MAS: Going beyond whose expectations?

[KK Lee 5]

29/06: MAS: Going beyond whose expectations?

Category: General Posted by: Raja Petra

Biggum Dogmannsteinberg

 

A lot have been said about the national carrier, Malaysia Airlines (MAS) these past two years. Too many people pass judgments based on mislead or wrong information, either portrayed or explicitly presented. It is no longer “who, what, where and how”. The more important question is “why”.

 

Lets recapped what has transpired within these two years. When Datuk Idris Jala, the current MD first started, he made a statement of two pertinent points which later he never kept and honoured. One, he announced that there will be no retrenchment and redundancy, provided MAS is allowed to keep all its routes. Two, he wanted to “unleash the talents within”. It was an important starting statement as he was known as “the butcher”, for his ability to deal and break ‘tough’ unions within Shell and his intentions has clearly marked the direction he was going.

 

When he undertook the assignment, he made it conditional that the Government allowed him to make his own decisions (no interference) and he was set to “unleash the talents within”. The Government was very confident Idris could do it, based on his experience in turnaround management in Shell. Then again, with a safety net that Shell (which promised to take him back anytime he wished so) provided, Idris was not really motivated to really succeed and place long term solutions for MAS’s predicament. Maybe he just needed to look good, so that some medium term remedy or scheme can be concocted.

 

Now, after more than 18 months, did Idris made the right decisions? Well, one of the first thing Malaysia Airlines did was appoint Peter Read, a former British Airways as the Director of Operations. That almost caused a row. Another is Malaysia Airlines were not able to keep most of its domestic routes. The funniest of all is that FAX conveniently refuse to carry on with Rural Air Service (RAS) and Transport Ministry made MAS took it back, especially after MAS did a massive exercise to dispose of all its assets and resources pertaining to RAS operations, including retrenchment.

 

Airline Rationalisation Plan

 

May last year the Transport Minister announced the ‘Airline Industry Rationalisation Plan’. Part of the plan is for MAS to surrender most but 19 selected routes to Air Asia and MAS to allow its facilities cater for the needs of AirAsia. It was a gold mine opportunity for AirAsia, as they don’t have to invest a lot of money into infrastructures such as Maintenance, Repair and Overhaul (MRO) facility, something of a necessity in highly technology induced logistic corporation like an airline. It also means AirAsia is set for good profits against minimal capital expenditure and spreading massive fixed cost.

 

To date, AirAsia have been using MAS resources and facilities and there is an RM 30 million accumulated unpaid bill. When MAS send an ultimatum to request payment, the Transport Minister instead became furious because of the call. Eventually, the Government settled the bill on behalf of AirAsia.

 

The fact that YB Dato’ Seri Chan Kong Choy has been dubbed “Minister in charge of AirAsia” is nothing secret within the industry. The speed of getting the Low Cost Carrier Terminal (LCCT) being approved by Government and built in amazing record baffles simply baffles too many.

 

That and another case of how an economical bus and taxi service was allowed to serve between KL Sentral and KLIA LCCT is also beyond comprehension as it was a long battle between operators and Ministry of Co-operative and Entrepreneur Development which was never resolve. The protection against a very important infrastructure purpose built for KLIA, the ERL, which was immediately lifted when the Minister allowed direct economical bus service from KL Sentral to commence.

 

Another important point not made known to public is that the last 3-4 years, anytime MAS requested additional routes for Transport Ministry acquire within the region, it was summarily denied with the verbal excuse that those routes would now be ‘reserved’ for AirAsia. For example, additional routes to Jakarta, Bali, Medan, Bangkok and new routes to Hadyaii.

 

MAS Rationalisation Plan

 

Idris promised an increased yield on routes operated by MAS. The fact that MAS never achieved real cost reduction but some of the routes start to make money. A better revenue management system were put in place and thus the significant shift in the net income curve.

