MAS Case Study
CASE 10 TURNING AROUND MALAYSIA AIRLINES MARIATI NORHASHlMa* ALI SHAH HASHIMb MOHD HANIF MOHD HELMIC ABSTRACT Malaysian Airlines (MAS), a government owned airline monopoly in Malaysia, was privatised in 1994 through the sale of Bank Negara Malaysia’s 32% controlling stake to TaJudin Ramli through Naluri Berhad. MAS posted profits in the first three years after privatisation, but in 1998, amidst the Asian financial crisis, the airline faced substantial losses. MAS incurred a debt of RM9 billion, one-third of which had been due to the depreciation of the Malaysian currency.
MAS debts had been almost ntirely raised offshore.. In 2005, MAS made a loss of RMI . 3b and was not expected to meet fuel bills and operation requirements. On 1 December 2005, a new CEO, Idris Jala, was appointed into MAS. On 27 February 2006, a business turnaround plan was announced to bring MAS back into black within two years. Some of the steps taken had been controversial. The case provides data from 2003 to 2007, before and after the business turnaround plan had been announced. Students are to analyse the facts and evaluate the success of the plan.
Students are also expected to utilise financial statement analysis techniques they ave learnt and generate alternative solutions to the cash flow problem faced by MAS. Keywords: Corporation Sector, Corporate Governance, Management Introduction Idris Jala was appointed by the Government of Malaysia on 1 December 2005 to helm Malaysia Airlines (MAS) as its new Chief Executive Officer (CEO). His first order of the day was to resolve issues affecting the company’s cash flow to enable it to meet its fuel bills and operation requirements by April 2006.
On 27 February 2006, a business turnaround plan (BTPI) was a Faculty of Management, Multimedia University Corresponding author: E-mail: mariati. [email protected] edu. my, Phone: 603-8312 5770 b A member of the Malaysian Institute of Accountants (WA) and a Certified Practising Accountant of the CPA (Australia). Bank Rakyat School of Business and Entrepreneurship, Universiti Tun Abdul Razak * Jala’s measures had been controversial; for e. g. , on 22 December 2005, the Senators Clubl made an issue of the proposed sale of the building housing MAS Headquarters in Jalan Raja Chulan; Idris Jala went on to proceed with his plant.
The building was finally sold in 2006 to Perbadanan Nasional Bhd (PNB), another government linked company (GLC) at a price of RM130 million. By the end of 2008, MAS posted profits for two years in a row amidst the volatility in fuel prices and the global economic crisis at that time. Idris Jala was appointed Minister in the Prime Minister’s Department” on 27 August 2009. Many saw this appointment as a promotion of sorts because he left MAS to take up a senator’s post and Joined the Malaysian Government’s cabinet helmed by Dato’ Seri Mohd NaJib Tun Abdul Razak.
Meanwhile, the public grew concern with the future of MAS. The issue seemed critical as MAS reported losses for the first and third quarters of 2009iii. Analysts and the public alike wondered whether Idris Jala id indeed turn around MAS during his tenure. In 2005, MAS reported a loss of RMI . 3b. There had been concerns that MAS would not be able to meet its fuel bills and operation requirements by April 2006. On 6 July 2006, the previous CEO of MAS, TaJuddin Ramli, in his statement of countersuit of RMI 3. 6 billioniv had alleged that he was at all times required to report and abide by the decisions of the Government of Malaysia (60M) on all material matters, including but not limited to matters concerning the re-branding, livery, disposal of assets, restructuring of human resources, routes policies (both nternational and domestic) as well as its investments. Idris Jala did admit in his Business Turnaround Plan 1 (BTP 1) that MAS was constrained from freely changing destinations, routes and pricing within its domestic sector.
And even though there were no explicit constraints on the international routes, MAS might not at that time had full flexibility to make changes to destinations, schedules or pricing. Nevertheless, he managed to announce a drastic restructuring of human resources by proposing a Mutual Separation Scheme (MSS). He also announced a restructuring of routes for MAS. Market was amazed at how he managed to put forward such a proposal in spite of the ‘so-called’ restrictions and constraints. He was quoted as saying “l had to put the truth on the table.
