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This article first appeared in The Edge Malaysia Weekly on October 28, 2019 - November 3, 2019

AS the government prepares to choose a strategic investor for loss-making Malaysia Airlines Bhd (MAB), pressure is already building to get the choice right and as quickly as possible.

People who have seen the national carrier’s books tell The Edge that as it stands, the airline only has enough cash to sustain its operations up to April 2020.

However, other sources familiar with Khazanah Nasional Bhd’s plans say the sovereign wealth fund, which wholly owns MAB, will not let the carrier crash by then.

“They have funding in place on a rolling 12-month basis ... Khazanah is already planning for beyond the original timeline [of the latest RM6 billion turnaround plan],” says one source who requested anonymity.

While cash may not be an issue, whether the government actually wants to inject more money after 15 years of unsuccessfully throwing money at the problem is the key question.

“In 2018, MAB basically lost over RM1 billion,” Khazanah managing director Datuk Shahril Redza Ridzuan told the Parliamentary Public Accounts Committee (PAC) in April, according to a transcript released last week.

“To sustain operations as it is ... you’re looking at probably about a billion (ringgit) plus a year of capital,” Shahril added when outlining the options for the government, which ultimately owns MAB via Khazanah.

Economic Affairs Minister Datuk Seri Mohamed Azmin Ali told parliament last week that from four shortlisted bidders for a strategic stake in MAB, a decision will be made by early 2020 at the latest.

The Edge understands that the bidders include Japan Airlines Co Ltd (JAL), Qatar Airways and China Southern Airlines. Interest from the fourth is said to have cooled, though this is unconfirmed.

Allowing a private investor into MAB via strategic investment could mark the end of Khazanah’s 15 years of unsuccessfully trying to turn the airline around. It will hinge on some key questions.

These include whether the government is prepared to cede management control  — a potential dealbreaker given the state of MAB and why its past turnaround attempts have failed.

In the financial year ended Dec 31, 2018 (FY2018), Malaysia Airlines saw net losses narrow to RM791.71 million (FY2017: RM812.11 million) as revenue grew marginally to RM8.74 billion (FY2017: RM8.67 billion).

Its balance sheet also appears increasingly strained. FY2018 saw total liabilities exceed total assets, with shareholder equity now at –RM852.14 million. Based on its -7.01 net gearing ratio, the airline’s net borrowings amount to RM5.97 billion.

The speed of decision-making is also crucial. The longer it takes to decide, the closer MAB gets to running out of its existing cash, which weakens the selling position to interested bidders.

Taking more time to decide will also mean the government, via Khazanah, could be forced to inject more money in. That may add to Khazanah’s woes as MAB-related impairments came to RM3.1 billion in 2018, according to Shahril.

That is almost half of Khazanah’s total RM7.3 billion impairment last year as it reported a pre-tax loss of RM6.27 billion.

Shahril told the PAC that the big MAB impairment should have been staggered several years ago “as it has been evident that the (turnaround) plan was not working”.

That adds another dimension to Khazanah’s rolling funding plan for MAB. For the government, the decision to inject more money into the airline must be weighed against the potential economic value-added (EVA) from continuing MAB’s operations, not just its profit and loss position.

Given that money into MAB means money that cannot be invested elsewhere for the rakyat, choosing the right strategic investor quickly is critical as it may avoid or reduce further capital injection needs from the government.

To recap, Khazanah took over the airline in 2004 from the government, which in turn bought out controlling shareholder Tan Sri Tajuddin Ramli in 2000 following the Asian financial crisis. Tajuddin had entered MAS in 1994 by buying a 32% stake from the government for RM1.79 billion.

When the government bought out Tajuddin, it paid RM8 per share, double the market value back then. By the time Khazanah privatised MAB in December 2014, it paid 27 sen per share.

Since the government took over MAB in 2000, the carrier has undergone three turnaround programmes costing billions of ringgit. Its current CEO, Captain Izham Ismail, is the eighth man at the helm since Tajuddin stepped down as executive chairman in 2001.

