Collision avoidance

“Around about the end of 2005 we had a look at the cash position, and we realised we had only enough cash for four months,” Malaysia Airlines’s chief financial officer Tengku Azmil, who joined the airline at the same time as Jala, told Australian Aviation.

“Basically, we would run out of cash by the end of 2006. ” One of the key issues was although MAS offered a premium product which customers were happy with, yields had been eroded due to competition with other carriers, particularly AirAsia. “Our yield was much lower than most other airlines,” explained Azmil. “In 2005 our yield was 20 sen per RPK (8. 4c/RPK), and our competitors were doing anything between 22-32 sen per RPK (9-13c/RPK). ” Azmil says another problem was with the airline’s network. “We had a very inefficient network. We were flying to too many destinations with too few frequencies. We were not dominating any of the particular markets we were flying to, and so we could not become a market leader. ” In order to address these problems, Jala launched a Business Turnaround Plan (BTP) in February 2006, which aimed to pull the airline out of its poor position. In many ways, it was the last roll of the dice for the airline, as without dramatic change it was facing certain bankruptcy.

Under the BTP, Malaysia’s management took a number of steps to fix up the airline’s balance sheet, including selling assets such as its headquarters, embarking on a network redesign, and cutting costs in as many ways as it could.

Interestingly, one of the major changes the carrier made was to give over a number of domestic services to its rival AirAsia and its affiliate Fly Asian Xpress, which took over a number of MAS’s Fokker 50 and DHC-6 Twin Otter turboprops.

At the same time, the airline made some major investments in its product by fitting new seats and on-demand inflight entertainment to the business class cabins of its Boeing 747s and 777s used on long haul flights.

Although it was initially expected to take three years to turn the company around to profitability, this was achieved in 2007 when the airline made a record profit of MYR610m (A$256m).

While the result was most encouraging, the airline’s management team was also acutely aware that the strong market conditions which had helped the carrier achieve its record profit would not last forever.

“We have been saying since early 2007 that there was going to be a car crash some time soon, and we started having conversations with other airlines about this,” Azmil said. “Most airlines in Asia Pacific felt we were being too pessimistic.

I think with the benefit of hindsight we were not pessimistic enough. ” This prompted Jala and his team to embark on a new Business Transformation Plan, known colloquially as ‘BTP 2’ and aimed at making further productivity gains to ultimately shift Malaysia into a more sustainable position which will allow it to weather the expected poor conditions.

As part of this, MAS has shifted its positioning to be a “five star value carrier”, which Azmil says is about being able to deliver a strong product while also being able to offer competitive fares. “We want to lower costs, offer more competitive fares to get more customers and revenue, and then grow the network and build capacity. ” Given that MAS is facing increasing competition in its home market from both AirAsia and its long haul sister carrier, AirAsia X, being able to offer sustainable yet cheap fares is no small task – especially while still offering a quality onboard experience.

According to Azmil this has been achievable, but has required a little more analysis of customer trends to identify those parts of the product which are valuphotoable to customers while also reducing the carrier’s costs.

Azmil nominated catering on a typical flight from Kuala Lumpur to a Chinese destination as an example, and explained that research by the airline found that its high cost lamb biriyani meal was not satisfying the customers, but a lower cost option such as chicken and noodles or satay would gain greater satisfaction.

However, instead of trying to standardise on lower cost meals, Azmil says that the airline realised that with the diversity of its network and its customers, it would not satisfy all the customers on all routes.

“You have to be very granular in how you apply that methodology because you have to do this survey destination by destination, and that’s why not many airlines do it,” said Azmil. “When you get a lot more granular, you can find opportunities to both improve service and reduce cost. ” At the same time, the product has not been compromised, and Skytrax has recently re-certified MAS as one of only six five star airlines.

MAS has also recently launched a number of fare initiatives aimed at delivering more price value to passengers. One of these included offering a number of seats on some domestic flights for only the costs of taxes and charges for those passengers who booked more than a month from the date of travel, and only through the airline’s website.

