Look into regional tie-ups to survive, Mavcom tells Malaysia Airlines

The government has received interest from some local and foreign firms to buy over the national carrier. (Reuters pic)

KUALA LUMPUR: It is about time for airline companies such as Malaysia Airlines Bhd (MAB) to go beyond code-sharing or alliances and look into regional tie-ups to survive in the highly-competitive and capital-intensive industry.

Malaysian Aviation Commission (Mavcom) executive chairman Nungsari Ahmad Radhi said cross-collaboration or regional tie-ups is not something new as this has long taken place on the global stage.

In Europe, the concept of national airline or flag carrier has been redefined, he said.

One of the most prominent mergers was between flag-carrier British Airways and Spain’s Iberia in 2011 but both retained their original brands.

In 2004, Air France and the Netherlands-based KLM Royal Dutch Airlines became Air France-KLM.

“The airline industry is not only a tough business for locals but also global players,” he told Bernama in a recent interview.

Talks on MAB’s future have resurfaced since Prime Minister Dr Mahathir Mohamad said the government had received interest from some local and foreign firms to buy the national carrier.

This followed a massive impairment loss made by MAB’s sole shareholder Khazanah Nasional Bhd, resulting in the sovereign wealth fund reporting a pre-tax loss last year — its first since 2005.

According to the Centre for Aviation, six of Malaysia’s seven carriers were unprofitable, with low-cost carrier AirAsia, generating its smallest operating profit in four years.

AirAsia Group Bhd, MAB and Malindo Airways Sdn Bhd, a Malaysia-Indonesia collaboration, are the top three airline companies in Malaysia.

Nungsari attributed the current scenario of the industry to, among others, the mismatch between passenger and airline fleet growth.

“The number of passengers has recorded growth over the years, but the percentage is relatively small compared with the growth of global aircraft fleet and size (capacity) in the market,” he said.

Locally, the Mavcom industry outlook itself revealed that overall passenger traffic growth in Malaysia has significantly declined to 3.0% in 2018 from 10% in 2017.

The projection was partly due to the strong reduction in domestic seat capacity from the second quarter of 2018 onwards.

Hence, the commission is forecasting passenger growth traffic for the current year to be between 2.2% and 3.3% year-on-year (y-o-y).

Nungsari Ahmad Radhi.

Nungsari said market structure for the airline industry is tough in nature and could be equated to the automotive industry, he said, adding that there were more automobile companies 30 years ago than now.

“The same goes to airline companies globally. The automotive sector has undergone a consolidation similar to the aviation industry. The first and second rounds of ‘marriages’had happened in the United States,” he said

While merger and acquisition in the automotive industry were seamless, the airline industry mostly went into code-sharing and alliances, namely OneWorld, SkyTeam and Star Alliance, as part of their rationalisation exercise.

Perhaps, it is about time that airlines look into the regional level tie-up, as well as mergers and acquisitions, said Nungsari.

As a regulator, Mavcom cannot decide for the airlines on their corporate move, but in general, airlines have no option but to look into the next phase to continuously survive in the fast evolving and challenging industry, he said.

“(Airlines such as MAB need to look into this) because the yield has reduced.

“It has gone down over the years, making Malaysia unattractive to airlines to fly to. Malaysia’s hub ambition will also be a challenge (to achieve),” he said.

Citing international carriers, Nungsari said the once mighty industry giants, Pan American World Airways (Pan Am) and Trans World Airline (TWA), were the best examples in this scenario.

The United-States’ Pan Am had its glorious years around 1970, but filed for bankruptcy in 1991 due to overcapacity, low passenger demand and rising fuel cost issues.

Likewise, TWA failed to cope with the environment during airline deregulation in the 1980s, and lacked focus on the trans-Pacific and air cargo markets, leading to financial troubles.

Similarly, higher jet fuel costs have been the biggest factor threatening the profitability of Malaysian carriers and this may persist well into 2019 as global jet fuel prices are expected to further increase.

Thus, collaborating with airlines with a larger footprint or network would be the answer, Nungsari said.

“All of our airlines are regional players. So, if partnerships or collaborations were to take place, I think we should look at the routes, and a company that has a bigger footprint.

“Maybe some companies from North America, Africa or maybe Chinese companies, where most of our tourists come from China,” he suggested.

The main issue in the aviation industry is how to optimise the growing fleet, he said.

“Through partnerships, you can utilise your assets and at the same time expand your footprint worldwide.” - FMT