Thursday 20 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on March 25, 2024 - March 31, 2024

MALAYSIA Aviation Group Bhd (MAG), the parent company of national carrier Malaysia Airlines Bhd, will reward its staff with a bonus of between two and five months’ salary after reporting its first annual net profit since the airline was privatised in 2014. Prior to that, the then Malaysian Airline System Bhd had made a financial loss every year since 2011.

MAG group managing director Datuk Captain Izham Ismail says the payouts vary depending on employee performance.

“We believe that by implementing a performance-based bonus structure, we can incentivise our staff to deliver on the customer value propositions (CVPs) we’ve developed. Recognising the current economic climate, we are committed to fostering a competitive compensation package that not only motivates achievement but also helps us retain top talent,” he tells The Edge. As part of its plans to restore its reputation for premium service, MAG set out three clear CVPs to be achieved by 2030 — cabin comfort, cabin services and enhancing customer experience through in-flight dining.

The airline group now has around 12,000 employees on its payroll.

Along with the bonuses, Izham says pilots, cabin crew, engineers and technicians at MAG are set to receive a pay increase in line with the rising cost of living and inflation.

The decision by MAG to pay higher wages also reflects the intense competition for aviation workers, as global airlines seek to strengthen their operations in response to high travel demand after the Covid-19 pandemic. It is understood that Middle East airlines such as Qatar Airways and Emirates are among the highest-paying airlines for pilots and cabin crew, while local aircraft engineers are leaving Malaysia-based carriers to join other airlines.

“We do understand that our crew who fly to overseas stations are impacted by currency fluctuation and thus, we will compensate them with an increase in flying allowance. Depending on the region, they will receive increases in allowance of as much as 30% from their current base,” Izham says.

Nevertheless, he concedes that MAG’s new pay package for pilots, cabin crew, engineers and technicians will still be lower than those of some rival airlines; however, the salary increases would “narrow the gap” between MAG and the market.

“Currently, MAG is undergoing a reward philosophy/change, driving productivity, efficiency and [being] incentive-based. We want to transform ourselves to be a performing organisation. Henceforth, the reward scheme/structure has to change to drive performance. This is currently a work in progress.

“But we recognise that immediate intervention needs to be done before the completion of the reward scheme. The four key groups of people who we feel need to be addressed under Phase 1 are pilots, cabin crew, engineers and technicians. We looked at the cost of living and the market [in coming up with the pay raises].”

He says MAG will revise its current reward scheme for the entire organisation under Phase 2 to “promote further efficiency”.

“We expect to complete the exercise by the end of 3Q2024,” Izham says, adding that the group has hired a consultancy to advise on the new reward scheme for employees. “We have engaged an adviser to help us, who has done it for 56 airlines.”

MAG 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 allowances of senior management, including pilots, during the period.

The last salary revision that MAG had undertaken was in August 2022, when the MAG Total Rewards Transformation Programme was introduced, under which its permanent employees were paid based on their performance on the job. The rewards structure was to make variable the costs of the organisation, optimising them so that it would not be laden with fixed costs.

“At the end of the day, you can’t stop people from leaving. The grass will always be greener on the other side depending on the person. What is their objective? What is their purpose? And what do they want to achieve? Yes, there are people who want to leave and also people who want to join. People who left Malaysia and want to come back.

“As a CEO, I have to be responsible to remunerate my staff accordingly but I have to balance that with other stuff as well. The principle of our reward scheme coming out from Covid-19 has to be productivity-driven. For an organisation to be profitable like Malaysia Airlines today, it’s because we harness variability to the maximum. So if an aircraft doesn’t fly, we don’t pay money. We now pay power by the hour for the usage of an aircraft engine. Even our contract obligations with service providers are all variables coming out from Covid-19. The same goes for our employees. The harder you work, the more you get,” he adds.

“We have been underinvesting in our products, services and people because we were cash-strapped all these years. Now we have reached a point where we have to invest in our products, services and people in order to grow and compete in the marketplace. When you talk about investing in people, you are also talking about rewarding them properly because there is a lot of competition in the market,” MAG group chief financial officer Boo Hui Yee tells The Edge.

MAG reported a net profit of RM766 million for the financial year ended Dec 31, 2023 (FY2023), compared with a net loss of RM344 million the previous year.

