engineering capabilities. Make KL the base for aircraft maintenance for the region and the world since we have the capability, expertise and infrastructure. We can do third party work for aircraft maintenance in this region and other parts of the world. During my time we did aircraft maintenance for the US. But after I left, it has stopped and I do not know why. These are good areas to work on than to be solely dependent on the leisure traveller.

 

In your view, would the business turnaround plan put MAS on the right track?

I would say they will have problems and that is why I talked about cargo and engineering expansion. They also have to scrutinise costs further. They have to keep track of competition.

 

If you were at the helm now, how different would your strategy be to turn MAS around?

It is difficult to say but I would probably work on expanding the engineering and cargo business. I will concentrate on markets such as China, India and the Middle East. As I did before, I would go into cooperative mode to form joint ventures with other carriers so as not to waste capacities and this is also for mutual benefit. It is not just code share, but joint operations like those being done in the KL-Singapore sector. We agree on a certain level of costs and sell on that.

 

I will work hard to get the various airlines because of the high fuel costs. Why do we have the dog-eat-dog situation? Then all the dogs will die. I would also work with the LCCs. They would have to work with us; otherwise, the full service carriers can gang up and give the LCC a tough time. Remember that the LCCs are not the only smart ones around. Work with the LCCs in such a way that they divide the routes and timing and do some interline arrangements to help each other to avoid head on competition. That is better than allowing the LCCs to have as many flights as they want and allowing them to reduce their fares as much as they can.

 

THE A380 ISSUE

 

Should MAS add the super jumbos to its fleet?

That is a big problem. They have ordered six via PMB and I am worried about them. I do not see the rationale of buying such a big aircraft. How are you going to fill it with 555 passengers? The questions to ask are: which markets are you going to serve, what if you cannot fill it up, what is your breakeven load factor, 80% or 90%? Their argument is that SIA, Emirates and Qantas have it, so we too must have it to be (in sync) with the market. Have they considered the population that Emirates serves, the business strategy of SIA and Qantas?

 

SIA has its own marketing strategy; Singapore is a hub and it may set up hubs in the US and Europe as it practises the open skies concept. We do not have an open skies policy, as we still need to protect ourselves. If we do it, SIA will benefit from our generosity. I do not know how MAS is going to solve this but it should resolve it soon. If I am wrong, let me know that. But if it is doing it on the basis that “others ordered, so must I”, then it should not follow others. We should look at our own market requirements.

 

SERVICE LEVELS

 

What have you to say about service levels?

I am proud MAS has established a good reputation and won many awards in terms of service standards in the economy, business and first class. I would say the staff members are well-trained and capable. I am proud that this has been carried out and improved upon from my time.

 

Some of his comments on the domestic sector

THE challenge is different now on the domestic turf compared to previously. There was no competition in the past but the Government controlled fares. We could not justify a rise even when the fuel prices were high. We also had to cross-subsidise the profitable routes with the unprofitable ones, as there was no subsidy given by the Government to MAS, unlike now. The only subsidy we received was for flying to very remote areas of Sabah and Sarawak, for which we got a subsidy of RM1mil to RM2mil per year. The fares for rural services were very low and established in 1947. After years of asking for a fare hike, we only succeeded with a 10% increase for domestic but not rural air services.

 

To me, that was not a monopoly as we could not raise fares. MAS was already losing money on many routes – they had to cross subsidise – and all of a sudden the Government approved an LCC (low-cost carrier) which could charge whatever fares it liked, while MAS was not allowed to do so. I cannot see the rationale behind such a move since the domestic market is very small.

 

Maybe the rationale is to allow more people to travel but at whose expense? MAS is Government-owned; in other words, it is the public’s funds. Under the WAU (widespread asset unbundling) exercise, the Government took over domestic operations and is subsidising the domestic operations, which is a big difference from what was going on during my time. Then we could not even get a RM1 rise in fares and we operated with no subsidy. I cannot see the rationale of the Government having to subsidise between RM200mil and RM400mil a year for the domestic operations. Let me tell you, nowhere in the world does any Government subside air travel. Governments only subsidise surface travel like buses or trains to help the lower income group.

 

I know this because I was the president of the International Chartered Institute of Transport and travelled globally to study the global transportation system. I have not heard of any Government giving subsidy to domestic air travel or other air travel except for very remote areas. So, I must say our Government is very kind to have done that.

 

The Man

 

Tan Sri Dr Abdul Aziz Abdul Rahman, 71, spends about two hours daily at his legal practice, Nik Sagir and Ismail, where he is a partner. He also sits on the board of some listed and private companies, including United Chemical Industries Bhd. He is chairman of AsiaEP Bhd and BTM Resources Bhd. Aziz has never really left the aviation industry since stepping down as MD of MAS in 1992. He has kept abreast with the developments in the aviation industry and a close eye on MAS.

 

He is also on the boards of some travel companies.

[Tony 1]

Costly just because there's too much outsourcing or too much rip-offs as a result of outsourcing? Last I know outsourcing helps in cost reduction, but MH pays big bucks to outsourcing agents and that's one of the reasons why the airline is bleeding. I guess we've heard enough of how much a bottle of water and a set of nasi lemak cost to the airline. <_>

 

And I like the way he said it, when asked what's wrong with MH - if you summarise it, it's basically everything...

[H Azmal 0]

Costly just because there's too much outsourcing or too much rip-offs as a result of outsourcing? Last I know outsourcing helps in cost reduction, but MH pays big bucks to outsourcing agents and that's one of the reasons why the airline is bleeding. I guess we've heard enough of how much a bottle of water and a set of nasi lemak cost to the airline. <_>

 

And I like the way he said it, when asked what's wrong with MH - if you summarise it, it's basically everything...

 

Oh, outsourcing the Malaysian way will get you 'bleeding' no matter if it's an airline you're running or building school computer labs.

Edited June 27, 2006 by H Azmal

[Andrew K 0]

Has MH sold their share of the Four Seasons Langkawi? I think they own part of it, saw it in the papers last year.

[KK Lee 5]

 

 

Problems at Mas is not unknown. Just that, non-business objectives were (or still are) at higher priority.

 

 

 

[HSLim 0]

I recall that this former MD was quoted months ago as saying that MAS should not only be concerned with profitability and neglect its national duties. Back then, it seemed easy to dismiss those comments as coming from someone stuck in the past. Then again, he might have been misquoted or quoted out of context.

 

This time around, his comments contain a few sound bites in my opinion.

 

For one thing, the domestic network restructure leaves MAS in the odd position of competing with AirAsia on the 19 trunk routes without full pricing freedom. It's one thing to make sure that MH does not take advantage of its PMB backing to practise predatory pricing. However, maintaining a lower limit on MH fare levels is simply asking for MH to operate flights with many empty seats.

 

Other than that, MH is still clearly being bailed out by the government. Who is footing the bill for the mutual separation scheme? What is the state of PMB's accounts?

 

I also agree with his view that the key is to cut costs because raising yield is a tricky business. MH has been unrealistic about its market strength for the past decade. The most recent quarterly report mentions increased yield. If the yield is measured by revenue over available capacity, then it is promising if MH can maintain that. On the other hand, if the yield is defined as revenue over sold capacity, then one has to check if there is a drop in load factor. In any case, the trend has to be monitored over the next few quarters to assess the impact of recently introduced fare increases.