Khazanah Nasional’s managing director, Shahril Ridza Ridzuan opined that Malaysia faces an overcapacity issue, which is reflected in Malaysia Airlines’ persistent losses.
Khazanah Nasional’s managing director, Shahril Ridza Ridzuan opined that Malaysia faces an overcapacity issue, which is reflected in Malaysia Airlines’ persistent losses.
The country has four main carriers in a market of 30 million people, representing “roughly about” 1.7 seats for every flying passenger, he said at a parliamentary committee in April, of which the transcript was released last month.
Shahril noted that Malaysian carriers have been facing revenue pressure due to intense competition, and the airlines are pricing their tickets to cover their variable costs but not the fixed asset costs.
The influx of new aircraft deliveries by AirAsia Group and Lion Air Group over the next five years will also intensify competition in Southeast Asia.
As a result, shareholders of the main carriers will have to pump in additional capital to ensure the viability of the airlines, he says.
While Malaysia increased visitor arrivals with a more liberal air traffic policy that allows more airlines to fly into the country, this was “terrible” for local carriers as it brought a “downward” pressure on the ticket prices, he adds.
Unlike Hong Kong or Singapore, Malaysia also lacks a “high concentration of business users” and that its price-sensitive consumers prioritise the affordability of their tickets over product or convenience.
“That is why low-cost carriers have about 60% share of the market in Malaysia. We just don’t have enough business users in Malaysia for a full-service airline,” notes Shahril.
CHALLENGES AT MALAYSIA AIRLINES
The Khazanah chief says it had to undertake a MYR3.1 billion ($744 million) write-down in 2018 after the five-year recovery plan for Malaysia Airlines launched in 2014 did not work out as intended. Instead of breaking even in 2018 and attaining profitability this year, it continued to face losses.
Based on its financial data lodged with the Companies Commission of Malaysia, Malaysia Airlines narrowed its 2018 pre-tax loss to MYR777 million, from MYR808 million losses in 2017. Revenue for the year ended 31 December was broadly flat at MYR8.7 billion compared to the previous year. Loss after tax amounted to MYR792 million, improving from a MYR812 million loss in the previous year.
To keep the airline alive, this will require capital injection of over MYR1 billion each year, assuming there is no industry consolidation in the country. However, to grow its revenue base, a larger investment will have to be made, as this involves improving onboard product and expanding its route network.
While its unit cost was cut significantly, which Shahril claims is lower than that of Singapore Airlines and Thai Airways International but higher than AirAsia Group, the cuts had the unintended consequence of affecting its revenue and route network.
The Malaysian government, which owns 100% of Malaysia Airlines through Khazanah, is facing a dilemma as to whether it should continue providing money to the carrier, due to the knock-on effect the airline has on the Malaysian economy.
“What is your opportunity cost for supporting Malaysia Airlines? To be fair, every ringgit put into Malaysia Airlines may not be seen in [its] profit and loss. But you probably do see it in terms of the economy as a whole from passengers, like the taxation for government. But it is still an opportunity cost because that is a ringgit you could have invested in something else,” explains Shahril.
While Malaysia Airlines no longer needs a cost-efficient solution, it needs to find ways to improve its revenue, and there is a need for market consolidation and better capacity management in the country, he adds.
In the months following the Shahril’s parliamentary speech, both Khazanah and Malaysia Airlines’ parent company, Malaysia Aviation Group, shortlisted four entities to be the carrier’s strategic partner. Details of entities were not shared by the minister for economic affairs Azmin Ali because of non-disclosure agreements.