The current turnaround programme, a RM6 billion plan that among others saw the first non-Malaysian at MAB’s helm, its privatisation in December 2014 and its 18,000-strong staff slashed to 12,000, has also failed.

The programme initially aimed to make MAB profitable by end-2017, but has shifted the deadline multiple times before Shahril, who joined Khazanah only in August 2018, affirmed to the PAC that it is unsuccessful.


What went wrong?

In his testimony, Shahril offered an interesting assessment of why the carrier is still struggling. Among others, he says MAB has done a very good job of cutting costs.

For perspective, the airline’s cost per available seat km (CASK) is lower than Singapore Airlines, Thai Airways, Cathay Pacific and only 15% to 20% higher than AirAsia, the biggest low-cost airline in Asia outside of China.

“So on the cost side, they are actually doing okay. The problem with MAB today is not so much of cost as it is of revenue,” Shahril told the PAC.

The cost efficiency is a reflection of the multiple turnaround programmes thus far, all of which share the common theme of emphasising cost-cutting and prioritising operational efficiencies.

What was perhaps lacking in hindsight was a parallel emphasis on finding a new business model that works in the face of shifting market realities.

MAB had dominated the local air transport market for decades before low-cost travel began surging in the early 2000s, spearheaded by AirAsia. From what was once near-dominance, MAS now has only about 20% of the domestic air travel market while AirAsia commands the largest  market share.

From Khazanah’s perspective, the local Malaysian market’s population is simply not enough to sustain the current domestic capacity. In other words, the domestic revenue pie is too small to share.

“If you look at Malaysia today, we actually have four home carriers — MAB, AirAsia, AirAsia X and Malindo (Air) — in a market of 30 million people and a massive oversupply where effectively you have about 1.7 seats for every actual customer,” Shahril told the PAC.

While the point is valid, the other side of the coin is that MAB has unsuccessfully tried to broaden its revenue pie abroad.

Its current turnaround sought to cut unprofitable domestic routes and shift to more long-haul, profitable routes but it remains loss-making today. As a quick comparison, Singapore Airlines, with an even smaller home population and higher cost base than MAB, remained in the black in 2018.

Meanwhile, the cost-cutting initiatives has compromised MAB’s quality of service, a point highlighted by the PAC and acknowledged by Shahril. MAB used to be a five-star airline as rated by Skytrax, but lost the status amid its turnaround struggles.

The revenue problem implies that MAB has yet to find the right business model, which will dictate the right positioning of its product. This is reinforced by Shahril’s admission to the PAC that on top of RM1 billion a year to sustain MAB as it is, improving its product would require even more money.

The airline even underwent a strange period in which it tried to fight AirAsia in a price war, acting like a low-cost carrier despite its premium cost base and product. It even charged below cost on some flights to fly amid its “load-active” strategy back then.

Adding to its woes is the perceived corruption and cronyism that ailed MAB amid its financial struggles. Past attempts to bring the hatchet to the problem have, so far failed.

Recall that Khazanah broke with tradition to appoint Christoph Muller as the first foreign CEO of the airline. An industry veteran of over 25 years, Muller came with a renowned track record as an aviation turnaround specialist, with the financial recovery of Aer Lingus among his noteworthy accomplishments.

Officially becoming CEO on May 1, 2015, Muller set to work. He cut 6,000 jobs and cut down MAB’s bloated supply chain from over 20,000 to 4,000.

It seemed to work at first. In February 2016, MAS posted its first monthly profit in years. But two months later, MAS announced that Muller had requested to leave due to “changing personal circumstances” and was gone after a six-month notice period.

On his way out, the Muller told German media that when he came in, the carrier was paying up to 25% higher than market value from its suppliers and that many MAB employees were “doing nothing”, hence the job cuts.

The Muller episode highlights why management control will be important to any strategic investor looking at MAB. The question is, is there enough political will to relinquish it?


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