This article first appeared in The Edge Malaysia Weekly on May 10, 2021 - May 16, 2021

AS Malaysia Airlines Bhd (MAB) kicks off a new five-year turnaround plan aimed at making it cash flow positive by 2023 by slashing costs while growing revenue, it will be keenly watched for many reasons.

The national flag carrier, which had at the onset of the Covid-19 pandemic in March 2020 warned that it was at risk of shutting down, recently pulled off an impressive RM15 billion debt restructuring exercise — which saw it eliminate RM10 billion of debt from its balance sheet — in 4½ months. It comes at a time when many other airlines are still in talks with their lessors and creditors about a restructuring plan.

MAB was also given a new lease of life by its controlling shareholder Khazanah Nasional Bhd, which provided interim funding of RM1.1 billion earlier this year and pledged a further RM3.6 billion capital injection into the company over the next five years.

Despite this, not everyone is optimistic about the new turnaround plan — and not without reason. Previous such efforts at the carrier have been disappointing, with CEOs coming and going, and the airline’s financial statements continuing to show massive losses even as the government sinks more public funds into it. Last November, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz revealed that sovereign wealth fund Khazanah had so far injected RM28 billion into MAB.

This time, the question on everyone’s mind is whether it can pull off a turnaround in a pandemic. MAB was already struggling financially with rising fuel costs, foreign exchange volatility, stiff competition and a weak pricing strategy in the best of times, and staging a recovery in an increasingly uncertain environment can be especially challenging. Nonetheless, MAB group CEO Captain Izham Ismail believes it can be done.

In an exclusive interview, the 60-year-old former pilot, who took the helm at MAB in December 2017, tells The Edge why he is confident of the airline’s turnaround under the Long Term Business Plan 2.0 (LTBP 2.0).

“MAB has undergone various transformations throughout the years. One or two of them worked, but eventually (the airline) went back to where it was (unprofitable), driven by, to a certain extent, inefficiency within the organisation. That’s because all this time, you only fixed the balance sheet, but you didn’t fix the operational efficiency. And in the first two years of the five-year MAB Recovery Plan (MRP) (announced in 2014), another challenge MAB faced was dealing with overcapacity in the market.

“Still, the one thing that has been haunting the airline for the last 20 years, when it was still known as Malaysian Airline System Bhd (MAS) and then as a new entity, MAB, is the balance sheet, and we’ve got that sorted out under the recently-completed restructuring exercise,” he says.

“While previous transformations (underwent) balance sheet restructuring, it was to a certain extent not holistic. It was done in bits and pieces. For example, the most recent transformation — MRP — addressed operational creditors, but not the structural portion such as Turus Pesawat Sdn Bhd. That itself was a huge chunk of liability that we had to carry,” says Izham. The debt owed by MAB’s parent Malaysia Aviation Group Bhd (MAG) to Minister of Finance Inc-owned special-purpose vehicle Turus Pesawat was attributed to the purchase of six Airbus A380 superjumbos and two A330s in 2012.

The recent clean-up of its balance sheet has resulted in the airline’s debt-to-expected FY2022 earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio improving to 3.9 times, compared with 6.9 times pre-restructuring.

MAB’s balance sheet showed negative shareholder equity (before minority interests) of RM624.8 million at the end of 2019. Its total assets were RM16.26 billion while its total liabilities were RM16.85 billion. It has yet to file its financial statements for the financial year ended Dec 31, 2020 with the Companies Commission of Malaysia.

“That [the reduction in debt-to-Ebitda ratio] itself has made MAB agile and competitive. Now, what it needs is just (for) the market to rebound (for it to return to profit),” says Izham.

But the recovery has been slow. The recent fourth wave of Covid-19 infections is expected to be a further drag on the aviation sector owing to continued restrictions on domestic air travel as well as the longer-than-expected closing of national borders, says Hong Leong Investment Bank Research aviation analyst Daniel Wong in a May 4 report.

Last month, the Malaysian Aviation Commission revised downwards its 2021 passenger traffic forecast and now expects a contraction of between 22.9% and 29.1% year on year, instead of an earlier forecast of a 94.2% to 100.3% y-o-y growth.

“There are three moving parts that we really need to push — the balance sheet, the profit and loss (P&L) and, of course, the cash flow. We’ve done the balance sheet this time around. Next is P&L, which is market-driven. My anticipation (of a return to profit) is 12 to 18 months, depending on the market situation.

“The third is cash flow. Why do airlines keep on cancelling flights on a daily basis? That’s the lowest-hanging fruit in terms of containing costs. So you ground the aircraft. Also, whatever we can take from the market, the likes of cargo operations and selling peanuts and satay — those deliver cash flow,” he notes.

