When Salomon Brothers Hong Kong released a report on Malaysia Airlines in late December, it left little doubt that the airline was no gilt-edged investment opportunity. Recommending a 'hold' on the carrier's shares, which put in a weak performance during the carrier's latest financial year, the report's title says it all: 'Malaysia Airline System - a hard road to hoe'. Salomon's regional airline analyst Peter Negline blames rapid fleet expansion, which has stretched MAS' balance sheet, and slower growth for the downbeat assessment.
Sebastian Chang, research manager at Mohaiyani Research in Kuala Lumpur, has a different view, rating the airline a 'buy'. He blames fuel costs for recent disappointing results and believes these have already peaked and will not cut into profits this year. Besides, he adds, improvements made since Tan Sri Tajudin Ramli took the helm in 1994 will soon begin to pay off.
These divergent views on MAS' potential serve to underscore the uncertainty, even among experienced industry analysts, about its future. Overall, the jury is out on a carrier whose income remains modest at best.
MAS' situation sparked rumours late last year that Ramli, controlling shareholder and chairman, was on the verge of selling out. Not so, he declares, insisting his is a long term commitment and anyone who thinks otherwise is 'talking in their dreams'. Indeed, Ramli has said that he wants to increase his holding from 29 per cent to 51 per cent by mid-1999.
Patience and commitment are going to be qualities Ramli will need over the next few years. As he pushes through the most thorough reorganisation in the carrier's history, the chairman and his airline face flak from all sides. Profits have stagnated and MAS has to answer concerns about its debt, customer service standards, lack of high-yield business, and staff shortages.
Still, Ramli has upgraded the airline's management skills, cut costs and improved productivity considerably, and further gains can be expected once Kuala Lumpur's new airport opens. While new airlines pose a competitive threat, Ramli is determined to use cooperation with other carriers more aggressively than MAS has in the past.
Ramli became chairman of MAS after buying the Malaysian government's remaining 32 per cent stake for US$725 million in 1994 - his stake was diluted to 29.25 per cent after a share placement last May. He inherited a carrier whose fortunes were on the wane. Net profits plunged from $56.5 million in 1992/93 to $2.7 million the following year. They climbed back up to $102.4 million, then slipped marginally in 1995/96 to $99.8 million - 4.3 per cent of the company's $2.3 billion turnover.
MAS still appears to be struggling to achieve real profitability, although many of the measures taken by Ramli may not pay dividends for two to three years. The latest results, for the six months ending 30 September, show group revenues lifted 12.8 per cent to US$1.3 billion. But the airline company's revenue rose by a more modest 4.4 per cent to $1.1 billion and airline operating profit slipped 9.4 per cent to $46.7 million. Net profit was down 10.6 per cent to $44.8 million.
Ramli expects the second half performance to match, if not better, the first, although continuing pressure on yields is expected due to the excess capacity in the industry. And fuel prices - up to 14.6 per cent of costs in recent months from 10 per cent a year ago - will continue to take their toll.
Despite these uncertainties, MAS has committed itself to a major re-equipment programme to grow its fleet from 90 to 120 aircraft within five years. In 1996, it placed a US$4 billion order with Boeing for 15 B777s and 10 B747-400s, with options on another two B777s and three B747s. Deliveries begin in April. Ramli had also said that MAS intended to be a launch customer for the new high capacity B747-600, though Boeing has now stopped development work on it.
It is funding for all this which concerns analysts, although it doesn't seem to bother the airline's chairman. MAS is in good shape with its bankers despite being highly geared, borrowing money at only 0.58 basis points above Libor. About 70 per cent of aircraft financing will come from internally generated funds. The remainder is likely to come from a stock offer to employees, in which 77 million shares, or 10 per cent of the share capital, will be made available to the carrier's 20,000 staff. This follows last May's private share placement, which raised $200 million.
Furthermore, Ramli proposes to list MAS shares offshore, targeting bourses in Europe, the US and Asia-Pacific in an effort to lift MAS' global image. 'I can't say when I will be able to do it, although there is some work already done,' he says. 'I would not think that we would do it unless the market is ripe for us to go in. What we are doing now is all the preparatory work.'
Still, most analysts are nervous about MAS' high debt, which stood at M$7.1 billion (US$2.8 billion) last March and is forecast by Salomon to reach US$3.8 billion by 1998. They consider this to be a dangerous burden threatening future financial equilibrium. They say there isn't enough fat on the bone to guarantee debt servicing if there is a market downturn.
