Substantial Overhaul Needed To Revive Malaysia Airlines

Still reeling from two disasters within months, Malaysia plans to overhaul its national airline as its second-quarter loss nearly doubled. Experts agree substantial changes are needed to set the carrier back on track.

Malaysia Airlines (MAS) said on August 28 it posted a 305 million ringgit (97.5 million USD) loss in the April-June quarter, nearly double the net loss of 175.9 million ringgit the flag carrier registered in the same period a year earlier. However, the result was an improvement from the net loss of 443 million ringgit (140 million USD) it reported in the first quarter of 2014, following the March 8 disappearance of Flight MH370.



The struggling airline has been cutting fares on most of its routes in a bid to lure back customers. But it is too soon to say whether this strategy will be successful, analysts say. The second-quarter results come as state wealth fund Khazanah Nasional - which owns 69 percent of the Malaysia Airlines and seeks to take full ownership of MAS - said it would announce details of the overhaul of the carrier by the end of this month. Analysts expect Khazanah is likely to reduce up to a quarter of the airline's 19,500 staff, stop flying unprofitable routes to Europe and China, and replace top management.



The image of the flag carrier - known for its high quality service and good safety record - has been tainted by recent tragedies. The fate of MAS Flight MH370 has been shrouded in mystery ever since the Boeing 777 left Kuala Lumpur for Beijing in the early morning hours of March 8, with 239 people on board.



While satellite data suggest the aircraft crashed in the southern Indian Ocean, international search efforts have so far failed to provide any concrete evidence as to the fate of the plane. On July 17, 298 people were killed when MAS Flight MH17 was shot down while flying over rebel-held eastern Ukraine.



Change is 'inevitable'



For UK-based aviation safety consultant Chris Yates the plan to overhaul MAS doesn't come as a surprise and is long overdue: "Change is the inevitable consequence for an airline that has not only suffered the loss of two aircraft in the space of a few months, but has also been engaged in an uphill battle with lower cost and much leaner competitors for some time now."



Even before the disappearance of Flight MH370 the carrier had been wracking up significant losses - 1.31 billion USD in the period from 2011 to 2013 - as it faced rising competition from upstart budget carriers such as Malaysia's AirAsia. However, the financial situation became much worse in 2014. The carrier suffered a first quarter net loss of 443 million Ringgit (130 million USD) following the disappearance of MH370, its biggest loss in two years.



Yates therefore believes that Khazanah Nasional's decision to buy MAS' remaining stock from minority stakeholders has bought it the time it badly needs to carry out the restructuring. But just how deep this will go, remains to be seen. Some analysts suggest the ailing airline may run out of money in four to five months if a radical restructuring is not forthcoming.



The flag carrier



Hamburg based-aviation expert Heinrich Grossbongardt explains that having a shareholder with deep enough pockets who is not looking for short term profit and is committed to the airline for years to come is essential for stabilizing MAS. The only risk associated with many state-owned investment companies is, however, that key decisions are driven by politics and not by economic facts and business needs, the analyst told DW.



With 16 million passengers per year and a fleet of close to 100 aircraft, Malaysia Airlines - founded in 1947 - has been a mid-size player in international air traffic. According to sources, Malaysia Airlines would stop flying to some unprofitable routes in China and other places such as Frankfurt under the new restructuring plan. Mohshin Aziz, aviation analyst at the Kuala Lumpur-based Maybank Investment Bank, believes this is a necessary step: "MAS is a business after all and the main objective is to make money. Some of the routes stated have not been making money for a very long time, and it is envisioned that it probably never will make money given the extraordinary circumstances," said Aziz.



But the carrier's importance for the Southeast Asian nation goes beyond sheer numbers. As the flag carrier of the country, the airline is regarded as a symbol of national pride and an important ambassador to the world.



This why Yates is of the view that the impending changes may not be as radical as expected in certain areas: "National flag carriers exist as much to fly the flag around the world as they do to fly passengers to and from the home state. Simply hacking off the long haul route network and becoming a local and regional carrier isn't necessarily the answer." The aviation expert is of the view that prudent pruning of long haul services could yield much better results and leave the carrier in a position to serve key markets.



Low morale



It is important to point out that the double tragedies have also had a strong impact on staff members. The airline said in a statement that 186 crew had left the company in the first seven months of this year, with many citing 'family pressure'as the reason for their resignation due to the MH17 and MH370 tragedies. Twenty-seven crew members were among the 537 people killed in the two tragedies.



Aziz explains that it is quite normal for staff to resign, especially after such a double incident. "They tend to lose focus, feel depressed or simply lose the desire to work in the company. Therefore, this is to be expected said the analyst. Malaysia Airlines System Employees Union secretary general Abdul Malek Ariff was "ed by the Edge Financial newspaper as saying that some crew "are now afraid to fly." He also said crew shortages were forcing staff to work up to 12 hours a day.



There are also media reports stating that under current Chief Executive Officer (CEO) Ahmad Jauhari Yahya – whose term ends in September - staff morale has reached an all time low, with crews complaining of a lack of career advancement. "Ahmad Jauhari had worked in the power, oil and media industries prior to taking the top job at the airline and simply didn't possess the skill set necessary to drive the business forward," said Yates.



Experts argue that whoever is brought in to succeed him needs to have significant airline experience and wisdom of the ages to navigate though turbulent times. "The new man at the helm will have to at least send out a convincing message that in return for pain now benefits will be seen eventually," Yates added.



Some of those required skills will be the ability to rebuild trust and bring the workforce together behind the CEO. According to Grossbongardt, hiring a foreign expert with experience in restructuring and turning around an airline might be a good idea. "Many very successful airlines today are run by expats, just think of Emirates and Etihad for example," he says.



Impending job cuts?



Nevertheless, many of those still working for the MAS may end up losing their jobs as analysts agree that substantial cuts to the workforce are inevitable if the carrier is to survive. "Malaysia Airlines has been burdened for too long by chronic overstaffing amongst the mostly unionized workforce. The unions have previously fought off at least two other attempts to cut staff, but with the writing firmly on the wall it seems likely they will acquiesce in order to save the airline from imminent demise," said Yates.



The cargo option



Some have argued that the airline should expand its cargo business to stay afloat. However, experts are cautious and warn that the sector is extremely volatile. "It is a really difficult time to expand the cargo business, at least if this means increasing the fleet of MASkargo," said Grossbongardt.



On their passenger flights aircraft such as the Boeing 777-300ER and - in the future - Airbus A350 are capable of stowing so much cargo under their main decks that it is increasingly difficult to sell the capacity of aircraft which only transport cargo.



Alongside the exclusive express specialists such as UPS, DHL and Fedex, Emirates is the biggest cargo airline in the world. It has only 13 dedicated freighter aircraft, but a huge fleet of more than 120 Boeing 777. "Operating freighters has always been a niche in the airline market, but is becoming more and more difficult to make money in this segment," Grossbongardt added.