Doubts Remain On Malaysia Airlines' Future

March 8, 2016

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Two years after two air crashes that left its brand in tatters, Malaysia Airlines is still a company in limbo.

The loss of two Boeing 777s just months apart in 2014 triggered a much needed state bailout for the already loss-making carrier. It cut a third of its staff, grounded its Boeing 777-200s and scrapped its less profitable long-haul routes.

As a result of those efforts - and low oil prices - the group says it will reach its target to turn a profit in 2018, the same year its German boss, Christoph Mueller, ends a three-year contract.

But some analysts and executives question a bet on a narrow, regional business model they say could leave it struggling to compete with regional rivals.

They say Mueller and his team are not paying enough attention to the airline's long-term strategy in the face of intense competition from southeast Asian rivals Singapore Airlines, Garuda Indonesia and Air Asia - particularly if the airline continues to lose pilots, engineers and middle managers.

"Apart from shedding jobs, cutting its fleet size and renegotiating vendor contracts, it would appear nobody envisions what the airline might look like in 10 years' time," said Shukor Yusof, founder of Malaysia-based consultancy Endau Analytics.

Malaysia Airlines was struggling with a high cost base and low yields even before 2014, but its troubles deepened after March that year, when flight MH370 disappeared en route from Kuala Lumpur to Beijing with 239 people on board. In July 2014, flight MH17 was shot down by a surface-to-air missile over Ukraine, killing all 298 on board.

SHOWING RESULTS

In December 2014, Malaysian state-owned sovereign wealth fund Khazanah took the airline private as part of a MYR6 billion ringgit restructuring plan. Mueller, 54, was brought in as the airline's chief executive in May 2015 on the strength of his experience turning around Aer Lingus, Sabena, and Lufthansa.

Some of the operational changes Mueller has implemented are starting to show results: on Friday, the company released data showing revenue per available seat km up 10 percent from the previous quarter.

But that may not be enough, senior executives warn.

"Khazanah must push Christoph and his team to do something about this if they want to secure the airline’s future beyond his three-year contract," said one.

A second executive also called for greater ambition, arguing against "too much short termism" in the overhaul plan.

In Friday's announcement, the airline said its latest cost cuts included renegotiating contracts with leasing companies, reducing the number of suppliers, and implementing a new IT system.

The cuts so far have included a dramatic shrinking of the airline's network: over the last year, it has cancelled all non-stop flights to Europe except those to London and ended several low-yield Asia Pacific services.

It is instead concentrating on short- and medium-haul flights to Asia and Australia. It has signed a code-share agreement with Emirates to give its passengers access to points in Europe and Africa through Dubai.

As a smaller full-service airline without a large network, it won't be able to compete effectively with other full service hub carriers in the region, they say.

But it will also have to compete with Malaysian budget carriers AirAsia and AirAsia X, which have a similar point-to-point network, lower cost base and offer cheaper ticket prices.

In a statement, Malaysian Airlines said its business plan took "a long term view of the airline’s strategy with a distinct focus on cost competitiveness in the short term and a clear ambition for expansion after reaching break even. It is clearly the national carrier’s role to support the Malaysian economy to enhance connectivity in the rapidly growing markets in Asia Pacific and beyond."

A planned rebranding has been put on hold. The company wants to be profitable before it relaunches the brand.

The restructuring of the fleet and network, and the cost cutting plans are "fundamental and underpinning elements which have to come ahead of any softer elements such as brand", said John Strickland, a British-based independent aviation consultant.

For Johor Bahru-based Yusof, despite the restructuring, there are more questions than answers about the airline's future.

Says Yusof: "Sadly its mid- to long-term future, under the current circumstances, looks almost as bleak as the possibility of finding the missing MH370."

(Reuters)