This article first appeared in The Edge Malaysia Weekly on January 29, 2024 - February 4, 2024

WHEN Malaysia Airlines Bhd launched a new turnaround strategy in July 2019, there was much scepticism. After all, over the past three decades, the national carrier has drawn up as many as five turnaround plans to revamp its business and cut costs — including a much-publicised “hard reset” that saw 6,000 jobs slashed and the airline being removed from Bursa Malaysia and privatised. Yet, all these initiatives failed to achieve the desired result.

Still, sovereign wealth fund Khazanah Nasional Bhd, the carrier’s sole shareholder then, had lent its support to Malaysia Airlines’ long-term business plan (LTBP), which had aimed to achieve financial break-even by 2022, only to be thwarted by Covid-19. After threatening to shut down for good, the carrier entered into negotiations with its creditors to restructure more than RM15 billion in liabilities. It also saw Khazanah injecting RM3.6 billion in capital to strengthen the flag carrier’s balance sheet.

And now, five years on, the LTBP is bearing fruit.

Malaysia Aviation Group Bhd (MAG), Malaysia Airlines’ parent company, swung to its first annual operating profit of RM556 million in 2022, and has logged its first net profit for 2023 since the airline was privatised in 2014 as demand for travel soared and passengers returned to the skies, driving up airfares.

In 2022, the group reported a net loss of RM344 million.

“Our 2023 net profit exceeded our target by more than 30%. The group has also turned cash flow positive on a daily basis for the last 30 months, driven by a restructured balance sheet, strong revenue growth and less capacity in the marketplace. Our results indicate that our long-term business plan is progressing well,” MAG group managing director and Malaysia Airlines CEO Datuk Captain Izham Ismail (pictured) tells The Edge in an interview.

He declined to reveal the numbers, saying only that the flag carrier will announce its 2023 financial results in late March or early April.

To recap, Izham took over from Malaysia Airlines CEO Peter Bellew, who abruptly resigned in October 2017, midway through a three-year contract that was supposed to end in June 2019.

When he took the reins at Malaysia Airlines, Izham says, one of his goals then was to relist the national carrier on the local stock exchange.

“Perhaps I was naïve then, but relisting the group’s shares on Bursa Malaysia was one of my ambitions, as part of the MAS Recovery Plan (MRP),” he recalls.

Under the 12-point MRP announced in 2014, Malaysia Airlines was to have broken even in 2018, achieve profitability and return to the stock exchange via a flotation exercise in 2019. However, it missed the target amid a challenging operating environment.

In 2019, MAG unveiled the LTBP that would see the group achieve financial break-even by 2022 and generate enough income to cover the cost of capital for its operations two years later.

Following its debt restructuring exercise, MAG announced the second iteration of its turnaround strategy, LTBP 2.0 (2021-2025), under which it aims to become Asia’s leading travel and aviation services company, not just an airline; and envisages the group returning to profitability from 2022.

“Today, there are no deep conversations with my shareholders about the relisting (of Malaysia Airlines). My view is that it would be a low priority at the moment.

“Why? We have a healthy cash balance, which stood at RM5.2 billion as at end-October 2023,” Izham says, pointing out that the airline has enough cash on hand to carry on business “for years to come”.

“But we must invest smartly,” he cautions.

Today, Khazanah owns 83.58% of MAG, Turus Pesawat Sdn Bhd holds 12.94% and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) owns the remaining 3.48%.

According to Izham, Malaysia Airlines’ top priority this year will be to restore its reputation for premium service, which has been decimated over the past two decades as the carrier relied on discounting to fill cabins. During the period when Datuk Seri Idris Jala was at the helm, Malaysia Airlines had positioned itself as a five-star value carrier, providing five-star services at low-cost carrier (LCC) cost amid stiff competition from a new generation of LCCs in the region.

“Malaysia Airlines has had a chequered journey. Because of that, we were not able to reinvest. And one of the key factors that contributed to its chequered journey was not having a clear strategy in the marketplace.