 

The restructuring of the airline industry is being made by a ‘power’ where MAS does not have a hand in it. This was clearly shown the week Idris went to see the Prime Minister and presented him with the MAS Rationalisation plan. The Prime Minister got his office to work at MAS’s proposal the remaining of the week. Over on Saturday, it was said that Khairy Jamaluddin brought AirAsia Boss, Tony Fernandes for a private meeting with the Prime Minister at Seri Perdana private residence. The next morning, Khairy and PM’s Office Head of Policy Zaki Zahid came into the office and reworked all the papers already prepared. By evening, the Chief Private Secretary to the Prime Minister received a call with instructions for him to personally leave for the Caribbeans immediately and assist Wisma Putra in forming a new Charge D’Affaires office, as a subsequent action from the PM’s recent visit. Personal touch and previous experience was given as the excuse to get him out of office.

 

By the next Cabinet meeting, almost everyone in MAS’s turnaround project had a major surprise. Government announced almost all but 19 domestic will be operated exclusively by Airasia. This announcement was the backbone of AirAsia’s expansion program and justification for their massive asset acquisition, especially to the financiers.

 

MAS also brought in Bernard Francis from AirAsia and he was given a very senior post. Considering that his limited experience was running a regional low cost airline, now he is expected to transform a tier-1 intercontinental major airline around.

 

The formation of Fireflyz is also baffling for the industry. Eddie Leong, a new talent without any logistics nor airline experience were brought in from outside, is made to run the show. Now MAS is expected to maintain two tier airline service within the same company. Conveniently less than one month after Firefly was launched, AirAsia announced they wish to let go the FAX and transfer all RAS routes back to MAS. The transfer of RAS to FAX did not come without controversy.

 

FAX, in their typical money making mode, significantly reduce frequency of many RAS routes in the interior of Sabah and Sarawak which disrupted the rakyat’s convience and lifestyle. So much attention and so many political reps from both states made strong criticisms against the RAS services provided by FAX and wanted the old service provided by MAS to be reverted. Historically, MAS was formed in 1972 after the Singaporean part of MSA wanted to focus on commercial growth and agenda where else Malaysia still maintained national integrity and economic development programs as a priority. Hence MAS and SIA was born and MAS continued serving the much needed logistics service.

 

“Developing talents within”

 

This was something Idris announced what he wanted to do when he first took over the helm of MAS. Being a HR man, it was not surprised the Shell ‘culture’ of developing highly skillful specialists of the industry was his theme to address the solution for MAS.

 

However, something else prevailed. No real “developing talents within” efforts were carried. Instead, MAS went of a massive “retrenchment” exercise, by allowing 3,900 people of the originally intended 6,500 to take the ‘mutual separation scheme’. More MSS exercise will be carried out as soon as the ‘new talents’ figured their way around the company and/or industry.

 

In place, Idris brought in too many newbies with little or no experience in an airline or aviation industry in. Some of them carried their high maintenance ‘baggage’ with them to MAS. Most of them, from other organizations. Therefore, new cultures and work ethics were brought in and some personality and practice clash is starting to develop. Also, as in any MNC, MAS is now in a state of high dependency on external consultants, especially from abroad.

 

Too many middle managers and loyalist were sidelined and pushed aside. A lot of their valuable experience and knowledge were not tapped but instead expensive external consultants are procured. Training programs for existing employee and management were frozen silently. However, the ‘new people’ had to undergo expensive training abroad and highly dependent on external consultants to bring their work, up to speed. MAS, went into a conundrum where they had to bring in people which “ask to borrow your watch to tell you the time”.

 

Even the turn around process and team are highly dependent on the external talents brought from outside and exorbitantly expensive consultants. Idris was even quoted to talk about bringing in imported talents from abroad, especially Europeans into MAS, like how Gulf states airlines are like, where else valuable experienced local talents were systematically allowed to leave, at a high departure cost (MSS scheme).

 

Naturally, like in the case of Proton, the new management have managed undermined the spirit of the larger MAS workforce. The moral is an all time low, especially a lot changes that affects the welfare of the employees, such as selective bonus and reward schemes, new leave system and other perks they used to enjoy. HR related decisions made by a new HR man like Idris and the high salaried executives he brought in will one day backfire adversely to the company.

