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This article first appeared in The Edge Malaysia Weekly on October 3, 2022 - October 9, 2022

A new all-red airline will take to the skies soon, and one should not be faulted for confusing it with the present incumbent low-cost carrier (LCC) at first glance. After all, it is no secret that the majority of MYAirline Sdn Bhd’s top management and employees had previously worked for AirAsia Group, including its co-founder and CEO Rayner Teo Kheng Hock.

And Teo has roped in his former colleagues at AirAsia, Kathleen Tan and Stuart Cross, for the venture. Tan, former China president of AirAsia, is now MYAirline’s chief executive adviser, and Cross is its chief operating officer (COO).

In an interview with The Edge at the airline’s office in Subang Jaya, Selangor, last week, Teo did not shy away from acknowledging that there were many similarities between MYAirline and AirAsia, from its business model to its aircraft type and the use of red, but he believes the new budget airline can differentiate itself by focusing on customer experiences and seat offerings.

“When we were choosing the colours to grace our airline, we told our team to avoid red, blue, purple and orange. After two to three days, however, we couldn’t find any colours interesting enough to make us want to look at it more than once. We would always skew towards the colour red, and the significant role red plays in Chinese culture also played a large part [in our final decision],” he says.

Thus, MYAirline has unveiled a livery that pairs red with streaks of grey.

Teo likens it to English football clubs Liverpool and Manchester United, arch-rivals on the field that don the colour red.

But MYAirline is determined to prove itself to be the “better red”.

“As a start-up, because we are small, we are nimble, more aggressive, and if we get ideas, we can work on them quickly. And if anything doesn’t go right, we will make sure that we address it just as quickly,” he says.

MYAirline recently received its air operator’s certificate from the Civil Aviation Authority of Malaysia (CAAM), paving the way for Malaysia’s newest low-cost start-up to start flying passengers. The approval essentially confirms that MYAirline has complied with all safety regulations set in place for aircraft operations.

But there are still several regulatory approvals, including a full air service licence from the Malaysian Aviation Commission, that are needed before it can put flights up for sale. Until then, it cannot disclose the new routes it plans to fly to, except to say that it will start operating with domestic flights in the one-hour range and target leisure traffic with its three Airbus A320s.

“Pretty much everything is in place. We are ready to go,” says Teo.

And it is looking to fill the void left by incumbent players, which were forced to quickly shrink, cut routes and ground hundreds of planes during the Covid-19 pandemic.

Still, the new airline’s entry into the capital-intensive sector has raised eyebrows, with many pointing to the chequered history of airlines in Malaysia as well as the daunting global economic outlook gripped by recession fears, surging inflation and sky-rocketing jet fuel prices. Even before the pandemic, incumbent airlines such as Malaysia Airlines, AirAsia, Batik Air (formerly known as Malindo Air) and Firefly were unprofitable as the airline market was suffering from overcapacity and irrational competition.

Teo points out, however, that MYAirline has several things going for it, including lower rates for new aircraft leases and abundance of airport slots and skilled labour (pilots and cabin crew) in the aftermath of the pandemic, which means previous barriers to entry have been lowered.

“We are reaping the benefits of getting good planes [at lower leasing rates] and we have secured as many planes as we can,” he says.

Maybank Investment Bank (Maybank IB) aviation analyst Samuel Yin Shao Yang concurs, noting that leasing rates for an A320 has dropped to about US$200,000 (RM927,000) per month, down 33% from US$300,000 per month before the pandemic.

Teo also says MYAirline has had no issue hiring talents such as pilots and cabin crew after Covid-19 lockdowns led incumbent airlines such as AirAsia and Batik Air to downsize. The airline already has about 330 employees, but that number is expected to increase to 500 by the year’s end.

“We are still seeing the economic benefits [from the pandemic], but we are also wary that at some point in time — maybe next year — we will see some changes when recovery happens,” he adds.

Maybank IB’s Yin says it will not be an easy start for new airlines such as MYAirline, owing to the recent strength of the US dollar and still-high oil prices.

“US dollar-denominated expenses typically account for 60% to 70% of an airline’s expense. Meanwhile, oil prices are in their best of times, which is not so great for airlines as jet fuel traditionally accounts for 30% to 50% of their expenses,” he tells The Edge.

Nevertheless, Yin notes that lower aircraft lease rates and higher fares have more than compensated for the weaker ringgit and still-high oil prices. The ringgit has fallen around 11% against the greenback over the past year.

“The saving grace for MYAirline is that fares in the last two years have been high, and that was due to low [seat] capacity. But what we are seeing is that fares have remained high despite capacity being brought back [post-pandemic]. The reason for that is many airlines had cut capacity during the pandemic and, thus, with demand recovering, supply remains tight and fares remain high,” he says.

He adds that fares in general are up about 25% since the pandemic. “In some cases, fares have doubled, especially for long-haul flights as airlines like AirAsia had stopped flying [to some of these long-haul destinations] and have yet to resume their service. A return ticket to London now costs RM10,000 compared with RM5,000 before the pandemic, while a return ticket to Sydney or Melbourne costs RM5,000, up from RM2,500 before the pandemic. Yet, people still want to fly.”