“Five years ago, we were very clear about where our market was and who our customers were. We started reinventing ourselves and the platform that we used to do so was the LTBP,” Izham says.

The LTBP rests on five main pillars: 

(i) to become a premium Asia-Pacific carrier; (ii) recapture the domestic and Asean markets; (iii) drive deeper commercial partnerships; (iv) diversify its revenue streams; and (v) make digital the cornerstone of its business.

“With about RM5 billion cash in hand, we are reinvesting this sum back into our business, with a focus on enhancing and improving our customer experience. Malaysia Airlines has lost its way over the last two decades. We have fallen far behind our peers in the premium market, such as Singapore Airlines, Emirates and Qatar Airways, and catching up [with them] doesn’t happen overnight.

“But from this point onwards, we are mindful that customers are our centre of gravity. It is by elevating our customer experience that we elevate our business,” he says.

The year 2024 is being hailed by Izham as “the year of building credibility”.

Malaysia Airlines has set out three clear customer value propositions (CVPs) to be achieved by 2030.

“The first of three CVPs is cabin comfort, which comes with new airplanes. We will retrofit our older planes with new cabin standards to align with the new Airbus A330neos. We intend to do that with our fleet of seven A350s in 2025. So, if any of our passengers walk in the cabin of any of these aircraft, they won’t notice the difference.

“The second CVP will address our cabin services. We must uphold that customers are our centre of gravity and serve them with empathy. When we say ‘Malaysian Hospitality’, what does it actually mean? It is actually welcoming our passengers and staff as if we are welcoming them into our home. Not only in the cabin, but also from the point of booking, shopping and the check-in counter until the customer arrives at his destination. This starts from our staff right down to our suppliers, vendors and partners,” he says.

For example, MAG businesses in Melbourne and Singapore are operated by Swissport International AG and SATS Airport Services Pte Ltd respectively.

Its third CVP refers to enhancing customer experience through in-flight dining. In August last year, MAG ended a long-standing partnership with in-flight caterer Brahim’s Food Services Sdn Bhd (BFS), which had affected the standard of its food served onboard for some 2½ months.

“Coming out of the catering fiasco, our catering operations have stabilised today. Customers like our in-flight meals. And what we did along the way was to bring in eight new suppliers (including its 60%-owned unit MAS Awana Services Sdn Bhd and Pos Aviation Sdn Bhd),” Izham says.

“With regard to our partnership with BFS, MAG has moved on. We are still evaluating our next step with regard to our 30% shareholding in BFS,” he adds, declining to elaborate. Brahim’s Holdings Bhd owns the remaining 70% stake in BFS.

MAG had previously said that it may operate its own in-flight catering facility and work with international technical partners as part of its catering business continuity plan.

Izham concedes that while catering is not the airline’s core business, food is an important metric in the customer experience index. “If it is core to customer service, then catering becomes core.”

Malaysia Airlines has set its first milestone for customer experience, that is, to earn a place in the Skytrax list of the world’s most improved airlines by 2025. “That is our ambition. At the same time, we have also set our sights on reclaiming our crown as the world’s best airline cabin crew by Skytrax. By 2030, our ambition is to be among the top 10 airlines in the world and top five in Asia-Pacific,” he adds.

MAG is confident of turning a profit again this year despite ongoing pressures from rising fuel prices, foreign currency exchange fluctuations and changes in interest rates, says Izham. “The airline is very clear that it will not accept macroeconomic risks sitting down. If we continue with our strategy of international revenue flows and disciplined cost management, I don’t see why Malaysia Airlines cannot be profitable again this year. We are clear that we need to be agile and able to navigate those macroeconomic challenges.”

After decades of focusing on the price-sensitive domestic market, the airline restrategised itself as early as mid-2021 to focus more on the international market where passenger yields are higher, according to Izham.

“For the last 10 to 15 years prior to 2019, domestic flights contributed to 55% of total airline revenue while the remaining 45% of revenue was from international flights.

“But for the last 30 months, only 10% of our revenue was generated from the domestic market, while 90% came from international markets,” he says, noting that while this exposes the national carrier to fluctuating foreign exchange risk by focusing on international markets, it also benefits from natural hedging, for example, by having both revenue and expenses in various foreign currencies.