People want the facts, I told the staff that if we didn’t change, by April there would be no money for salaries and fuel. We could not cure this with Panadol, we needed surgery. “v Senators are members of the Dewan Negara (Malay for Senate, literally National Hall) is the upper house of the Parliament of Malaysia 2 Business Turnaround Plan 1: BTP 1 (2006-2008) On 27 February 2006, MAS unveiled the first Business Turnaround Plan which o address at both firm and industry levels. The document subsequently outlined the steps needed to address them, namely: 1 . There had been a slowing of growth in its Global Revenue Passenger Kilometre (RPK).
With increasing capacity with new aircrafts and players coming into the market throughout the airline industry and rising factor costs, there was stiffer competition and lesser ability to increase prices due to a fear of losing market demand. 2. The BTP! Reported that observations from the European and US markets showed that Winners [would] make dramatic staff cuts fuelled by massive increases in labour roductivity where ‘lean manufacturing techniques in areas such as maintenance had allowed airlines to increase unit productivity by over 30% by redesigning how basic tasks [were] done. The BTPI called for the alteration of the mix of full-time, part-time and temporary employees. In addition, the plan sought to revise the automation of non-value activities such as check-ins and the outsourcing of non-core activities such as maintenance and call centres. 3. The company’s product design needed to be rethought, where investments would no longer centre around a customer’s wants or network structures based on a ustomer’s fancy, but rather around services and network structures that were profitable. 4.
MAS would be in competition with the US, European and Australasian carriers with their lower cost structures, leaner processes and faster decision cycles. It was concerned that these would prove to be greater competitors particularly when there were more open skies agreements2 with multi-national bargaining units3 5. Because of the gradual expansion of markets and increase in investments in the air travel industry, it gave birth to intense low-cost competition (e. g. Air Asia, Tiger Airways) at the regional level.
Open skies is an international policy concept which calls for the liberalization of rules and regulations on international aviation industry most specially commercial aviation 3 Multilateral air services agreement allows the airlines of both states to launch commercial flights that covers the transport of passengers and cargoes of multiple countries. The contracting parties may include a group of companies or countries. The airlines of the contracting parties bargains for the rights to bring or pick up passengers and cargoes to a host or a third country in which the contracting states as existing open skies agreement. . The rising costs of maintenance due to ageing of aircrafts and the need to reinvest in new aircrafts was a burdening factor. 7. Pricing power was poor due to weaknesses in its pricing and revenue management, sales and distribution, brand presence in foreign markets, and alliance base. 8. The current, and future, fleet and product lines were poorly matched to MAS’ relatively small and yet its routes predominantly engaged some of the largest aircrafts in its class. Idris Jala had been forthright in his analysis. He saidvi that, in 2005, 60% of MAS routes had been unprofitable.
He provided the example of the Kuala Lumpur-Manchester route which he had claimed to be so dysfunctional that it had to be 140% capacity-full to break even. He concluded that it had not been Just about filling seats. It had been about pricing them properly to maximise “yield” (profits). Yield was defined as Revenue per Revenue Passenger Kilometre (RRPK). It was a measure of the volume of passengers carried by an airline i. e. a revenue passenger-kilometre is flown when a revenue passenger is carried over one kilometre. assenger who was transported by an airline for which the airline would receive ommercial remuneration was called a revenue passenger. This excluded passengers travelling under fares available only to airline employees and, babies and children, who do not have a seat of their own. The RPK of an airline was the sum of the products obtained by multiplying the number of revenue passengers carried on each flight stage by stage distance – it was the total number of kilometres travelled by all passengersvii.
Among the actions taken by the management to turn around MAS under BTPI: 1 . Idris Jala instituted an austerity drive where a Mutual Separation Scheme (MSS) aimed to ‘right-size’ the staff . Steps were taken to tackle the problem of low yield. In 2006, with the consent of the Government, MAS increased domestic prices for the first time in 13 years, implemented an Administration Fee (RM14 per person) as practiced by Air Asia (its competitor), and pursued cost reduction programmes. 3.