The airline also continues to exercise strict cash management. At the group level, MAG achieved RM5.7 billion in cost savings and cost avoidance last year. In the first quarter of 2021, it achieved a further RM510 million in cost savings and aircraft deferrals, and is targeting another RM1 billion by the end of the year.

Izham is confident of turning things around.

“This time, I have confidence and conviction that it will work. Why? The plan moving forward is LTBP 2.0, and this was not a tabletop exercise.

“LTBP 2.0 is the offspring of LTBP, which was formulated in 2018 and launched in 2019. LTBP managed to give us a hockey stick-like recovery in traffic in the third and fourth quarter of 2019,” he says. However, the business plan, which would have seen the national carrier achieve financial break-even by 2022, was upended by the pandemic.

LTBP was focused on four strategic pillars — for MAB to become a premium Asia-Pacific carrier; recapture the domestic and Asean market dominated by low-cost carriers; create deeper commercial partnerships with other airlines and non-airlines; and diversify its revenue streams by focusing more on its other businesses including maintenance, repair and overhaul, cargo, training and ground handling.

“With LTBP 2.0, we have included another strategic pillar, which is digital. Whether you like it or not, digital is the future. So MAB has to embrace that. We have no doubt been executing our digital plans over the last few years, but they just need to be ramped up even faster today,” says Izham.

“And we believe that our employees are our true north. There are news articles quoting analysts as saying that MAB staff are laidback and have a bloated workforce. They are not, honestly.

“When I started as CEO (in 2017), we had about 13,500 staff. (As at April 2021) MAG had 11,695 employees. Of this, 7,225 are MAB staff and 80% of them are production staff, including pilots, cabin crew, check-in staff and engineering workers. In fact, our back-office staff are very lean and running on fumes — but driven and supported by digital,” he says, adding that labour costs only account for 7% of MAG’s total costs.

In previous interviews, Izham has told The Edge that he is ready to hand over the CEO reins to his successor to take MAB to the next level, following the completion of the restructuring. Still, it looks like he will be sticking around for a while to see the turnaround plan through.

According to Izham, he has received a contract extension through 2021. “I honestly wanted to retire last November, but it would have been irresponsible of me to leave the organisation amid a deep crisis. The chairman (Tan Sri Wan Zulkiflee Wan Ariffin) said, ‘Izham, you’re the only one who knows the business. We’d appreciate it if you continue. Shareholder (Khazanah) said the same thing and hence I’m still here.

“The beauty of LTBP 2.0 is that while it is a vision of Izham, the articulation of the plan is down to my C-level executives. They are the ones that shouldn’t retire and not me. I am dispensable. I have empowered them. This team of mine, 11 of them do everything. LTBP 2.0 involves teamwork.”

Still, a recovery in air travel has been slower than expected so far this year, given the recent resurgence of Covid-19 cases in Malaysia and globally. European plane maker Airbus says a full recovery in global air travel to pre-pandemic levels is not expected until 2023, while the International Air Transport Association sees global passenger traffic returning to pre-Covid-19 levels only in 2024.

Thus, it remains to be seen if MAB can pull through these trying times.

The following are excerpts from the interview with Izham and MAB’s group chief strategy officer Bryan Foong.

The Edge: Malaysia Airlines Bhd (MAB) has launched at least five turnaround plans over the years. How different will the Long Term Business Plan 2.0 (LTBP 2.0) be? How confident are you that the airline will achieve sustainable growth this time?

Captain Izham Ismail: I don’t know what the future holds, but I can plan as best as I can based on the data that we have, the chequered journey that MAB has been through, and what we think will happen in the future.

The biggest element — the balance sheet that was part of the legacy issues — was not created in the last three years. The balance sheet issue was created 20 years ago. It was a case of ‘Korek lubang sini, kambus lubang sana’ and it just kept going. But the balance sheet issue has been addressed in the recent restructuring exercise, which involved about 75 creditors. Of course, the creditors, just like you, asked, ‘If we give you these concessions, haircuts or waivers, what is MAB doing differently from the previous turnaround plans? What is the future going to be like?’

We told them, ‘Take this and run the numbers to see if this plan is credible for you to continue doing business with MAB’. Based on the feedback from the creditors, that was actually the turning point.

They had confidence in our plan and wanted to be part of this journey. They saw our financial modelling, with a very lean and agile balance sheet this time, as well as the operational efficiency that we have driven.

We have successfully transformed our cost structure in recent years. For example, our cost per employee is 30% lower than the industry average in 2019 while that of revenue per employee is 13% lower. Of course, don’t compare us with the low-cost carriers (LCCs). We deploy different products. For example, an LCC cabin crew only has three to four people on board, while we carry more crew.