According to Yin, what is preventing the aviation industry from fully recovering to pre-pandemic levels are the backlogs at maintenance, repair and overhaul (MRO) service providers, which is making it harder for incumbent airlines to return airplanes that were grounded during the pandemic to the skies as quickly as they would like. Global airlines were forced to slash capacity to as little as 2% of pre-pandemic levels during the pandemic.

“Demand has been quite resilient, actually. Thus, I believe the issue has more to do with redeploying of planes rather than demand. The MRO service providers are unable to repair and redeploy aircraft fast enough, owing to a shortage of spare parts and labour,” he says.

Association of Asia Pacific Airlines (AAPA) director-general Subhas Menon says it will take time for airlines to restore their capacity to pre-pandemic levels as the aircraft have to undergo maintenance checks and staff will need to be retrained.

“It’s not like turning a tap on and off. Airlines have to make a lot of preparations to bring their flights back. The staff will need to be retrained after not working for more than two years, while many have left the industry during the pandemic. So, you have to attract them back. Just the background checks and certification required by authorities can take two to four months,” he adds.

Still, with travel restrictions starting to ease in places such as Hong Kong, Japan and Taiwan, Subhas believes this is an optimal time for new airlines like MYAirline to launch.

“If you look around, there seems to be a lot of pent-up demand at the moment. Many countries are reporting a huge surge in demand in the last few months and it doesn’t look like it is abating anytime soon,” he continues.

“But, of course, we have to be conscious of the headwinds ahead such as surging inflation; rising interest rates; the strong US dollar, which makes other currencies weaker; and the supply chain problems that affect food and energy security and also drive up cost. But the good thing is that, even though everyone is predicting a [global] recession, it will be a job-full recession. In other words, unemployment is very low.”

The people behind MYAirline

Companies Commission of Malaysia (SSM) data shows that Zillion Wealth Bhd has an 88% stake in MYAirline and Trillion Cove Holdings Bhd has 10% equity interest, while Teo owns the remaining 2% of the airline’s shares. Both Zillion Wealth and Trillion Cove, a money lending and financing company, name Datuk Goh Hwan Hua as a director.

Teo has more than 34 years’ experience in the aviation industry, 15 of which were spent at AirAsia as group head of sales and distribution.

“Having been in the airline industry from day one, one of the goals I had was to one day start a new airline,” he says.

According to Teo, both he and Goh have been working to start the airline since the onset of the pandemic. “I first met Datuk Goh when I was working with AirAsia and he was providing some services to the airline. That’s how we became friends and that’s how we got connected. It’s been over 10 years.”

Apart from Goh and Teo, MYAirline’s three other directors are Datuk Abd Hamid Mohd Ali, former COO of Malaysia Airports Holdings Bhd; Datuk Seri Azharuddin Abdul Rahman, former director-general of the Malaysian Civil Aviation Department (now known as CAAM); and Jothi Prakash Murugan, who is a director at Trillion Cove, the SSM filing reveals.

“We recognised the fact that we needed to have a strong team in terms of the board to support me. So, we went out there to look for them. They did not need much convincing because everybody bought the idea of a new airline very quickly. They believe in this as well,” says Teo.

Avoiding pitfalls

Teo recognises that the operating environment in Malaysia will remain challenging even after the pandemic, amid a generally price-sensitive population, with many players in a small market and high jet fuel prices. As such, he is making sure MYAirline does not over-expand too fast.

“We have seen situations where some people are very aggressive. To a certain extent, they become too aggressive. When that happens, they tend to put in a lot of capacity,” he says, adding that MYAirline expects to expand its fleet to more than 50 planes in five years. “We are not going in and making empty promises or over-promising.”

According to AAPA’s Subhas, the pandemic has so far not been partial to any kind of business model. Both LCCs and full-service carriers (FSCs) alike have been hit hard by the border closures and multiple lockdowns.

“Likewise, the recovery is also not partial to any kind of business model. The same factors apply — the airline business, whether you like it or not, is a high-cost business. It is all a matter of how airlines manage their finances to make sure they are always cash-flow positive. So I don’t think it really matters what sort of business model you are adopting; it is more how you manage demand and supply,” he says.

Maybank IB's Yin believes starting an LCC would be a better bet in a potential recession as cash-strapped travellers would choose low-fare airlines.

“There are fears that the hawkish US Federal Reserve’s actions will ultimately lead to a global recession, probably next year. And LCCs tend to do reasonably well [during a recession] as consumers trade down [to cheaper travel],” he says.

Yin adds that airlines are behaving more rationally post-pandemic, pointing to Malaysia Airlines, which is selling tickets at a more reasonable price level.

He says: “They [Malaysia Airlines] have more resources because of government backing. Its group CEO Captain Izham Ismail had come out to say that his key performance indicator is based on how much money he draws down from Khazanah Nasional Bhd.

“That tells you that the market is behaving more rationally.” As part of the national carrier’s debt restructuring in 2020, Khazanah had committed to injecting RM3.6 billion in new capital into holding company Malaysia Aviation Group Bhd to fund the group’s business until 2025.

“The same goes for Batik Air. They have been loss-making since they came to Malaysia. But fare-wise, they are now behaving more rationally. They are taking delivery of 10 Boeing 737-8 MAX aircraft [from Lion Group this year] and that’s about it. So, everyone is in this kind of [cautious] mode,” says Yin.

“I do agree with what the boss of Ryanair, Michael O’Leary, said — that the era of ultra-low airfares is over.”

 

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