Over the last two weeks, we have had so much news about airlines. They include the crash of the Ethiopian Airlines’ Boeing 737, Cathay Pacific announcing its results on its latest turnaround plan and Prime Minister Tun Dr Mahathir Mohamad’s announcement on the possible closure of Malaysia Airlines Bhd (MAS).
Cathay Pacific has announced its latest financial results for 2018, with the airline making a profit of 2.1% on a sales revenue of HK$111bil. In only its second year of a three-year turnaround plan, it has reversed its losses incurred in 2017. Net profit margins are thin, though, almost like the hypermarket retail business.
Meanwhile, back home, AirAsia X Bhd has been incurring losses for five consecutive quarters. AirAsia Group Bhd, however, turned in a profit for its full-year 2018 despite incurring a loss in the last quarter of 2018.
The airline business is notoriously tough, with high capital expenditure (capex) , volatile fuel prices and stiff competition driving down ticket prices. Airline operators need to drive down CASK – cost per available seat km – while at the same time driving up RASK –revenue per available seat km. Operating profit can only be achieved if RASK is higher than CASK. Simple as that.
Low-cost carriers (LCCs) like AirAsia survive because they keep CASK down as low as possible by filling up the seats on every flight ( high load factor). That is only possible by selling the seats at prices low enough to attract more passengers to fill up the seats. Even if RASK equals CASK, the airline would still make a profit from ancillary income, through the sale of food, beverages and baggage space.
While LCCs are set up with lean operational costs, full-service carriers (FSCs) have legacy issues of high operational costs built up over the years. FSCs like MAS, Cathay Pacific and Singapore Airlines have a higher CASK and thus a higher RASK, as they have to sell tickets at a higher price due to the full service provided.
MAS has been fully owned by Khazanah Nasional Bhd since December 2004. To understand what Dr Mahathir as chairman of Khazanah has said about the unknown fate of MAS, one must go back to the day when a series of unfortunate events affecting MAS started.
Back in 1994, Dr Mahathir approved the sale of a controlling stake (29%) in MAS to businessman Tan Sri Tajuddin Ramli (Naluri Bhd) at RM8 a share. MAS was reported to have a cash hoard of RM600mil at that time.
hen the Finance Ministry (MoF) bought back the same stake in February 2001, it was reported that MAS had accumulated RM9.4bil in losses.
Despite the huge losses, MoF still paid Naluri RM8 a share. That was the first major bailout of MAS by the government.
The second period of losses for MAS was from 2001 till June 2014 where the accumulated losses came up to RM8.4bil. During the same period, the government and Khazanah extended an additional RM9bil via Penerbangan Malaysia Bhd (PMB), which took over aircraft assets and liabilities, loans, redeemable convertible preference shares, rights issues, sukuk bonds etc. The total funding came up to RM17.4bil.The third episode was from August 2014 to 2018 when Khazanah announced the MAS recovery plan, where subsequently another RM6bil was spent on the airline and lost. From 1994 to 2018, a total of RM32.8bil had been spent on bailing out MAS over 24 years, or an average loss of RM1.38bil a year.
So, should Khazanah divest MAS from its portfolio of investments? Divestment could mean selling MAS, selling PMB with its assets and liabilities or closing down MAS if there are no buyers and selling off its assets and paying off its liabilities. Both exercises could cost Khazanah a few more billion ringgit. The last option is to launch another turnaround plan, pump in another RM6bil and restore national pride that we have kept our national airline flying again. Looking at the burn rate of RM1.38bil a year, this RM6bil might just last another four years and four months. Then what?
Then, there is the sensitive issue of MAS’ 14,000 employees. I am sure the government will be able to find places for these employees, or Khazanah can find them employment in their many GLCs. Just leave the unions behind.
Khazanah should divest because the airline business is not sexy anymore. High capex, low margins and low-cost competitors all around. Investing further would be like good money going after bad.
What price to pay for national pride? RM1.38bil a year can do wonders for our economy. Bringing in tourists is the job of the Tourism Ministry. There are sufficient airlines with spare seating capacity.
The current management team seems to be clueless as to any other turnaround strategies, missing all the conditions set by Khazanah. Khazanah perhaps has set too high a CASK and RASK target for MAS to reach.
MAS has always been subjected to political interference to the point that no capable manager can operate on their own. Old habits die hard.
Dr Mahathir was in some ways responsible for the sale of MAS shares to Naluri. He was the prime minister at that time. His decision led to the series of bad fortune caused by poor management. So, it is his karma that as the chairman of Khazanah, he now has to decide on closing down our once iconic airline.
I hope his decision will be the first of many that will move the government away from managing businesses, as otherwise, we will continue to hear about billions of excuses for mismanagement for the next 44 years.