 

The aircraft replacement program and exit plan

 

This was and still is an important point which left too many people continuously wondered. The current 39 B737-400 fleet is 19 years old and due for replacement. The replacement program is valued at RM 11 billion and expected to invite too many interested party. It is a commitment MAS inevitably have to make at some point of time.

 

However, there is another twist of the probable direction of MAS. AirAsia since two years ago, have been making massive 150 unit order on A320s, as part of their bullish expansion program. That, will be a serious financial commitment, even for a highly profitable company.

 

Recently, this is the latest financial review on AirAsia, by Citigroup. The Edge, has the story:

 

25-06-2007: Citigroup: Sell AirAsia to take profit

 

CITIGROUP Equity Research has recommended investors to sell AirAsia Bhd shares to take profit, given the low-cost carrier’s rich valuations and its rising investment risks.

 

With a PE of 22 times, AirAsia was trading at 23% premium to global sector peers with similar earnings per share growth and 24% premium to the Malaysian market.

 

The research house rated AirAsia as “sell/high risk (3H)”, with a 12-month target price of RM1.66.

 

“We remain bullish on the prospects for budget air travel in Asia. AirAsia, in our view, is so far the cleanest play, with some competitive advantage and a significant beneficiary of the domestic route rationalisation, is emerging as the dominant player.

 

“However, we are concerned about rising investment risks given lower earnings visibility and potential share overhang. There is greater uncertainty on historical and future reported earnings due to existing accounting policies on the treatment of deferred tax, investment allowances and hedging instruments,” it said.

 

Citigroup added that there could be potential share overhang given recent significant off-market transactions that led to a reduction in Tune Air Sdn Bhd’s stake.

 

“We estimate AirAsia’s net debt to equity level would rise to circa 300% by FY09E and AirAsia will likely need to raise more capital to fund the remainder of its Airbus aircraft purchase as its gearing level is already high,” it said.

 

Citigroup also said AirAsia had garnered a significant market share of 50%, compared with 30% in FY06, in less than a year since the domestic route rationalisation took place.

 

Domestic routes contributed about 70% of AirAsia’s revenues and were expected to remain the main driver of earnings due to the significantly stronger competition on international routes, it added.

 

While traffic growth had moderated in recent months given AirAsia’s larger base, new routes, namely Kuala Lumpur-Shenzhen, Johor Bahru-Macau and Johor Bahru-Langkawi, should help boost its growth.

 

Citigroup said it expected AirAsia to meet its forecast FY07 recurring profit forecast of RM198 million or a reported profit of RM400 million, if the Malaysian Accounting Standards Board approved the inclusion of deferred tax credits in AirAsia’s audited accounts.

 

However, it said rising fuel prices remained a key concern in FY08, given that fuel accounted for 50% of AirAsia’s operating costs and it was unhedged from July 2007.

 

The skepticism and realism is starting to sink in after the over-kill on “hoohaaa” and “ga ga” and marketing gimmicks simmered down. AirAsia is an airline operator, trying to behave like a full fledge airline without proper technical assets and infrastructure. Therefore, the growth expansion AirAsia has set as target is now beginning to feature as ‘not too convincing’, especially their growth saturation is expected to stabilize sooner than expected, especially with more upcoming regional players in India and China, AirAsia’s two biggest potential market.

 

Some believe all the commitments AirAsia placed, especially after its major players in the likes of Tony Fernandes made their exit plan, will have to be taken over by MAS eventually. Therefore, some already beginning to embrace MAS B737 replacement program is about MAS merging with AirAsia and taking over the orders placed.

 

The end game

 

MAS’s end game is almost too clear now. Idris Jala has been making statements that MAS’s performance has shown positive results the past few quarters. He even confidently announce that MAS is “expected” to have ‘favourable’ results for the next consecutive six quarters.

 

There are some people, most probably within Khazanah, who wants to see MAS shares plateaud at RM 8.00. So that is where Idris is expected to do. Most probably Khazanah will recommend that MAS be sold of to realize commercial gains, much like what Proton is going through now.