Major cost reductions were made for fuel consumption, manpower, inflight services, and maintenance, enabling the achievement of an identified profit target in 2007, a year earlier than planned. Idris Jala stated that when “we cut that (turnaround time) by five minutes, MAS can free one whole 737 for flights”. He also aid that “when passengers are a “no show’ half an hour before take-off, some aircraft fuel is sucked out to save weight (a lighter plane is 4 cheaper to fly)”. Full meal trays had been replaced with meal boxes, as they were easier to handle, thus saving on time and staff strength. . MAS sold its Headquarters building in Kuala Lumpur to PNB for RM130 million. It later moved its headquarters to Subang. 5. One of the major BTPI steps was to improve MAS’ network. Idris Jala noted that MAS had made the grievous “strategic mistake” in not Joining a global airline alliance, the way Thai Airways and SIA had done. His solution became one to change MAS’ strategy from a ‘point to point’ carrier to a ‘hub and spoke’ strategy. To do this, MAS (Southern Europe), Virgin Blue (Australia) and South African Airways (SAA) had done.
This “hub and spoke” strategy allowed alliance partners to “feed” passengers to MAS regional hubs such as Amsterdam and Johannesburg, thus saving MAS from spreading itself too thin flying all over. MAS subsequently pursued code-sharing agreements with other airlines, specifically, KLM for North Europe, Alitalia for South Europe, Virgin Blue for Australia, South African Airways for Africa, China Southern Airlines for China. MAS signed up 25 code-share partnerships to expand its network and reduce the cost of flying into destinations with low-load factors. . On 17 March 2007, MAS launched its new low-cost community airline, Firefly. Firefly commenced operations with 2 Fokker 50 aircrafts from its Penang base on 3 April 2008 to four domestic (Langkawi, Kota Bahru, Kuala Terengganu and Kuantan) and two regional (Phuket and Koh Samul) destinations. For the rest of 2008, the Malaysian Government gave approval for Firefly to operate a total of 32 domestic and 41 regional routes from our hubs, namely, Penang, Subang (Kuala Lumpur), Johor Bahru and Kota Kinabalu.
Firefly went on to add an additional Fokker 50 to its fleet in December 2007 to operate another four domestic destinations (Penang, Langkawi, Kota Bahru and Kuala Terengganu) from Subang. 7. MASWings, Malaysia’s first commuter airline, was officially launched on 1 October 2007. Serving a network of 22 destinations with 660 weekly flights, MASWings was to cater to the air travel needs of Sabah and Sarawak’s traveling population. Business Turnaround Plan 2 – BTP 2 (2008-2012) A second Business Turnaround Plan (BTP2) was launched on 1 February 2008. BTP2 was to cover the period of 2008 to 2012. MAS aimed to increase its profit by 50% to RMI . bil by 2013. Again, the MAS management team had identified several trends that continued to erode profits such as capacity additions in 2009, Airbus and Boeing, the world’s major aircraft manufacturers, recording the highest ever orders, the continuing popularity of low-cost 5 competitors such as AirasiaX and Jetstar, which had begun to corner the Malaysia- Australian route, the ever-increasing fuel costs, the rise in public scrutiny on environmental issues, which subsequently forced airlines to reserve costs for ompliance with environmental standards, and the 2008-2009 global economic crisis.
The increase in liberalisation by Asian governments via their aviation policies meant that the traditionally highly-regulated Asian aviation industry could be open to foreign players, thus intensifying the competition. The BTP2 strategy was known as the Five Star Value Carrier (FSVC), which aimed at targeting customers who did not choose carriers based on price alone. This brought MAS out of direct competition with low-cost carriers. Its marketing approach was to be brand and customer loyalty- riven. The focus changed from being “business-focused” to “leisure-focused and business-interested”.
The pricing changed from being “fixed price standard packages” to “affordable standard packages with fees for optional services”. MAS also reduce the size of premium cabins in order to lower costs per seat while maintaining a threshold comfort level. In terms of operations, the BTP2 outlined a plan to tailor MAS’ procurement at the right cost-value trade-off. The BTP2 stated that “suppliers who subscribe to MAS’ aspiration would stand to benefit from our business growth nd remain our preferred partners”. MAS also aimed to maximise aircraft utilisation through efforts, such as reducing turnaround time, thereby increasing capacity.
This was expected to be achieved by freeing up aircrafts for more flights. MAS committed itself on productivity improvements through “precise, low error operations i. e. better on-time arrivals, fewer lost bags and also in customer experience, i. e. shorter queues, greater consistency’, in its effort to eliminate wastage, variability and error. Idris Jala claimed that efforts to improve aircraft turnaround time by five minutes, nd the introduction of meal boxes, could bring in RM50 million in additional revenue annually for MAS.
