Malaysia Airlines (MAS) has unveiled a sweeping restructuring aimed at turning around the loss-making flag carrier, which new chief executive Idris Jala warns will “fail” without immediate change.
Idris, a long-serving executive with oil giant Shell, took over as managing director and chief executive of state-owned MAS in December after his predecessor resigned following a negative set of quarterly financial results. In unveiling his “Business Turnaround Plan” at the end of February, Idris made clear – in remarkably frank language – that he had taken over a company in serious trouble.
“Today, we have a cash and profit crisis,” Idris wrote in the restructuring document. “A real business turnaround is an imperative for MAS. The new environment will continue to hit MAS hard. The projections for 2006 look dismal. In fact, on its current business assumptions, course and speed, MAS will likely fail, running out of cash in April 2006, and reporting a 1.7 billion ringgit [$457 million] loss for 2006.”
Work has already begun on the turnaround programme, however, and cash-raising efforts have been launched with the aim being to raise 4 billion ringgit in cash “through internal and external sources to tide us through our current cash crisis”. MAS has also been working to secure new deals with employees and recently firmed up wage and productivity improvement agreements with every staff representative group.
MAS says it hopes its “base forecast loss” of 1.7 billion ringgit for the
2006 financial year can be cut to 620 million ringgit through the turnaround work. For 2007 the restructuring plan forecasts a further improvement of around 670 million ringgit, resulting in a 50 million ringgit profit, followed by a net profit of 500 million ringgit in 2008.
The carrier says it will reconfigure its route network and product portfolio and improve operational reliability to boost yield, which is below that of many of its competitors. There will also be improved financial controls and a strong focus on boosting employee productivity, which is also comparably low. MAS also suggests in the restructuring document that the Malaysian government needs to support the carrier’s turnaround efforts and not force it to operate on so many unprofitable routes. It reveals that around 60% of its international routes are unprofitable, which “means that we lack the core ‘profit engine’ that can help to fuel experimentation and expansion into new frontiers”.
Only 48 of its international routes are listed as being profitable and the other 66 unprofitable, while on the domestic front 114 out of 118 routes are unprofitable. MAS has no exposure to domestic losses, however, as its internal services are operated on behalf of the government for a fee. “In moving forward, both the government and MAS need to establish a workable mechanism to ensure that both the social objectives of the government and commercial objectives of MAS are catered for,” says the airline.
This will see Malaysian low-cost carrier AirAsia taking over some secondary domestic routes from MAS. The government has instructed the two airlines to negotiate a “rationalisation” of domestic services to help MAS return to profitability. The move would see MAS focusing on the main domestic “trunk routes”.
MAS last carried out a sweeping financial restructuring several years ago, when a government company acquired most of its aircraft and other assets and leased them back to the carrier, which was also renationalised. As part of that restructuring, profit and loss responsibility for domestic operations was taken on by the government. MAS says it may be able to take back responsibility for domestic operations from January 2007, but only if the government continues to subsidise some of the routes and allows it to operate services on a commercial basis without interference. ■
NICHOLAS IONIDES / SINGAPORE
Source: Airline Business
