By LEONG HUNG YEE
hungyee@thestar.com.my
Article from the Star Online
IT is undeniable that Malaysia Airlines (MAS) is facing a crisis and is in a dire state now. The carrier is having both cash and profit crisis for a while and may fail if it continues the way it is now. Realising this, the management introduced a new Business Plan 2012 on Wednesday hopefully to turn its fortune around. Many will be interested in the business plan and the details on how it will help steer MAS away from turbulence.
But surely many will ask ... doesn’t MAS have enough business plans already? Over the past decade, the flag carrier has undergone several business plans including the Widespread Asset Bundling (WAU), Business Turnaround Plan 1 (BTP1) and Business Transformation Plan 2. Some of these initiatives have produced some promising results but the momentum was not sustained, nor did it steer MAS from further turbulence.
Ten years on, it is back to square one. For the first nine months to Sept 30, 2011, MAS posted a net loss of RM1.24bil against a net profit of RM8.55mil a year ago. Its cash and cash equivalent have depleted to RM968.5mil as at Sept 30 compared with RM1.92bil a year ago.
Some analysts are saying the new business plan was basically a new plan with the same story they have been seeing over the years. Analysts tracking the airline concur that its history, both financially and operationally, is an eventful one, especially since its low-cost counterpart AirAsia Bhd has now become a substantial shareholder in MAS. Ironically, AirAsia is celebrating its 10th year of success this year.
“The carrier (MAS) has faced strong financial challenges over time. Yet, it has managed to survive them. It’s interesting in the sense that one day it was flying high and the next thing you know, it has hit bottom but it has, through it all, managed to turn around,” says an analyst.
Basically, the business plan will see MAS turning itself around by cutting capacity, wooing back its customers, enhancing costs, and focusing in its core business.
“This business plan outlines our near-term recovery plan to move us to profitability by 2013, as well as a set of ‘game changers’ to sustain our performance and create a platform for continued growth for MAS’ future,” group CEO Ahmad Jauhari Yahya says.
He adds that MAS needs to make “hard and unpopular” decisions simply to survive and realise the airline’s vision.
A decade ago, MAS suffered high losses due to high fuel prices. The Government took control of the airline in 2000, but failed to turn it around. MAS had lost much of its core competencies in many areas of operations and was burdened by route and fleet expansion programme.
MAS reported an operating loss of RM776.6mil and a net loss of RM835.6mil for the year ended March 31, 2002.
In the same year, MAS underwent the famous WAU revamp to restructure the whole group. The WAU exercise wowed many with the almost instant result of turning around MAS.
Penerbangan Malaysia Bhd (PMB) was set up in 2002 as a wholly-owned subsidiary of the Minister of Finance Inc following the restructuring of MAS.
Under WAU, 73 aircraft of MAS (which were tagged with a value of RM5.1bil) as well as an associated RM7bil in debt were taken over by PMB.
The shortfall of RM1.9bil was made up by issuing additional MAS shares to PMB at RM3.85 each.
The aircraft were then leased back to MAS to enable the carrier to focus on operational efficiency.
With no aircraft assets on its balance sheet, MAS essentially became a marketing entity and operator of leased passenger and cargo capacity on international routes.
One of the immediate effects was that the restructuring transformed MAS’ gearing ratio of 700% as at March 21, 2002 to a net cash position, thus creating an “asset-light” airline.
The restructuring was successfully executed by Nov 6, 2002 over a record duration of 8.5 months.
The success of the WAU exercise speaks for itself. In the following year, MAS posted a significant improvement after its restructuring exercise. MAS narrowed its operating loss to RM47mil in 2003. It turned around in 2004 with an operating profit of RM195.6mil and RM317.7mil in 2005.
Not only did MAS manage to turn around its operation, the carrier also saw its share price increased from RM3.06 on Nov 5, 2002 upon shareholder approval of the WAU restructuring and reached a high of RM5.60 on March 31, 2004.
However, the momentum was not sustained. MAS continued to be in a precarious state despite having had all its debts transferred and seeing some improvements operationally and financially. High jet fuel prices were a serious concern, and a big factor in pushing it from a newly turnaround company into the red again was high oil prices in 2005.