Notwithstanding this, a potential overcapacity in the local aviation industry this year remains a concern for Izham, who has been using his catchphrase “If you are a billionaire and dream to be a millionaire, open up an airline” of late.

“As a major industry player in Malaysia, I am still concerned over the overcapacity. How much can we run away [from this issue]? Because we are a national airline, we have to ensure connectivity in domestic Malaysia and the Asean region continues,” he reasons.

He says even before the pandemic, the Malaysian aviation industry had been plagued by overcapacity.

“Before Covid-19, the overcapacity was already 1.7 times; that is, five airlines were serving 32 million people. If you want more airlines to come into play, you have to really control capacity [in the marketplace]. Otherwise, you will be racing to the bottom. When you do that, it is not good for the industry because it is unable to reinvest to spur the economic movement of the country.

“We are supportive that the industry should have at least two products — premium and low-cost. But too many airlines delivering these products are just not sustainable,” he says, adding that this may result in passenger yields collapsing.

“Also, a lesson we have learnt from the Covid-19 pandemic is that we cannot over-rely on the airline passenger business. Thus, we have set an aspiration where 30% of MAG’s revenue will be generated from non-passenger revenue by 2025. The means revenue from the businesses of our non-airline units such as MAB Kargo Sdn Bhd (MASkargo), MAB Engineering Services Sdn Bhd, AeroDarat Services Sdn Bhd and MAB Academy Sdn Bhd,” says Izham.

Last year, non-passenger revenue contributed 22% to the group’s revenue.

Izham says the airline is on track to meet its key performance indicators under LTBP 2.0 thus far, except for its on-time performance (OTP) — which measures the proportion of flights that adhere to their scheduled departure. He pegged it to a constraint of resources and delays in aircraft and parts deliveries.

“We are not the only airline facing issues with OTP, but remain focused on the need to turn around our OTP. We are aiming to record an OTP of 85%, from 79% currently,” he adds.

MAG, which now employs about 12,000 staff, managed to navigate challenges arising from the pandemic without having to lay off employees — although it did ask them to take voluntary unpaid leave. It also cut the wages and allowance of senior management during the period. Since then, it has restored pilot and cabin crew salaries to pre-Covid-19 levels.

“We are fortunate to have staff who are committed and loyal. We did not sack anyone during the pandemic, but some people left for greener pastures. However, we all know that wage inflation peaked in 2023 and remains high, driven by a high cost of living.

“MAG is aware of the environment faced by our team members and we are taking measures to ensure that they are rewarded fairly. There are pockets in MAG where staff salaries are not on a par with the market and which MAG has to review and we are doing that now. (This week), I am going to the board of directors to (seek their permission to) restructure the reward scheme of this group of employees to be more incentive driven,” he says.

Often, losing its leader can leave a company adrift and disrupt business plans, but this doesn’t have to be the case.

The 63-year-old Izham, the longest-serving CEO of Malaysia Airlines since it underwent a full reset in 2014, already has a succession plan in place to provide a clear road map for the airline’s future, as he prepares for the time when he will no longer oversee the national carrier. Izham’s current tenure will end on Nov 30.

“Since the launch of LTBP in 2019, followed by LTBP 2.0 for 2021 to 2025, MAG has seen tremendous progress. We have already established a preliminary LTBP 3.0 that will take the group up to 2030. The management is currently having deep conversations with the board on this. We will make our final presentation in September,” he says.

“What is important for MAG to take this business plan forward to 2030 is the management team. You cannot have people who are retiring. You must build a team that is young and who can take this plan forward for the next 10 years. The average age of C-suite executives at MAG is 46 years. The average age of a general manager is 40 to 45 years, while for a senior manager it is 35 to 40 and manager is 25 to 30.

“This young team has been involved in the thought process from the beginning. If you put in a new team, they may not understand the thought process and the evolution of LTBP and what it takes to take it to its third iteration,” Izham concludes. 

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