Should MAS has seperate domestic subsidiary?

[Keno Omar 0]

Economics is hardly my strongest point being a science man myself, so please bear with me. We always hear statements from the govt that they're not happy with MAS financial performance when compared to other (much) more successful airlines like SQ or CX. At the same time, we also often hear that MAS should not concentrate solely on making profits because it also has national duty to domestic travelers, which is true considering the govt has a fair stake in the company. MAS cannot really move forward in this volatile industry as long as there's this conflict of interest.

 

Would it be a good idea for MAS to have a separate subsidiary for its domestic operation? Routes like KUL-IPH, KUL-KUA and many many intra-Borneo flights are not really doing MAS any good financially but they have to be served in the name of public duty. Other domestic routes, both intra-Peninsular and between KL/Borneo are bound by fare control by the government e.g. the maximum MAS can charge for KUL-BKI is around RM550 one-way regardless of high demand. On the other hand, international sectors like KUL-LHR's full Y fare can go as low as RM2500 or as high as RM8000 or more depending on demand and when the ticket is purchased.

 

Looking at other airlines' examples, SQ has Silkair for its low-yield regional destinations, e.g. CGK and DPS are served by SQ while Medan is handled by MI. Shortly Surabaya will be handed over from SQ because it makes more business sense for MI to operate it. SilkAir is not just about narrow-body subsidary of SQ, they have a different business model to cater for these regional markets (they're not even in Star Alliance). British Airways also has its own franchises and subsidaries to serve different market segments like BA Citiexpress, GB Airways, BMed, SunAir and Comair. Logan Air, a BA franchise is probably a good example if we want to compare it with MAS. The airline, which fly full BA colours serve domestic routes within Scotland not just from the major airports like GLA, EDI, ABZ or INV but also smaller airports and remote airstrips in the highlands and the islands of Orkneys and Shetlands (the latter is actually closer to Norway than Glasgow). In a way this is UK's version of MAS Rural Air Service which are there not really to make money but more of a service to the community. This allows BA (mainline) to concentrate on its money-making business strategy abroad without having to worry too much about their "patriotic duty".

 

Having different subsidaries for different market segments would give more flexibility in an airline's operation. As it stands now, MAS has to live by the rule dictated by the govt but at the same time have to adapt to challenges of international market. More than often this two does not go well together. This coming from somebody who has no economics nor accountancy background, but wouldn't it be better to split MAS domestic from its international operations? The domestic arm, being seperate from the parent company, can follow whichever strict guidelines that are imposed by the government while the mainline (international) entity should be set free from its domestic operation burden in order to compete fairly with its competitors.

 

How the domestic subsidary should look like? Probably no visible change at all to the traveling public, it's all about how the management and financial aspects of things are handled, i.e. a split between international and domestic. There's no need to hand over not-so-profitable route like AOR or TGG to Air Asia, MAS has done a tremendously good job for these sectors so I don't see why they should withdraw. MAS should continue to serve all existing domestic routes, but on a new business model.

 

Comments please.

[Pieter C. 5]

How about KLM cityhopper feedering for KLM or Lufthansa Cityline feedering for Lufthansa; both have a seperate management and (lower) pay-scale/WRR (more hours) making it more "profitable" for some routes...

 

It's well known here in Europe; also look at SAS Braathens for SAS, Air Nostrum for Iberia and Eurolot for LOT...MAS should have done this a long time ago already IMHO...

 

"MAS financial performance when compared to other (much) more successful airliners like SQ or CX":

 

Both have no "domestic" obligatory routes to operate...

[H Azmal 0]

No MAS shouldn't. It will definitely result in more bureaucracy and red tape, not to mention increased management cost.

 

The solution would be to do away with this 'national pride' thing and let MAS scrap any routes it deems unprofitable, international or domestic. For Sabah and Sarawak allow smaller companies to serve the intrastate air routes. Interstate services can be given to AirASia which have given the indication that it is more than willing to take over. For long term solution to the transportation of the people in SAR & SAB I suggest improving roads and possibly introducing railways. Subsidising rail networks should be less of a pain for the government than to do the same for airline companies. A win-win situation.

 

An engineering man's 2ps.

Edited October 13, 2005 by H Azmal

[Roszaimy 0]

From accounting perspective, adding a "subsidiary" under Malaysia Airlines System Bhd will not help because the losses reported by the subsidiary will also accrue to the parent company, ie: MAS Bhd.

 

One more important thing: ALL MH's domestic operation's profit/loss now is being absorbed by Penerbangan Malaysia Bhd, which is a different company. So MH's RM200+million loss in the recent quarter is purely from its international operation!

[Ruiz Razy 1]

"subsidiary" , I think is now the old method of "getting rid of wanted but unwanted stuff"; This may no longer work.