“Robust passenger traffic from the premium segment, intensified international network flow, active capacity management, deep partnership collaborations between airlines and non-airlines alike and stronger yield for passenger segment drove profit,” Izham said during a news conference on MAG’s 2023 financial performance last Thursday.

He says the group also expects to be profitable this year.

In FY2023, total revenue surged 31% to RM13.85 billion, though cargo revenue fell 49% to RM1.41 billion due to overcapacity in the market. “Passenger revenue grew 64% year on year on the back of increased capacity of 61%. Yield eroded by 4% to 5% [in 2023] compared with 2022 as more capacity was deployed into the market even though the passenger load factor was strong at 77% in 2023 compared with 72% in 2022,” says Boo.

MAG’s cash balance at end-2023 stood at RM4.27 billion, down 6% from RM4.56 billion a year earlier, driven by capital expenditure spending. The group paid RM632 million cash for the acquisition of one A350 and two A330s in FY2023.

“Amid a high interest rate environment, we didn’t want to finance the aircraft and get locked in with high interest for a long period. Therefore, we bought them in cash,” says Boo.

“But if you add that [RM632 million] back into our cash balance, on a daily basis, we had generated positive cash flow of RM850 million. Going forward, we expect the cash balance to remain healthy and strong. The forecast for 2024 is RM4.606 billion. For 2024, we expect cash to remain positive on a daily basis,” she adds.

Izham notes that the group has accumulated about 42% of its cash balance in US dollars. “This will make us stronger in circumnavigating the weaker ringgit at the marketplace. In 2023, we hedged 29% of our fuel needs and we continue to hedge aggressively for 2024.”

Airfares likely to remain high in 2024

As the aviation industry continues to be dogged by supply-chain constraints that have slowed aircraft production rates and deliveries, the bad news for consumers is that airfares are expected to remain high this year, according to Izham.

“Disruptions in the supply chain will make aircraft high in demand. So the rates will go up. The cost of sales will go up,” he says.

MAG group chief strategy and transformation officer Bryan Foong Chee Yeong says the group is closely monitoring the supply chain issues that are affecting aircraft reliability and parts.

“That is a global problem that all airlines are facing at this point. We are also in the process of receiving 737-MAXs from Boeing and there have been disruptions. We are looking to adjust our plans to match those disruptions happening. Within our industry, manpower-related issues and shortages and escalating labour costs are key issues affecting us as well,” he adds.

MAG saw its on-time performance (OTP) — which measures the proportion of flights that adhere to their scheduled departure — drop to 72% in 2023 compared with 82% the previous year, where it was affected by aircraft reliability.

“We are in constant discussion with Boeing around the state of the aircraft. We are in the midst of a 737-8 MAX delivery programme, and we are monitoring the situation very closely with Boeing in terms of what is happening. We are working closely with them to talk about the changes and improvements they are making to their processes to make sure that we are not impacted adversely in any way. Having said that, we are experiencing delays in deliveries from Boeing,” says Foong.

MAG is expecting 14 new aircraft to be delivered this year, comprising 10 737-8 MAXs and three Airbus A330-900neos.

“We are not 100% sure that Boeing is going to deliver the 10 737-8 MAXs, but we hope they do. We as a network have been quite impacted by the lack of aircraft that they promised to deliver. We continue to work with Boeing on how to resolve this problem and our lessor Air Lease Corp (ALC) around the delivery of the aircraft as planned,” says Foong. MAG has an order book of 25 737-8 MAXs through its operating lease with ALC. It took delivery of its first 737-8 MAX last November, with the rest to be delivered progressively through to 2026.

Izham points out that the 737-8 MAXs are largely to replace its older aircraft. “The delays mean that we have to extend the leases of our current fleet, which are of older products, not competitive in the marketplace and less economical.

“And if you go back to the lessors to extend leases, you might not get the competitive rates that you achieved in 2021 during the restructuring. We have ambitions to fly to certain places, and we can’t do that. Also, we can’t deliver first to market.

“The targeted delivery date of our first A330neo is Sept 27. Contractually, we are supposed to receive four this year, but Airbus is not spared from supply chain issues.  The A330neos are an important product for us to raise our flag that this is a new Malaysia Airlines. If the delivery of the A330neos is delayed, the leases will also be extended,” he adds.

MAG is purchasing 10 A330-900neos directly from Airbus and another 10 to be leased from Dublin-based Avolon. 


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