Fernandes takes state role

Malaysia's airline industry is undergoing a revolution after the government called a truce between the country's two main carriers and stopped the competition between them developing into a bloodbath.

National investment company Khazanah, majority owner of flag carrier Malaysia Airlines, agreed to buy a 10% stake in low-cost carrier AirAsia from its majority shareholder Tune Air, as part of a cross-share swap. It also plans to buy a 10% stake in AirAsia X, the long-haul, low-cost associate.

Tune Air acquired a 20% stake in MAS from Khazanah as part of the deal, while its founder and chief executive Tony Fernandes and his deputy Kamarudin Meranun joined the full-service carrier's board. One casualty is MAS managing director Azmil Zahruddin, who pressed on with his predecessor Idris Jala's efforts to turn around the airline. However, he has now left his position to rejoin Khazanah.

On Zahruddin's watch, under MAS's Business Turnaround Plan, the airline was gearing up to take on AirAsia full-on in the low-cost segment through its subsidiary Firefly. That, however, will stop with this cross-share swap and Firefly will focus on the full-service regional market.

"Broadly, the collaboration agreement enables MAS, AirAsia and AirAsia X to respectively focus on business segments in which they are capable of developing the most value," Khazanah says. The airlines also aim to co-operate in areas such as aircraft purchasing, engineering and ground support, cargo, catering and training services.

"We believe that the joint collaboration will help MAS focus on our strengths in our core markets and work towards deriving higher loads and more-efficient resource utilisation," MAS chairman Md Nor Yusof says.

Fernandes adds: "By focusing on core competencies, it will enable both parties to increase product offerings to our respective customers. AirAsia and AirAsia X see growth opportunities in new routes and destinations. Our business model requires us to continue to reduce prices in order to increase volumes for consumers in the low-cost travel segment, which we can now focus on in a more significant way."

Until a new managing director is found a committee, that includes Fernandes, will be responsible for running MAS. This move effectively brings the years of bitter rivalry between the airlines to an end.

MAS has, over the years, been beset by government intervention in its network, high operating costs, poor decisions on fuel hedges and old aircraft.

It has been renewing its fleet with a slew of Boeing 737s and Airbus A330s and the A380.

However, its cash position has been hindered by its low profitability. In that context, observers say, a wiser decision would have been to leave the low-cost segment to AirAsia and concentrate on the rejuvenation of its full-service business.

Royal Bank of Scotland, in a report, says the deal would benefit both airlines.

"We see room for yields of both airlines to improve as the rivalry subsides and an optimised route network (reduced duplication: management has cited 57 overlapping routes) should further enhance profitability," it says.

"Also, MAS and AirAsia could be better placed to compete with their regional peers through the collaboration."

The bank, however, believes the deal could end up benefiting MAS more than AirAsia, for various reasons.

It worries the AirAsia founders' loyalty will be split between the two carriers, especially with their stake in MAS, resulting in a risk that executive decisions may not always be in the interest of the low-cost carrier.

In addition, AirAsia's competitive edge could be "watered down" if it shares the benefits of its lean operations with MAS.

There is also the question of how competitive MAS and AirAsia would be as a partnership against other carriers in the region.

Singapore Airlines, for example, is starting up its own long-haul, low-cost airline next year, while Qantas subsidiary Jetstar and its Singapore-based associate Jetstar Asia plan to expand their operations in the region.

Questions remain on whether MAS will be able to take on the likes of SIA and if it really can co-operate with AirAsia.

"We do not rate MAS service standards in the same league as, say, Singapore Airlines or Cathay Pacific. In other words, we do not believe that MAS's service quality is highly rated enough by the travelling public that it would pay a significant fare premium to what low-cost carriers such as AirAsia charge. We therefore believe that the two airlines will continue to compete for a significant overlap of the customer pool after this deal is consummated," the RBS report says.

Source: Airline Business