 

However, "franchise" could be a better option. Just like Maersk Air of BHX,

( became a BA franchise partner by late 1990s) maintains the quality and standards of BA ( with full BA uniforms / livery and identity) but the holding company is a different group entirely. In this case, the benefits are

1 Feeder services (i.e. Intl. to Domestic) is maintained

2 Cost is low as it is a small company

3 Intl. quality and standards maintained.

4 Considered as one form of alliance.

5 Staff and Overhead Costs can be reduced as these franchises staff are specifically employed for this small company.

6 As it is small, every little effort will be done to ensure that it will remain profitable .... i.e. routes will be cut if it does not give any returns.

 

BUT....when the local Malaysian scenario and politics being added in this case, I'm not sure .... that it will work...... In this context, it is for PMB and our Government to think about.

[Sanjay Thaker 0]

I think a franchise would be good too....and have a better management running it....coz i think the management is to be blamed...so a better management runnning a franchise would mean even the government wouldnt be losing money..and MAS gets a share of the profits too...but then again its easy for us to comment..implementation is way tougher...but if theres a will theres a way right..

Edited October 14, 2005 by Sanjay Thaker

[Tony 1]

don't you guys think the current management structure is very messy? i mean, there's no transparency at all! nobody knows where money flows to (not very clearly) and nobody knows who is the ultimate decision maker since there're so many companies (each with its own management) involved in getting something done.

[Isaac 0]

don't you guys think the current management structure is very messy? i mean, there's no transparency at all! nobody knows where money flows to (not very clearly) and nobody knows who is the ultimate decision maker since there're so many companies (each with its own management) involved in getting something done.

10656[/snapback]

Totally agree with you, Tony. As Sanjay said in the other thread, it's the management to be blamed. Corruption i guess ? And giving the contracts to their friends and companies that charge unreasonably high prices that they can get, let say 10% shares ?

 

[Sanjay Thaker 0]

280 million from international ops....with a pax load of over 70 percent.......how can any airline do tht???

[Pieter C. 5]

with a pax load of over 70 percent.......how can any airline do tht???

10740[/snapback]

 

Air France - KLM does it (that's why it is soooo difficult for me to fly to KUL and visit you guys )

[Roszaimy 0]

Did AF/KL make profit for the last few quarters?

 

Assuming AF/KL enjoying the same load of around 70% just like MH, there's no reason why MH is making losses. Our cost should be much lower than the European airlines. While we stay pay jet fuel in USD, but the staff salary, benefits and other costs are in MYR.

[Ruiz Razy 1]

Load factor does not mean profit....... the revenue / cost per km counts; i.e. YIELD,

MH domestic services has a very low YIELD and cost is high. Amongst the key reasons are:

1 Fare - unrealistic - controlled by the government. Especially premium C - class fares , short flights like KUL - AOR / TGG / KBR and Sabah / Sarawak are much lower than EY (in some cases LCC) flights of the same distance in Europe / US.

2 They have "senior"/ elderly staff to take care at these stations, unlike AK, New staff , pay can be slightly lower. - Automated / self check in facilities may be a solution.

3 Night stops at almost all major towns ( perhaps for connectivity reasons) additional cost for crew. - Late / Early - Departures / Arrivals may need to be reintroduced (e.g. 0545 Dep. KUL - KBR and 2330 KBR - KUL in the 1980s)

 

Politically and socially are good national service for MALAYSIA but commercially it does not sound viable.

 

 

 

[Ruiz Razy 1]

........ some cost may be in MYR; But major cost are still in USD!

1 Jet Fuel

2 Aft. Finance / leasing Charges

3 Aft. / Pax. Insurance

 

[Keno Omar 0]

Politically and socially are good national service for MALAYSIA but commercially it does not sound viable.

10831[/snapback]

Exactly my point when I started this thread. When is the govt going to realize that they cannot have it both ways i.e. (1) to protect the interest of domestic passengers (2) making big bucks to compete internationally. It may have worked it the past but unfortunately things have changed and MAS have to adopt to the market.

 

Besides having a separate domestic franchise operator, is there any other way to free MAS from their domestic burden?

[Ruiz Razy 1]

One idea,

1 PMB be the domestic operator

2 Have franchise arrangement with MH

3 Existing domestic MH staff - VSS or transferred out or sacked

4 PMB recruit new domestic staff, with lower cost - i.e. on contract basis

5 Let PMB decide on schedules, aft. types ...etc.

6A PMB must go for smaller aft. like CRJs / Emb with high frequency for conectivity instead of 32x or 737NG. Another advantage - quicker turnaround.

6B MH may choose to operate and maintain high density and demand routes themselves like KCH / BKI and PEN ( maybe JHB and KBR if there is sufficent demand). But it must be on wide - bodied jets like 787 / 332; as cost / km is lower compared to 32x 0r 737NG; Provided that the load factor is more than 80% particularly at the front end.