 

The signs are starting to show. “Fresh talents” like Bernard Francis has been rewarded handsomely for their short stint. Recently he was offered 600,000 MAS shares, as a reward under the ‘selective ESOS program’. So did the other top and senior management brought in from other industries, like oil and gas and advertising and promotions. Almost the remaining other top performing loyal managers. who were seasoned airline professionals however were not considered at all in the most recent rewards exercises. Inevitably, moral dropped to a new all time low.

 

Like Proton, MAS professionals are greatly demotivated and adversely charged. An organisation with low moral cannot sustain long term success, even if better systems and work processes are in placed. In an enigma hybrid between high technology and high standard hospitality, a tier-1 intercontinental airliner like MAS very much needed to take care of its most valuable assets, the people.

 

So if the solution that Khazanah executives expect to put in place for national corporations and ‘pride’ of the nation such as Proton and MAS is based totally on commercial grounds and so much weightage given on PEs, ROIs, EBITDAs, et al, then we might as well embrace ourselves for MAS’s “going beyond expectations”. Really beyond expectations!

 

http://malaysia-today.net/blog2006/index.php?itemid=5923

 

Another rumours?!

 

 

 

[Mushrif A 3]

For the record, Peter Read has or will leave MH and he will be succeeded by a local within MH.

 

I think the article is very shallow & written by somebody who has an axe to grind but short of facts. AK cannot be merged with MH just like that on TF's exit. The author conveniently forgot that both are public listed companies with AK having a spread of foreign shareholders. AK is not solely TF sdn bhd.

 

The ESOS program is really no big deal - how else do you want to motivate the executives? For all the headache of taking over an ailing company, Idris was only paid around RM1.2m per annum (this is made public in the annual report - read it). That is really peanuts in the big picture corporate world, especially when some 28%+ will probably go to the taxman. The article also said the ESOS is given to selected people - this is true but also stretching the truth. Any ESOS program has to be made public. As per announced to the world, via KLSE, the ESOS will not be given to amongst others, contract staff and foreign staff.

[Alan B. 5]

Blogs like this are interesting to read but should only be taken as personal opinions of the blogger. As bloggers are not expected to meet journalistic standards, do not consider the blogs to be 100 percent truths.

[Radzi 2]

The ESOS program is really no big deal - how else do you want to motivate the executives? For all the headache of taking over an ailing company, Idris was only paid around RM1.2m per annum (this is made public in the annual report - read it). That is really peanuts in the big picture corporate world, especially when some 28%+ will probably go to the taxman. The article also said the ESOS is given to selected people - this is true but also stretching the truth. Any ESOS program has to be made public. As per announced to the world, via KLSE, the ESOS will not be given to amongst others, contract staff and foreign staff.

 

Whilst I agree that this article should be taken with a pinch of salt, the ESOS thing is something that should not be taken lightly. As of now it is creating a lot of confusion and unhappiness amongst the staff. It is based on performance but for some profession, it is not known how the performance is measured.

 

[Robin 0]

ESOS is normally a reward to Senior Management only. Therefore, it creates an unfair situation to the middle management and below level.

Edited June 30, 2007 by Robin

[Jessnor Arif 1]

MH going beyond whose expectation?

 

They are going beyond expectations of these people:

 

The Shareholders, most of the Passengers and me

 

I always feel like home whenever I boarded MH flights even if they haven't get clearance for Push Back.

[Sanjay Thaker 0]

A newsletter from the MD himself says that in the next two months, the method of how ESOS is allocated will be announced in full to avoid any ambiguity. This article is too shallow, no hard facts and a story line that keeps taking different directions. Of course though, "some people " who just look for an oppurtunity to belittle the national airline will be jumping with their hands high up in the sky...

[Mushrif A 3]

ESOS is normally a reward to Senior Management only. Therefore, it creates an unfair situation to the middle management and below level.

 

 

Using the word "normally" in your statement makes the statement factually incorrect. ESOS is quite common in many companies for all levels of staff (including your humble tea-lady, etc) but will normally exclude temp. or short term contract staff.

 

[Izanee 0]

poorly written article with nothing to substantiate it. the english is atrocious...