Jul 23, 2014

Malaysia - Double Tragedy Could Spell the End of MAS

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Loss of two aircraft and more than 500 people make it seem almost impossible to continue

The tragic loss of Malaysian Airlines Flight 17 on July 17 with 298 passengers and crew aboard, coupled with the mysterious disappearance of a second Boeing 777-200 into the Indian Ocean with the loss of 239 on March 8, could well doom the airline.

No other airline has ever suffered a double tragedy of this magnitude, especially one that had swum in a river of red ink for years. The airline has a sad history of exploitation by cronies connected to the United Malays National Organization despite a record of excellent service that earned it five stars from Skytrax.

MAS’s current chief executive officer, Ahmad Jauhari Yahya and his team, have been given credit for reacting well to the disappearance of MH370. They put in place an array of promotions plus a banner on the website pointing out its five star status. The airline attempted to convey a message that its operations were proceeding normally. But passenger traffic had fallen drastically after MH370. Given the double loss, the psychological impact on passengers is likely to cut even deeper into passenger traffic. Add to that the psychological impact on MAS's employees, with 27 friends and loved ones among the crews dead, which has to be devastating

Despite the most intensive search in aviation history, not a trace has been found of MH370 – no floating debris, nothing. It is considered the greatest mystery in aviation. The search, now four months along, continues although the focus of where the plane might have disappeared to has changed several times, all to no avail. By contrast, MH17 just happened to be in the wrong place at the wrong time, flying a route flown by scores of other airlines even though a civil war raged on the ground, when it was brought down by missiles apparently fired by Ukrainian separatists allegedly trained by Russian technicians who thought they were shooting at a Ukrainian troop carrier, if intercepted transmissions can be believed.

It also seems certain that the two disasters will attract the attention of the Rottweilers of the US legal profession, no matter how the demise of the two planes came about, generating a flock of lawsuits.

In April, Malayan Banking Bhd. put out a post-MH370 analysis suggesting the airline should be broken up and privatized because its component parts were worth far more than the net asset value – at that time. Since then, with the loss of MH17, its market capitalization has plummeted precipitously. Even before the loss of MH17, according to the analysis, MAS’s shares were trading at the lowest level in 12 years. They have since fallen farther.

According to the analysis, the parent airline itself MAS lost RM1.35 billion on revenues of RM10.859 billion in 2013. At the same time, its components Firefly, its low-cost airline, MAS Engineering and Airport Terminal Services, all wholly owned, Brahim’s Holdings (30 percent owned) which provides bonded warehousing, freight forwarding and transportation services, and KL Aviation Fuel Services (15 percent owned) all made enough money to reduce the losses by nearly RM300 million. Its wholly owned cargo line lost another RM29 million.

Even before the latest disaster, MAS’s financial performance was terrible, losing the equivalent of US$1.6 million a day. It has been deep in the red for at least the past three years. Losses in 2011 were RM2.54 billion, the largest in the airline’s history, because of rising fuel prices and mismanagement that forced it to cut back eight international routes.

It appears certain MAS will be unable to survive without yet another huge cash injection from either the Malaysian government or Kazanah Nasional, the government sovereign fund. Since 2002, the airline has gone through two capital raisings and five new chief executive officers. Even with yet another bailout, it appears that inevitably it will eat through vast amounts of money as it struggles to regain its equilibrium and its passenger traffic.

MAS has been required to do national service, flying into low-passenger-volume areas to keep local politicians happy although it did chop back its domestic routes from 113 to 22, But it continues to lag its competitors such as low-cost airlines like AirAsia, controlled by private entrepreneur Tony Fernandes, which eat its lunch on both high-profit domestic and international routes. An attempt to sell the airline to Fernandes last year foundered because of union opposition and a political furor.

The airline has 19,000 employees and efforts to cut staff have run into trouble both from unions and from the political constituency connected to UMNO. As the Maybank report points out, MAS “struggles to trim down its workforce. The management has mobilized some employees from departments with surplus staff to others which are in a deficit. However, there are many limitations on different skill sets and licensing requirements. A ‘golden handshake’ is a plausible consideration, but has not been talked about due to the highly sensitive nature.”

With compensation based on seniority, that limits the company’s ability to either attract or retain talent. Staff benefits are lucrative and among the best in the airline industry, Maybank says. “Whilst it is common to provide perks as a mean to reward and retain talents, it can backfire if it is not structured properly.

Cronies have repeatedly very nearly ruined the business operations. Sources told Asia Sentinel after MH370’s disappearance that contracts for everything from the packets of nuts for passengers to cleaning contracts are vastly inflated and given to UMNO cronies.  The catering contract, for instance, was awarded to the brother of former Prime Minister Abdullah Ahmad Badawi and LSG Lufthansa for 25 years. It still has more than a decade to run.

Too often, political cronies rather than professionals have been put in charge of running the carrier although Ahmad Jauhari Yahya has earned respect. Despite the bloated employee load, it is considered to have ignored investments in customer service, especially in comparison to Singapore Airlines and Cathay Pacific, considered to be the region’s best carriers.

MAS’s safety record isn’t unblemished, even without the two disasters, although given the record of other carriers in the region, including Garuda Indonesia, China Airlines of Taiwan, Korean International and others, it isn’t that bad. It’s worth noting, for instance, that Silk Air, a budget subsidiary of Singapore International, suffered an apparent pilot suicide in December 1997 when the pilot crashed the plane in southern Sumatra, killing 97 passengers and seven crew members on board. Singapore officials attempted to cover up the reasons for the crash.

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