7 Be focussed for Business travellers, (leisure and cost minded pax. to be channel to AK); Therefore increase premium seats. i.e. Club class.

8 Keep staff - aft. ratio low and out source maintainance / catering ......everthing.

9 Keep the premium pax. happy - i.e. lounges at all stations and allow Enrich miles accurals.

10 In flight meal for C class - keep it simple and yet good. One fine example, coffee / tea in mugs instead of cups, Cold snacks ( not just sandwiches) , pre - hot snacks only at longer flights served on tray

11 EY snacks can be distributed at boarding gates, maybe a packed juice with muffins or similar - something like what one get on LHR - AMS on BA.

 

..... I'm sure this is something that the government wants as there will be an increased role for AK in the domestic arena. But, to let go everthing for MH particularly to major towns like AOR / TGG / KBR / KUA will be a loss as the premium demand for business travellers is still out there........ After all to have a choice between 2 products is much better than just one.

 

... unless KTM introduces the high speed 400km / hour trains to these places.

[Isaac 0]

Load factor does not mean profit....... the revenue / cost per km counts; i.e. YIELD,

MH domestic services has a very low YIELD and cost is high. Amongst the key reasons are:

1 Fare - unrealistic - controlled by the government. Especially premium C - class fares , short flights like KUL - AOR / TGG / KBR and Sabah / Sarawak are much lower than EY (in some cases LCC) flights of the same distance in Europe / US.

Gotta agree with you, Ruiz.

 

2 They have "senior"/ elderly staff to take care at these stations, unlike AK, New staff , pay can be slightly lower. - Automated / self check in facilities may be a solution.

10831[/snapback]

It's not fair to compare MH with AK as it does make sence if AK staffs earn less than MH's because it's a LCC, right ? We should instead compare it with SQ, CX and TG (did you guys know flight crews at TG earn almost 50% - 70% more than MH ?)

 

3 Night stops at almost all major towns ( perhaps for connectivity reasons) additional cost for crew. - Late / Early - Departures / Arrivals may need to be reintroduced (e.g. 0545 Dep. KUL - KBR and 2330 KBR - KUL in the 1980s)

10831[/snapback]

In several destinations it's only a few hours of layover such as most domestic destinations (except BKI & KCH, night stops in BKI can last for 5 days ) and SIN. MAS no longer have night stops in all southeast asian and some Chinese/Indian cities such as BLR, CTU, MAA, CMB (sri lanka), DAC, CAN, HYD, CCU, KMG, MLE (what country is that ?) and XMN.

 

Politically and socially are good national service for MALAYSIA but  commercially it does not sound viable.

10831[/snapback]

Agree with you, Ruiz.

 

........ some cost may be in MYR; But major cost are still in USD!

1 Jet Fuel

2 Aft. Finance / leasing Charges

3 Aft. / Pax. Insurance

Exactly, but overall they still have much lower operating cost compared to SQ and CX (CX especially).

 

is there any other way to free MAS from their domestic burden?

Only one way out, i guess. Ask the government to stop controlling the domestic air fares and then try to run its domestic operation like QF

 

[Pieter C. 5]

Did AF/KL make profit for the last few quarter ?

 

Definitely !!! Last 4 quarters were profitable...

 

1st quarter for 2006 had a turnover of 5.19 billion Euros (and was profitable), and load-factor for september overall was 83.1%

 

[Sing Yew 1]

One idea,

1    PMB be the domestic operator

2    Have franchise arrangement with MH

3    Existing domestic MH staff - VSS or transferred out or sacked

4    PMB recruit new domestic staff, with lower cost - i.e. on contract basis

5    Let PMB decide on schedules, aft. types ...etc.

6A  PMB must go for smaller aft.  like CRJs / Emb  with high frequency for conectivity instead of 32x or 737NG. Another advantage - quicker turnaround.

6B  MH may choose to operate and maintain high density and demand routes themselves like KCH / BKI and PEN ( maybe JHB and KBR if there is sufficent demand). But it must be on wide - bodied jets like 787 / 332; as cost / km is lower compared to 32x 0r 737NG; Provided that the load factor is more than 80% particularly at the front end.

7    Be focussed for Business travellers, (leisure and cost minded pax. to be channel to AK); Therefore increase premium seats. i.e. Club class.

8    Keep staff - aft. ratio low and out source maintainance / catering ......everthing.

9    Keep the premium pax. happy - i.e. lounges at all stations and allow Enrich miles accurals.

10  In flight meal  for C class - keep it simple and yet good. One fine example, coffee / tea in mugs instead of cups, Cold snacks ( not just sandwiches) , pre - hot snacks only at longer flights served on tray

11  EY snacks can be distributed at boarding gates, maybe a packed juice with muffins or similar - something like what one get on LHR - AMS on BA.

 

10837[/snapback]

 

Sounds quite similar to what QF Domestic currently offers.