And the Winner Is?

On Aug 9, MAS and AirAsia had entered into a collaboration agreement to establish a framework to explore the possibilities of mutual co-operation. With that Tune Air Sdn Bhd, jointly owned by Tan Sri Tony Fernandes, Datuk Kamarudin Meranun and Datuk Aziz Bakar, gets 20 per cent share of the national airline. Many have expressed their fears that the merger might lead to less competition and higher airfares to consumers.

On the surface, it can appear as if Tony Fernandes is the winner of this development since AirAsia is directly competing with MAS. During the times when MAS was in the red, AirAsia was reaping profits.

Will the share swap enable MAS to rise again as a premium airline? It is common knowledge that MAS has been in the red for the past few quarters. Was it necessary for Putrajaya to intervene to help MAS? In 2002, BinaFikir consultancy, then led by Tan Sri Azman Mokhtar, (currently managing director of Khazanah Nasional Berhad, MAS’s ultimate main shareholder) had its books cleaned up in 2002 under the wide asset unbundling (WAU) exercise.

Since that WAU exercise, MAS had two rights issues, raking in RM1.6 billion in 2007 and RM2.67 billion in 2010 to fund its operations and fleet purchases.

In reality, there was a turnaround from 2006-2008. In December 2006, Datuk Seri Idris Jala and his management team joined MAS and took a few drastic measures including:

• the sale of the iconic MAS building in the heart of Kuala Lumpur
• the sale of the Four Seasons hotel in Langkawi
• what about the London property?

Bear in mind that at that time, MAS had little other assets to sell. Earlier in 2003, it had already sold all its aircraft to Penerbangan Malaysia Berhad (PMB) under the widespread asset unbundling (WAU) exercise.

If not for that move, MAS would have had cash flow problems. MAS at that time had little other assets to sell, having sold all its aircraft much earlier in 2003 to Penerbangan Malaysia Berhad (PMB) under the widespread asset unbundling (WAU) exercise — way before Datuk Seri Idris came into the picture.

Eventually, the share price of MAS improved and some sang glorious songs praising Idris for helping MAS to turnaround.

The 2004/2005 MAS annual report said:

Malaysia Airlines’ total revenue in 2004/2005 improved by RM2.6 billion to RM11.4
billion due primarily to the record 24 per cent increase in international passenger
traffic growth of 1.7 million passengers and a 21 per cent increase in cargo tonnage flown. International passenger revenue grew by 29 per cent to RM7.9 billion while cargo revenue increased by 44 per cent to RM2.4 billion.

These statistics differ from that of Wikipedia:

1. Prior to the Asian Financial Crisis in 1997, the airline suffered losses of as much as RM 260 million after earning a record-breaking RM319 million profit in the financial year 1996/1997. The airline then introduced measures to bring its P&L back into the black. For the financial year 1999/2000, the airline cut its losses from RM700 million in the year 1998/1999 to RM259 million. However, the airline plunged into further losses in the following year, amounting to RM417 million in FY2000/2001 and RM836 million in FY2001/2002. With these losses, the airline cut many unprofitable routes, such as Brussels, Darwin, Honolulu, Madrid, Munich and Vancouver. The airline recovered from its losses in the year 2002/2003. It achieved its then-highest profit in the year 2003/2004, totaling RM461 million.

2. In 2005, Malaysia Airlines reported a loss of RM1.3 billion. Revenue for the financial period was up by 10.3% or RM826.9 million, compared to the same period for 2004, driven by a 10.2% growth in passenger traffic. International passenger revenue increased by RM457.6 million or 8.4%, to RM5.9 billion, while cargo revenue decreased by RM64.1 million or 4.2%, to RM1.5 billion. Costs increased by 28.8% or RM2.3 billion, amounting to a total of RM 10.3 billion, primarily due to escalating fuel prices. Other cost increases included staff costs, handling and landing fees, aircraft maintenance and overhaul charges, Widespread Assets Unbundling (WAU) charges and leases.

A former MAS staff Song Eu Jun had this to say:

While the sale of the MAS building was a necessary pain, it merely bought a few extra months for Datuk Seri Idris and team to stem the flow of the cash bleed.


From a profitability point of view, MAS was also heavily in the red. Annualised, MAS lost RM1.7 billion in 2005. In Datuk Seri Idris’ first year on the job, he reduced the losses to RM133m and turned the company back into the black with a record profit of RM853m in 2007.


The profit in 2007 was the highest in MAS’s corporate history and was earned through massive operational cost reduction of RM745 million as well as on the back of record revenues of RM9.4 billion. The profit numbers were real as reflected in the cash balance at that time of RM5.3 billion which had grown from RM1.5 billion at the end of 2005 when Datuk Seri Idris joined MAS. One may doubt the accounting, but you cannot window-dress cash in the bank.


It was not a result of asset sale, which was realised in 2006, it was not a result of creative accounting (there were no accounting policy changes or one-off profits in 2007).