Ramli, refutes this. 'Based on present-day cash flow, our cash flow over three years would be sufficient to cover all our outstandings . . . If there is a 10-15 per cent downturn we will still be able to weather that without any problems,' he insists. He is quick to point out that MAS' debt: equity ratio has dropped from 1:9 in 1995 to less than 1:6 today.
Nevertheless, the carrier's chairman admits a lot of hard work is needed to get MAS back into shape and equipped to stave off the intensifying competitive onslaught. As he strives to lift the carrier's image and transform it into the global company he has in mind, Ramli faces a conundrum - how to reduce debt in the face of costly expansion while yields are declining and profits are low, and how to boost service while reducing costs.
He says the statistics speak for themselves. 'I think we have done very well. In terms of our passenger growth, the compounded growth has been more than 12 per cent the past two years and we are still growing very strongly now. On some routes we operated previously with less frequencies and we could get only a certain percentage of the market. Now we have increased the frequency and are achieving better penetration into the marketplace. We have found that our load factors have gone up.'
As new aircraft arrive from April, MAS will be concentrating on improving European services. 'We think the European sector, other than London, has yet to be completely exploited. We have not really gone deep enough into the European market. We think there are a lot more opportunities in there and we are developing that in terms of direct flights and increased frequencies,' he says.
While expanding, Ramli has to address concerns about service standards and staff shortages. At presstime officials from Malaysia's Transport Ministry were preparing to meet airline management and unions to discuss complaints about a decline in the quality of customer service, allegedly caused by a shortage of pilots and flight attendants. Transport minister Datuk Seri Dr Ling Liong Sik was to present a report on the problems to Cabinet in February.
Ramli admits there are service problems, particularly in the critical front end of the aircraft where load factors have been running around 30 per cent, compared with 70 per cent at competitors like Cathay Pacific and Singapore Airlines. 'That is very true, but it is not only the load factor we are addressing. I think it is a little bit more than that. One of the things that we started to put in place a couple of months ago is the management of our inventory, and that is now leading to a better capability for us to sell the front end, which we had not been addressing earlier on.'
On the agenda are a series of aggressive programmes aimed at raising the consistency and quality of inflight service and winning back business travellers. 'We have not been selling our high-yield product. While we continue to control costs, we are also looking at putting into place programmes to sell more front-end product, which means that even if we retain the same level of load factor, the revenue will be a lot more and profits will be bigger.'
The Malaysia Airline Pilots Association (Mapa) was due to meet during February to discuss pay structures for cockpit crew, complaining that flights are being increased without a corresponding lift in pilot numbers. MAS has about 1,000 pilots, which Mapa says is a 10-12 per cent shortfall. A Mapa official told the newspaper Berita Harian that some pilots haven't taken leave for three years. 'According to our agreement with MAS, the number of flying hours should be 80 for a 28-day period. Because of the shortage of pilots, we have been flying between 90 and 100 hours,' he claimed.
MAS' chairman suggests that real improvements won't show through until the carrier moves to Kuala Lumpur's new $3.5 billion international airport at Sepang in two years' time. Sepang, he considers, will be the 'defining moment' in the complex re-engineering programme. 'I do not say that we do not have any improvements. There are some improvements already and there will be more. But the marked improvement will come around that time, 1998 and 1999, after Sepang opens,' he predicts.
Ramli, whose flagship Technology Resources Industries (TRI) operates Malaysia's largest cellular telephone network, is not slow to suggest that management was far from up to scratch when he took over. 'We quickly recognised there were a lot of shortcomings among certain people who were supposed to be very conversant about certain specialist areas. We are helping them out by retraining them, upgrading their skills. As far as I am concerned, these are achievements already because, although it has not been translated into dollars and cents, we have already been able to identify the strengths and weaknesses of each of the individuals among some of the senior people in the company.'
That realisation led to a restructure of management and a reorganisation of the company, creating individual, core business units in areas such as engineering, catering, ground handling and cargo, to bring better control of cost and accountability.
However, MAS still can't fully benefit from these changes. 'Today, we are only achieving some of the things that we want to do. Changes in processes, changes in our cost structures can only be partially implemented. It cannot be done fully, but once we move to the new airport then you will see that the cost structure will be completely different and then the revenue structure will also be much better,' says Ramli.
Cost reduction has included a 30 per cent reduction in staff numbers, resulting in considerable improvements in productivity. Revenue per employee has jumped from US$60,400 in 1994/5 to nearly $100,700 in the last financial year, and Ramli believes this will be exceeded in 1996/7.