Despite having a better cost structure than our peers, revenue is a challenge for the group as we operate in a predominantly low-yield market.

I’ve been here for quite a while and I’ve seen how the organisation has changed from 2019. We have embraced that we are not an LCC. Over the last 10 years, we have been trying to compete with the LCCs, but we are not [an LCC]. We know the domestic market is leisure-centric and cost-sensitive. So how will MAB fight in this market? All this while we have been throwing ourselves to [compete in] the RM69 fare [bracket]. That’s ridiculous.

When we went to the market in 2019 and said, ‘This is Malaysia Airlines. We are a premium [carrier]. We don’t sell [tickets] at RM69. We sell at RM169, but the fare comes with all the fringe benefits of a product of a premium carrier.’ And for those who equate us with the likes of Qatar Airways and Emirates, of course we are not there. Those are not full-service carriers; they are luxury carriers. They have all the money to invest. We are not there and we are very mindful about that as well. Malaysia Airlines is positioned in no-man’s land, sandwiched between the luxury carriers and the LCCs in this region.

There were only five airlines in Asean, namely Royal Brunei Airlines, MAS, Vietnam Airlines, Thai Airways and Singapore Airlines about 30 years ago. Today, before the pandemic, there were 23 or 27 airlines in Asean alone, where everybody was fighting for the same customers. Thus, I don’t know what the future will be like, but our market forecast modelling last year shows that the market is expected to pick up in 2Q2021. So we put in our plan based upon a base-case scenario and a downside scenario, with both having an L-shaped recovery from the pandemic.

But look at what is happening now — 2021 is expected to be worse than 2020.

A good example is that we were planning to deploy more capacity in 1H2021 to reach -70% when compared against 2019 pre-Covid-19 levels and -30% in the second half. But in 1Q2021 alone, because of the travel restrictions, we had to cut back our capacity; so did our competitors across the region and in Malaysia. Our overall capacity has been cut by 90% since last October 2020 and we now expect capacity to remain at that level for the remaining quarters of this year as well. We see capacity in the domestic market reaching 46% of pre-pandemic levels only in March 2022, which brings the average capacity at 75% of 2019 levels for the next three quarters of 2021.

What happens if air travel is slow to recover?

We have contingency plans on the financial portion if the scenario goes on the downside. I am confident that this organisation would be able to withstand this crisis if the market goes south — for at least another 12 to 18 months. Still, market recovery is very dependent on establishing travel corridors, the rollout of vaccination programmes and economic conditions, which drive the leisure market, as well as the rebuilding of the entire hospitality and tourism ecosystem and infrastructure, which have collapsed globally and Malaysia was not spared. [It is also dependent on] travel rules, coordination between countries in [areas such as] digital health passes and, finally, consumer confidence.

If you ask me how can this plan (LTBP 2.0) fail, it would not fail because of its cost structure. It will not fail because of inefficiency in operations. It will not fail because [of claims that] our people are laidback. No. If it fails this time, it is clearly [because of the] top line.

From our monthly surveys with 30,000 to 40,000 respondents since 3Q last year, people said they want to travel. Malaysia is No 2 globally, with 92% of Malaysians saying they want to travel. And 80% feel very strongly that the digital health pass is the passport for them to travel. That is why MAB feels that the digital health pass is very important. The demand is there, but with the travel rules and the spike in Covid-19 cases in India, it just threw the crystal ball out the window. So anything that happens from now on, if you ask me personally, it’s purely top line.

And I hope when the market rebounds, Malaysia as a country does not flood the market with [seat] capacity. Then it will go back to square one. Meanwhile, I sincerely hope that my competitors in the region and especially in Malaysia will be successful in restructuring themselves. It is important for us as a country to drive economic activities. I hope they can survive and restructure properly because there are three markets in Malaysia — premium market, low-cost market and there’s also a market which is in between. So, airlines in Malaysia including Firefly, ­AirAsia and AirAsia X ... we need them to survive because they are key contributors to the Malaysian economy; they facilitate connectivity and induce tourism. Here, I am talking from an industry view.

Still, the air travel market does not look optimistic.

Yes, it is worrying. I’m worried, at least for the next two to three quarters. And our market has always been Australia and North Asia including India. On the optimistic view, I can take this organisation with the working capital that is given to us for at least another three years.