It was achieved through changes introduced by the management team, by cutting ridiculously unprofitable routes, reducing operational cost and increasing yields (the price of the ticket per kilometre travelled).


Other drastic actions such as the Mutual Separation Scheme (MSS), reducing the staff force from 23,000 to 19,500, were needed. However, while the staff reduction amounted to approximately 15 per cent of staff force, the largest single staff reduction by a GLC, the reality is that with a 60-year old behemoth like MAS, cultural changes will take years to happen. If at all!

So if the turnaround was achieved then, why does MAS find itself in the position it is now?

Song Eu Jin opined that it is because of Datuk Seri Idris’ premature departure to start anew as CEO of Pemandu - a move which he lamented was truly a loss for Malaysia Airlines at a critical period for MAS which was facing increasingly volatile fuel prices and capital commitments in the form of new aircraft. (You can read my post on this topic HERE.)

By the time the new CEO, Tengku Datuk Azmil took over, he faced the return to the pre-turnaround culture at MAS. It is reported that almost all of the management team which Datuk Seri Idris brought in to turn around the airline have since left the company, the last being Datuk Bernard Francis who left merely a month before the recent changes at MAS. Tengku Datuk Azmil Zaharudin lost his job the day on the day of the merger (Aug. 9th) but will join Khazanah as an executive director effective September 12, 2011.

Some argue that what Idris Jala did was to dump the assets of MAS including selling the MAS building and some old air crafts for liquidity and to improve cash flow. By doing so, the inflow from the sales of those assets would be greater than the operational loses. Then, the accounts would no longer be bleeding red. Such a move is only short-term because eventually, when there were no more assets to be stripped, the accounts were in the red again.

What about the MAS building in London? Did they ever try to sell that building? Does it belong to MAS? If it does not, who is the rightful owner and is MAS paying rental?

Clearly, solutions used in the past were mainly financial in nature to keep the airline in the black. A former staff expressed here that operational fixes are needed.

The Malaysian Insider recently featured an article written by Datuk Rashid Khan (commercial director, Malaysia Airlines when he retired in 2010) on the MAS turnaround. He said that the MAS turnaround received many commendations from international airline organisations. The MAS share price was at a historic high during Idris’ tenure. The MAS turnaround story was even featured as a MBA case study by Harvard University.

He acknowledged the relentless support of 19,000 + MAS employees who were dedicated and committed during Idris’ tenure. The blood, sweat and tears of MAS people and Idris Jala's leadership made the difference. So the question that remains is, why did the government pluck Idris Jala out of that rosy scenario to be replanted in a new role? A bewildering move indeed!

On August 11th, The Malaysian Insider reported that Putrajaya has directed all government-linked companies, including Malaysia Airlines and the national debt restructuring company Danaharta, to cease all civil suits against Tan Sri Tajuddin Ramli, the former chairman of the national carrier and protege of Tun Daim Zainuddin. Tajuddin, who is facing millions in legal claims for allegedly causing MAS to suffer losses in excess of RM8 billion during his tenure, had made a whopping RM13 billion counter-claim.

Past experiences have show that the government has been mollycoddling MAS by providing all sort of protections for the company and bailing it out instead of letting the national airline run as a corporate entity - independently and competitively!

The company is said to be using old aircraft that are fuel guzzlers thereby increasing operation costs. If this is true, MAS should really try its best to work efficiently via lower fuel efficiency to reduce wastage. Other operational costs such as on board catering should be reduced so profit margins can increase.

In The Star today, Sarawak Tourism Board chief executive Datuk Rashid Khan expressed concerns that flights to the state could be reduced following the share-swap deal between Malaysia Airlines (MAS) and Air Asia. A former MAS commercial director, Rashid said that when there is rationalisation or reforms, something will inevitably have to go. He feared that Firefly, MAS’ affordable sub-carrier launched two years ago, might be asked to pull out or reduce flights to destinations operated by Air Asia as well. Air Asia is likely to dominate in negotiations on the development of the low-cost aviation segment, since it was more successful in the segment.

For MAS to improve, it needs to revamp the entire operational system and improve in all areas without depending on government protections or bailouts any more. It is only when MAS can perform and operate competitively that it will and make a real profit.

So far, have they really sought out the creme de la creme to run the company or have there other 'requirements' that were of priority? One wonders why Idris Jala was plucked out of MAS at a time when the had been instrumental in achieving a turnaround for MAS. And one wonders why Air Asia and MAS made the collaborative agreement.

Ultimately, who is the winner and the loser in this game? Only time will tell.


Further reading:

1. Mr. Jahabar Sadiq, Editor of The Malaysian Insider wrote a very good analysis here where he considered who really wins in the swap.

2. MAS turnaround story was real by Rashid Hassan

3. The MAS business turnaround by Song Eu Jun

4. When politicians plot, public gets shafted by Mariam Mokhtar

5. Heads I Win, Tails You Lose!

6. MAS profit down on higher fuel costs

7. Is MAS still EMAS?

8. The MAS Scandal

- masterwordsmith