A key plank in improving MAS' economics will be the increasing use of information technology. Ramli sees an increasing convergence of interests between his flagship company TRI and the airline in areas such as electronic distribution. In April MAS will introduce ticketless travel on domestic routes, when passengers will be able to pay for tickets through bank automated teller machines, reducing costs associated with check-in and boarding.
Ramli says he believes in both cooperation and competition with other carriers. He wants airlines of the seven Asian nations to work together in a regional sense as well as competing against each other, to maximise the benefits of tourism and business traffic. Already boasting a host of commercial agreements, including codesharing deals with British Midland, Virgin and Ansett Australia, MAS is looking for more opportunities, particularly in North America.
While domestic operations moved into profit in 1996 for the first time in years, their performance could lift further if plans to take over regional operator Pelangi Air are finalised. That would enable MAS to hand over some of its domestic operations to Pelangi, moving them to a lower cost base.
MAS faces new competition, though. Malaysia now has a second flag carrier, Air Asia - operating under the name Pacific Eagle - which has begun services from Kuala Lumpur to Pataya, Thailand with a B737-300. Another, Asia Pacific Airlines, is also flying with Metros. These operators are far from providing major competition for MAS, but in the longer term one or both may grow into more than a minor annoyance.
MAS benefits from a strong relationship with government - which holds a golden share - and enjoys tax concessions. But Salomon Brothers suggests it may face difficulty catching up with rivals which have had longer to get their respective houses in order.
A young and expanding fleet will help MAS to improve both asset and labour productivity, while the move to Sepang will allow the carrier to re-engineer business practices and cut costs.
But the threats remain. Salomon's Negline points out that other carriers in the region, notably near neighbour Singapore Airlines, are among the most sophisticated in the world and are in excellent financial condition. In addition, MAS' global strategy will take it into even deeper waters, facing the likes of Lufthansa and British Airways which, aided by mega-alliances, will aggressively defend their markets.
Perhaps the biggest challenge facing MAS is the need to win a significantly higher share of high-yield business traffic. As Negline points out, MAS will be going head-to-head with a number of airlines already boasting widely established reputations for service excellence in their front cabins. Yet MAS must succeed in this area if it is to achieve a significant improvement in profitability.
The thoughts of Chairman RamliOn rumours he intends selling MAS
Absolutely not, otherwise why would I do all of this reorganisation? That has involved a lot of hard work, you know. I have put in a lot of effort and I suspect that within the next 12 months, when we start to move to the new airport, that will be the first time I will be able to get real results out of it.
On meeting competition
I think the figures speak for themselves . . . I think we have done very well. In terms of our passenger growth, the compounded growth has been more than 12 per cent over the past two years and we are still growing very strongly now. . . We have increased frequencies and achieved better penetration into the marketplace and our load factors have gone up.
On regional open skies
I think what we should be looking at in this region is not only competing among ourselves but cooperating among the airlines in the region. I believe in both competition and cooperation. Right now there are so many restrictions in the air service agreements among Asean countries. Whether they are business travellers or tourists, when travellers come to this region, moving from one location to another becomes quite a hassle. We want to make it a little more hassle-free for them. This can only be achieved if we work together.
On protection from local competition
We have never asked for protection . . . Since I came into this company two years ago the number of local companies, or licences issued to local companies, has reached more than 13 and some of them have started operations. Asia Pacific Airlines started to operate in November on some of the routes that we are on. Of course, they have a limited number of aircraft and they can't compete head-on, but we have never asked for protection on our international routes.
On becoming part of a major global alliance
We continue to explore this possibility, as long as it will benefit the parties concerned, because in this sort of arrangement it has got to be long term. No one party must be at the disadvantage of another. No one airline can cover the whole world single-handedly. That is why we believe there has to be cooperation. This is the principle and the very philosophy we have adopted. We will continue our search for more airline partners to work with, especially in North America.
On China
The Chinese market is a very big market. We continue to put a lot of emphasis on it, but as we say among ourselves, the market also has some difficulty and we are trying to observe that and see a pattern that should or could develop from this. In our opinion, right now it is still a rather immature market unless you have more destinations. You cannot go to just one point and say that's it. No. We have got to have multiple points in China and we are starting to get them.
On an overseas listing
Yes, as an airline we would like our name to be known not just to our customers but we would like to spread the knowledge, not only in the market but also on the stock exchange. We are still pursuing that mission. I can't say when I will be able to do it, although there is some work already done. I would not think that we would do it unless the market is ripe for us to go in. So what we are doing now is all the preparatory work.
Source: Airline Business