Among the challenges faced by MAS during the launch of BTP2 was the rise of fuel prices. MAS identified its fuel strategy in BTP2 (see Figure 1) to manage volatile fuel prices. In the first quarter of 2009, MAS reported a loss of RM695 million. This was followed by a profit in the second quarter of RM876 million. However, in MAS’ third quarter of 2009 report, while oil prices had begun to stabilise (Figure 2), the company reported another loss. The bulk of the RM299. 6 million net oss comprised of a derivative loss of RM202 million. A pre-tax loss of RM297. million, compared to a pre-tax profit of RM19. 7 million in the same quarter for 2008, had been incurred, while its corresponding turnover dropped to RM2. 96 billion from RM4. 1 billion. As of 30 September 2009, MAS’ cash and negotiable deposit balances stood at RM2. 5 billion. 6 Conclusion High hopes had been placed for the turnaround of MAS as the national flagship air carrier. A successful turnaround would be one that would turn MAS into an independent and profitable entity. Its image as the government baby should no onger exist to enable it to embrace privatisation wholly and without exception.
The Malaysian public was becoming increasingly critical of anything seen as wastage of public funds and a display of bureaucratic inefficiency. The changes in the Malaysian political landscape created an impetus for national privatization efforts to be transparently more efficient and free of political interference. However, MAS has yet to shed public’s expectations that it must continue to serve national needs and that include servicing unprofitable routes and yet providing excellent service at low cost.
The question remains as to whether, with the departure of Idris Jala, MAS can continue on the positive trend that he had started or whether the losses reported around the time of his departure is a portent of things to come. Has MAS truly turned around, or was it Just a flash in a pan? REFERENCES Victoria C. P. Chen, Dirk G??nther and Ellis L. (2003) Solving for an Optimal Airline Yield Management Policy via Statistical Learning. Johnson Journal of the Royal Statistical Society. Series C (Applied Statistics), Vol. 52, NO. 1, pp. 19-30 Doganis, R. The Airlines Business in the 21st century. Routeledge London. 01, Retrieved from http://www. panam. org/newhistl . asp. Spinetta, 2000, quoted in Doganis, 2002 quoted in the following: aviationexplorer. com/airline_industry_overview. htm http://www. aviationexplorer. com/airline_industry_overview. htm. http:// www. aviationexplorer. com/airline_industry_overview. htm. The Guardian Newspaper (4 December 2009) Exploring airline opportunities through code share pact. Exane SA at www. exanebnpparibas-equities. com. 7 Figure 1 MAS’s Fuel Strategy under BTP2 8 Figure 2: Crude Oil Spot Prices and Crude Oil Estimated Contract Prices Source: http://tonto. eia. doe. v/oog/info/twip/twip_crude. html Table 1: MAS’ Financial Position And Performance OPERATING STATISTICS Available Tonne Kilometres Load Tonne Overall Load Factor Available Seat Passenger Kilometres Flown Passenger Load Aircraft Utilisation (Average) 2008 2006 2005 2004 2003 Million 6815. 3 7,494. 6 7,674. 8 6,326. 7 8,127. 9 6,781. 8 4,723. 3 5,066. 2 5,229. 1 4,422. 4 5,442. 0 4,664. 8 69. 3 67. 6 68. 1 69. 9 68. 8 52,868. 0 56,104. 3 58,923. 7 49,786. 0 64,115. 2 55,692. 4 35868. 4 40,096. 0 41,099. 6 35,604. 8 44,226. 1 37,652. 9 67. 8 71 . 5 69. 8 69. 0 Hours per day 11. 1 11. 5 10. 8 10. 7 10. 0. 1 9 Table 2: MAS Group Financial Statements Income Statement Continuing Operations Operating Revenue Operating Expenditure Other operating income Residual income from sale of aircraft by Penerbangan Malaysia Bhd Gain on sale of properties Profit/(loss) on operations Finance costs Compensation for domestic rationalisation Domestic rationalisation expenses and redundancy expenses Exceptional items Share of results of associated companies Profit/(loss) before taxation Taxation Profit/(loss) for the year from continuing operations Discontinued Operations Profit/(loss) for the year – Income Statement