But compared with airlines in the US that get hundreds of billions and Singapore Airlines’ S$19 billion (from their governments), this (RM3.6 billion) is really peanuts. And we have not retrenched anyone. Of course, those whose contracts have ended, we let them go. We also have natural attrition ... jobs are more lucrative outside if you are in the digital space, so people are leaving us as well. Today, our payroll is 50% less than in 2019. That’s because staff that are above a certain level until the board have taken pay cuts, while others have taken no-pay leave and voluntary paid leave. All these have reduced our payroll.

Fortunately, we have a lot of cooperative creditors and partners. Not all the creditors, vendors and partners end up in our restructuring plan. Some were not included because we deem them as operational, but we deal with them separately.

The principle of the restructuring was not to induce pain. It’s actually the survivability of the entire ecosystem and the value chain. Our creditors and partners get it. They come back and say, ‘Hey, this plan is good’. In fact, some creditors have asked us to do a case study on our restructuring and our business plan. But I said, ‘Hey, hang on. Let the results speak for themselves.’

In your market forecast modelling, what is the worst-case scenario, where you said MAB can only sustain itself for 12 to 18 months?

This scenario is when our capacity has to be removed from the market by 90% or more for the remaining year. That means you’re not selling anything.

How much capacity was cut in 2020?

Izham: On average, we cut our capacity by about 75% last year. The deepest cut was made in mid-2Q at 96%.

Foong: 2020 was relatively better as we had January, February and part of March. When the first Movement Control Order (MCO) was implemented in mid-March last year, that was when we brought our capacity down by 96%. So 2021 is going to be worse off because we don’t have months where it would be normal. Now we’re into May and the situation has become worse. Last two weeks, we did another forecast and it’s just down all the way.

How does MAB predict its future capacity?

Izham: These are a few of the items that we used in our data points such as the anticipated period of border control relaxation, vaccination programmes around the world, historical peaks, and we put in current forward bookings, schedules submitted by airlines — other airlines are also doing their analysis and putting their schedule applications based on consumer feedback and confidence level.

Other items include long-term parking of aircraft by other airlines. We know when they will bring them back (into the air); our fare trajectory, and many more. It is data-driven.

Today, whatever data that we have, if you ask me about the reliability [I would say] 50%. Because you actually don’t know [what is going to happen]. This is the best guesstimate. The only thing that I tell my team that I don’t want to guess is the safety and security of the aircraft.

We ensure that we drive productivity, and the money that we have is mainly spent on maintaining the aeroplanes because the staff has taken a huge pay cut already.

Will MAG be announcing job cuts?

If you have 1,000 people and you need only 500, would you retrench the other 500? Or would you keep everyone and pay (them less)? That’s the approach we took. We need to be ready for the demand when it comes in. Airlines utilise a highly-skilled workforce such as engineers, cabin crew and pilots. If you think check-in counter staff are not skilled, you are wrong. They are skilled too because they must be trained to use the check-in systems, departure control systems. We want to be ready when [the up-cycle] happens. We don’t want to be scrambling to recruit people and then sending them for training. The strategy we deploy now is basically to keep as many as we can, and the objective is to attain half the payroll.

There are quarters that believe MAB has a bloated workforce, even after the restructuring.

MAG has about 11,600 staff members. Of this, only 7,000 are MAB staff members, of which 80% are production staff members. You cannot just throw a statement without validating.

[Our workforce] is not bloated, honestly. Our staff members are running on fumes. Take the communications team in Etihad Airways, for example. It has 40 people. SIA has 40 to 50 people now. We have only five. Our strategy team, the nucleus of this organisation, only has 15 people.

First and foremost, as a businessman, if people need to go, they need to go. But secondly, if they need to go, is the organisation ready to continue without them? That means you’ve got to restructure yourself. Thirdly, in the current situation, is it easy to get a job? I have to also be a responsible leader to try and balance all these together. But if the payroll cost is a fraction of my opex, why bother? I would rather concentrate on the big-ticket items like fuel and forex hedging, aircraft utilisation and leases, and payment to holders of our sukuk bonds and rental to Assets Global Network Sdn Bhd (a wholly-owned subsidiary of the Minister of Finance Inc) in relation to the lease of our facilities in KLIA.

To clarify, the RM3.6 billion is working capital, only a fraction goes to paying employees’ salaries. The RM3.6 billion is actually working capital for the business to continue over the next five years and the investment of aircraft replacement due from 2023 onwards. Our seats are tired. We need to do something about that. The RM3.6 billion will be spent on anything that will drive efficiency for the organisation and anything that will fulfil the needs of our customers such as seats, inventories and spare parts.

Would you say you are ready for a pick-up in the pace of vaccinations and economic recovery?

