A friend of mine has just purchased a round trip ticket with Malaysia airlines for travel between Thailand and Australia via Malaysia for a fraction over $US500. This trip of 7 804 km (4,849 miles) normally sits at around $1100 to $1200. A good deal is around $700. Such is the desire to get people onto their planes, that Malaysia Airlines is discounting heavily. The discounts are designed to match arch rival Air Asia and attract passengers “scared off” Malaysia Airlines after the disappearance of Flight 370 on 8th March.
The appearance of a Skytrax five star airline begging for customers by slashing fares is not a good image. For these fares are unsustainable.
First up, the airline has seen a 14 per cent increase in jet fuel costs.
Then, it has a bloated workforce that Bloomberg estimates means employees each generate less than half the amount of revenue per head than that at rival Singapore Airlines.
Competition is brutal. There are now 47 Low Cost carriers across Asia up from 30 in 2009. This is expected to reach 60 by the end of 2014. Malaysia Airlines is being further squeezed by the massive growth in Chinese carriers and the expansion by Emirates, Etihad and Qatar across the region.
The impact was announced this week: despite an 18 per cent increase in Revenue Passenger Kilometre (RPK), Malaysia Airline;s quarterly loss for March 2014 increased by 59 per cent. The loss of $US$138million marks five quarters of losses. The airline will definitely face a sixth quarter of losses at the end of June. Analysts see the deficit running for another two years. The airline has been flying in a financially troubled state for some time. Last year, Malaysia Airlines lost $US359 million. The carrier has survived largely through financial support from he Malaysian government Investment which is drying up. The Malaysian Defence Minister Hishammuddin Hussein said at a news conference last Thursday that the government has no plans to bail out Malaysia Airlines financially.
Two years ago Malaysia considered a deal with Air Asia which would have involved a share swap, co-operation in aeroplane purchases, and a reduction in competition on some routes. The deal was rejected by the MAS union.
Asset-wise, Malaysia Airlines has over 20 subsidiaries, 13 of them are fully owned by the carrier. It has a strong fleet which includes Airbus 330s and 380s, Boeing 737s and 777s.
What future does the airline have now?
Option One: Merger
Emirates, Etihad or (more politically difficult) Singapore Airlines may be interested in a merger with Malaysia Airlines. Its strong domestic network, five star Skytrax rating and fleet composition could complement the strategies of any of those carriers. Even Air Asia may be in a position to take on the national carrier, although I think this distraction from their growth strategy may not interest them.
Option Two: Firesale
The airline could sell off its profitable subsidiaries including its Airport Terminal Services division and Malaysian Aerospace Engineering. Low cost air subsidiary Firefly could be floated or merged with another carrier. The fleet could be slashed with planes leased or sold to other airlines and future orders cancelled. The airline could shrink to a fraction of its former self and survive with a handful of its current routes.
Option Three: Bankruptcy
The unthinkable is a real option. The results would be similar to the first option but airline would have less control and shareholders a lower return.
Option Four: Turn Around
A few years ago when Japan Airlines looked like it was on the ropes, they embarked on an ambitious program to turn the airline’s financial status turned around. It worked. Malaysia Airlines could do the same by:
- reducing staffing numbers significantly
- focusing on getting subsidiary MASKargo services into the black
- pruning the extensive network of 60+ cities globally
- handing some routes over to low cost subsidiary Firefly
- reducing capacity
- re-opening the 2012 Air Asia deal (if the other carrier will do it)
- using its rating as a five star carrier to focus on premium customers and business travellers instead of discounting tickets
- leveraging off its One World alliance membership to feed customers into alliance partners networks
No option is palatable. However, the airline needs to do more than unveil a new branding exercise, refreshed uniforms or even lower fares. In the midst of dealing with the on going aftermath of MH370’s disappearance, it must engage in a very real fight for its survival.
I hope my friend does get to use his $5oo discounted ticket.
3 weeks-3 questions unanswered (Mar 28)
Sun rises on a new day in Malaysia (March 8)
Malaysia Airlines Missing Plane (March 8)