For the period from April to December 2005, MAS’ losses amounted to RM1.3bil, shocking the market with its worst results since the WAU exercise.
Again, the company needed a restructuring plan to turn the company around – one more time. This time around, the Government appointed Datuk Seri Idris Jala as new CEO on Dec 1, 2005 to steer the company out of turbulence. Within three months, he came up with a BTP1 where he played a key role in helping MAS return to the black.
The success of the BTP1 saw the airline reporting record net profit of RM851mil for the financial year ended Dec 31, 2007 from a loss of RM1.3bil in 2005.
Jala launched BTP2, a five-year plan to transform MAS into a five-star value carrier and turn in profit of at least RM1.5bil in 2010 according to the plan. MAS posted a net profit of RM234.5mil for the financial year ended Dec 31, 2010.
MAS has managed to return to profitability within a short period. Route rationalising was one of the major contributors to the airline’s return to profitability.
Sustaining momentum
However, like in previous plans, the momentum could not be sustained. MAS continued to be in a bad position. One of the contributing factors for the massive losses was fuel costs. Another factor for the losses was high operating costs. MAS substantially lagged its peers on yields.
Some analysts say it was unfair to say the WAU and BTP have failed. The plans have managed to turn MAS to become an asset light carrier as well as to improve efficiency. Albeit a short period, the plans have also helped MAS to recover from unprofitability.
“If those plans did not take place, the airline would essentially be bankrupt by now. It may not even have survived the subprime mortgage crisis in 2008,” an analyst says.
Post WAU and BTP, MAS has taken all the necessary steps to improve its operations and efficiency. Now, it is time for them to look at ways to reduce their operational cost, an analyst says.
“As for routes, I think it had already stopped servicing unprofitable routes during the BTP days. What it should look at right now is on the capacity. It will also need to win back some of its customers,” an analyst says, adding that the national carrier’s biggest problem is in managing its cost.
Going forward, MAS’ network will include routes where its premium travellers will want to go, and where we can win in terms of competitive position and home advantage.
Maybank Investment Bank applauds the move that MAS would cut capacity or available seat per km (ASK) by 12% in 2012 on loss-making routes such as Buenos Aires, Dubai, Cape Town and Johannesburg.
“The move was overdue for decades as these routes have no chance to make money. This move is also a confidence booster because it shows that the management is bold and clear-minded in its cost-cutting approach,” says Maybank IB.
MIDF Research says MAS will deploy the resources to profitable routes by increasing frequency and the ASK is expected to increase by 3% over those routes. Hence, there will be a net reduction of 2% in ASK. The estimated impact will be RM220mil to RM302mil to core airline profit.
MAS currently leases its aircraft from PMB and will eventually return the aircraft to the latter when the lease expires.
As its fleet replacement programme shifts gear, MAS will have the youngest fleet in the region by 2015. Under its fleet renewal exercise, MAS could potentially own an additional 56 aircraft by 2016 excluding options for twenty B737-800 and ten A330-300. The aircraft deliveries are scheduled up to 2016.
“We will take delivery of 23 aircraft in 2012, each with state-of-the-art passenger amenities. As we introduce these products, we must also reinvigorate our sales and marketing functions,” MAS says in its Business Plan 2012.
MAS adds that it needs to “win back the hard-earned loyalty of customers”, especially those in Malaysia, and convince them of the superior value of our enhanced services. It also need to optimise our revenue management to enhance yields.
MIDF Research says MAS will accelerate the return of 36 older lease aircraft to PMB. “We believe that this will bring significant cost savings as the newer aircraft will be more fuel efficient.
Also, it will install state-of-the-art passenger amenities for better product offering and optimise yields through better revenue management. Impact is estimated to be RM394mil to RM477mil.”
Analysts say proper execution will be key risk factor to making that sure its MAS’ Business Plan come true and will be able to sustain for future growth.
“The execution of MAS’ business plan is important, as it will prove MAS’ ability to turn around and compete. It is for this turnaround story that MAS will be more significant for investors,” a local bank-backed analyst says.
Another analyst says that with all the building blocks in place, MAS may provide investors with a turnaround story. “It is not a new story but will be an interesting one considering its ups and downs. However, the results will only start showing in the next couple of years,” he adds.
Article from the Star Online