Yes. MAB is in the right position. We are agile, lean and efficient. We’ve got our financial structure sorted out; it’s solid now. Our on-time performance and our technical dispatch reliability have gone through the roof. All I need now is the market and no crazy pricing (of air fares) in the marketplace. In 2019, the average return fare from Haneda to Osaka was US$300 and from Jeju to Gimpo, it was US$290. In Malaysia, KL to Penang was US$30. How can airlines make money on this margin? How can it be profitable? In domestic Malaysia, we have 32 million people versus 37 million seats.

Even though the current environment is very depressed, the LTBP 2.0 excites me and the organisation. Somehow, it unites the organisation. Most companies, when they design a business plan, they get consultants like McKinsey and Accenture to help them. This time, we did it ourselves in 2018. We want to take this plan forward. Our litmus test was when we put it to the creditors and they wanted to be part of it. That gave us relief.

Can you share the breakdown of the RM3.6 billion working capital that Khazanah is providing?

I can’t because it will be for new works, new projects and new investments that will be tendered out. Basically, in a nutshell, [it will be used for] entry of service of aircraft, our digital investments, our end-of-lease commitment, retrofits and, most importantly, investment to our customers.

What is the timeline to profitability under LTBP 2.0?

2023, under a downside scenario, with the cash balance to be above the minimum cash balance of RM700 million over the next five years.

So, at any one time that we go below RM700 million, this is considered to be a crisis. RM700 million is the minimum cash we must have. We must have a waterline that we should not go under. It’s to make sure the company doesn’t go into additional risks. I don’t want to go back to my shareholder and ask for money.

The next question is whether the downside scenario is too optimistic. If it doubles down, there’s nothing much I can do, I just have to rejig the organisation to adapt. I’m not going to ask for more money (from Khazanah).

What does the LTBP 2.0 entail?

Moving forward, our vision is to position MAB as Asia’s leading travel and aviation services group. We are not merely an airline. We know a pure-play airline business will not be sustainable in the future. MAG will have three profit centres: the airline business covering MH, Firefly, MASwings and AMAL (pilgrim-centric services dedicated for umrah and haj); the aviation services business such as maintenance, repair and overhaul (MRO), cargo, ground handling and MAB Academy, and we are going to introduce a travel solutions business, where we will do our end-to-end business through the digital platform. The digital platform will be a means to an end. I am confident that from this model, it will make the group more diversified.

We envision that the non-airline revenue will contribute about 25% to the group’s revenue by 2025, compared with about 12% to 15% now. [In line with this,] we plan to expand into logistics, that is, offer end-to-end logistics solutions via MAB Kargo Sdn Bhd. We also have an MRO business, which is servicing our own aircraft fleet, and before the pandemic, we were servicing other airlines as well. What we envision to do is heavy, deep maintenance. We currently leverage existing capacity at Hangars 5 and 6 in Subang airport, but we plan to expand our operations to include Hangars 2, 3 and 4 as well.

What will happen to the six A380s superjumbos and AMAL?

Unfortunately, we will be retiring the A380s. We are weighing our options on what can be done. AMAL will be run using A330s. [We have] 21 A330s. Currently, we are going through an approving process with our board and shareholders to dispose of the A380s in the coming months.

How would you describe your feelings now?

I am relieved that the legacy balance sheet issue has been resolved, which makes MAB very competitive, agile and ready for the future. It has always been my objective to restructure and reset the balance sheet, and I believe God gave me that wish. With that, I’m hopeful. I am confident that MAB will be able to be very competitive in the future, but again it is subject to the pandemic. With regards to the restructuring, I am a very happy man. With regards to the organisation and staff, I am happy with them. They’re very efficient, all of them stood in solidarity. The senior-level people took pay cuts. When the staff think, “My bosses took a pay cut to support me”, it kind of unites the organisation. I see them respecting each other.

We went to the market with lots of products, we entertained refunds, we gave consumers options and they are now appreciative of us. The creditors listened to us. Our shareholder believed in us. Don’t you think I’m a happy man? But the market is still challenging. While I am a happy man, at the same time I am very worried about the future.

First and foremost, I must be clear about our returns on investment for the shareholder. Second, what are the total social returns to the people, my organisation, my community and my country? MAB must be mindful that it has a social obligation. It has to deliver in the context of environment, economics and governance. It’s an airline that treats everybody equally. My C-suites, half of them are non-Malays. I acknowledge diversity. I don’t care whether you have a preference. So this is the organisation that I envision. It has to be a model for GLCs.

And not only race and religion; gender as well. We have committed ourselves to IATA’s 25by2025 initiative, which aims to increase the number of women in senior positions by either 25% against currently reported metrics, or to a minimum representation of 25% by 2025. We have the numbers already, but I am pushing to have one or two female representations on our board.

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