Azmil explained that this initiative came about after some analysis of the booking trends on these routes, which found that most Malaysians book flights during their month of travel. This meant that there was an opportunity to offer the free seats for those booking more than a month out while still maintaining its yield for those booking closer to their flights.

The results of the initial experiment with this were both encouraging and surprising, explains Azmil. “The response to that has been amazing. We said you only book on the internet, so our internet bookings went up by 250 per cent, our revenues on those flights went up by 150 per cent and we had 75 per cent extra seats sold. ” In October, MAS also introduced its ‘Everyday Low Fares’ initiative, under which it is offering low, all inclusive fares on a number of routes, including many to points in Australia.

This initiative seems to be aimed squarely at offering fares which are both transparent and competitive with those being offered by AirAsia X, but also bears the risk that MAS will still be seen by consumers as a more expensive option.

“I think it will be a very interesting campaign,” said Azmil. “When we started our everyday low fares, our friend at the low cost carrier started jumping up and down a lot. It’ll be interesting to see how they respond. ”

Fleet

The first stages of fleet replacement have already begun, but according to Azmil the airline is not expecting to make any wholesale changes in the next three years due to the expected economic downturn.

The biggest change will be in the airline’s narrowbody fleet which will see its Boeing 737-400s used on domestic and regional routes replaced with 35 737-800s currently on order and due for delivery from late 2010.

MAS also holds an order for six Airbus A380s, which it recently deferred delivery on until 2011. Azmil says that the airline will decide later this year on the product features for the A380 and the seating densities, and it has been listening closely to feedback on Singapore Airlines’s product.

Azmil explains that the airline will initially use the A380s on slot constrained routes, with London/Heathrow the key market.

“We fly twice a day currently, and even today constantly get complaints that people can’t get seats,” he said, while also nominating Sydney as another candidate due to the strong traffic on the kangaroo route.

Unlike other airlines around the world, MAS enjoys the benefits of having a relatively young fleet of widebody aircraft, comprising 17 Boeing 777-200ERs, 11 Airbus A330-300s, three A330-200s and 11 747-400s.

Nevertheless, Azmil admits that the airline has been studying the Boeing 787 and Airbus A350 XWB. “Our plan was that we were going to make a decision on a widebody at the end of this year,” he said. “I can categorically say we’re not going to do that given what is happening now. ”

Wings & Fireflies

As part of its turnaround plan, MAS has now established two regional airlines which will be growth vehicles for the company – Firefly and MASWings.

Firefly started operations in 2007, initially with a fleet of four Fokker 50 turboprops which are now being replaced with 10 new ATR 72-500s, the first two of which arrived in August. Its initial route network saw it operate from hubs at the former international airports at Subang

“Around about the end of 2005 we had a look at the cash position, and we realised we had only enough cash for four months. ”

and Penang to destinations in Malaysia and southern Thailand. More recently, it has expanded to include Medan, Pekanbaru and Banda Aceh in Indonesia.

Positioned as a ‘community airline’, Firefly is aimed at offering low fares on a number of regional routes, both in Malaysia and the wider Malaysia-Thailand-Indonesia ‘growth triangle. ’ MAS hopes to expand Firefly to operate to a number of secondary cities once route rights within ASEAN become more liberalised.

The other regional airline which started in October 2007 is MASWings, which has taken over operating the publicly subsidised routes in East Malaysia after Fly Asian Xpress dropped them in favour of growing the AirAsia X operation.

MASWings initially also operated Fokker 50s and DHC-6-300 Twin Otters, but is phasing out the Fokkers in favour of new ATR 72s, the first of which arrived in October. “A lot of our passengers really like the ATRs that are coming in,” said Azmil.

The purchase of these new ATRs has also opened up some interesting ventures, with MAS committing to opening a new joint venture training centre with ATR at Subang. MAS’s Engineering and Maintenance operation will also perform third party maintenance at Subang for the ATR range.

Engineering & Maintenance

One of the major growth areas targeted as part of MAS’s BTP is with its Engineering and Maintenance (E&M) operations.

MAS E&M has long had an established reputation as a leading maintenance, repair and overhaul company in the region, and counts a number of major airlines among its customers, including All Nippon Airlines, Air Logistics, and a number of other airlines and lessors.

E&M operates from both Kuala Lumpur International Airport and the old international airport at Subang, and offers a full range of aircraft checks right up to D checks on a range of types, as well as component overhaul, non destructive testing and other services.

E&M also has the capability to carry out Boeing 737 Classic freighter conversions in cooperation with Pemco, which holds the supplemental type certificate, but has yet to conduct such a conversion.

In January, Qantas announced that it was setting up a joint venture with MAS which would see its overflow work on aircraft from Australia worked on in Malaysia. The joint venture company will have its own management and will also seek third party work which will initially be done as its existing facilities at Kuala Lumpur International Airport.

According to MAS E&M director Roslan Ismail, this arrangement has many benefits. “It’s a win-win situation for MAS and also Qantas,” he said. “If they have a joint venture, at least whatever they pay, a certain percentage will come back to them. ” It is also intended that the joint venture company will also seek third party work.

“I’m very excited about this because of Qantas’s excellent reputation,” said Ismail. “The safety record of Qantas, with our skill and competitive rates, it will be a good product. ” While the joint venture will be run separately to MAS’s existing E&M, Ismail says that it will benefit from some of MAS’s current overflow work. “I have 34 aircraft lining up. If I had the JV up and running now, I could push aircraft onto it,” he said.

However, there has been a public perception in Australia that the standard of maintenance carried out by MAS has been below par after a Qantas 737-400 was reported to have been found to have a number of defects after completing a heavy maintenance check.

That drew a strong response from MAS’s management, with Jala issuing a statement in July refuting some of the claims, while Ismail also noted that all work done on the aircraft was done under the supervision of Qantas engineers.

As well as the Qantas joint venture, Ismail says that MAS has also recently set up a joint venture with the Rajiv Ghandi International Airport in Hyderabad, India, and will service the needs of the growing Indian airline industry. “We are providing training to their engineers in Malaysia now.

More than 70 of them are being trained by us and hopefully by the fourth quarter of next year, this MRO would be up and running in India,” he said.

Tough Year Ahead

Like other Asian airlines, MAS is bracing for a downturn brought about by lower levels of economic activity and overcapacity in the region.

So far, the airline has managed to weather the chaos of the fuel price spike and has remained profitable. “We think we’ve done quite well in a very tough environment,” said Azmil. “For the first half of the year, we made R160m (A$67m) against a background when most airlines in the world have been losing money. We’re making less money than we did last year, but I think there are very few airlines that are making money in a very tough environment this year. ” MAS has already taken the first steps to address the situation, announcing in June that it would cut its capacity by 6. 4 per cent by the end of the year, while Jala has recently warned that there could be further capacity cuts if demand slows.

As well as the capacity cuts, MAS is continuing its cost cutting initiatives under BTP2. “Our target for 2008 is to take out about MYR1bn (A$420m) of costs this year,” said Azmil. “We are on track.

Whether we actually hit that or not is difficult to say at this point. ” As well as the difficulty in the marketplace, MAS may also have to deal with internal changes, with Jala’s contract set to expire before the end of the year. As of late October, MAS would only say that Jala has been in negotiations with the airline’s parent company Khazanah Nasional Berhad, but there are no indications that he will leave the airline.

In any case, Azmil says that the airline will still be looking for opportunities over the next 12 months. “Every crisis is an opportunity, and we think we are in a decent position to take advantage of the opportunities that will come up in the next year or two,” he said. “It will be tough for us as it will be for everyone else, but we think we are better prepared than a lot of other airlines. ”

“It’s a win-win situation for MAS and also Qantas. If they have a joint maintenance venture, at least whatever they pay, a certain percentage will come back to them. ”