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MAB should be ready to fly 'solo'

KUALA LUMPUR: Malaysia Airlines Bhd (MAB) needs to prepare for the impending day when it has to be successful in the competitive airline sector without any government support, industry observers said.

Economist and former Transport Ministry secretary-general Tan Sri Ramon Navaratnam said it was not sustainable for MAB to continue relying on the government’s financial support.

“As long as MAB knows that it will be bailed out, there is no incentive for it to perform its best,” he told NST Business recently.

Ramon said to compete effectively and make a profit, airlines must resolve unproductive internal environment, and choose the most entrepreneurial options. There was also no substitute for discipline and hard work.

He said the Pakatan Harapan (PH) government was not likely able to continue supporting MAB as the previous administration, due to the anticipated weaker budget allocation in 2019 as it grappled with reducing over RM1 trillion in national debt and liabilities.

“Hence, there has to be a complete overhaul of MAB in terms of its management and operations. Otherwise, MAB should prove how long it can sustain these losses, if not because of the government’s aid and subsidy,” Ramon added.

MAB’s sole shareholder, Khazanah Nasional Bhd, had committed RM6 billion for the airline’s five-year turnaround plan launched in 2014. It was recently reported that the airline had used up more than half of the amount so far.

Asian transport equity research firm Crucial Perspective chief executive officer Corrine Png said factor’s beyond MAB’s control — the sharp spike in jet fuel prices and weaker ringgit — had contributed to the airline’s higher operating costs.

“MAB needs to scale back its capacity on loss-making routes and work on trimming its unit costs further to stem losses. It should also work on improving risk management practices, such as fuel and forex hedging strategies, to reduce future earnings risks,” she said.

Png said MAB was facing stiff competition from AirAsia Group and the Gulf carriers’ aggressive expansion with much broader network reach.

She noted that MAB’s request for information (RFI) for the wide-body, twin-aisle aircraft was part of the airline’s order to replace older widebody aircraft in its fleet.

“This will help to improve MAB’s cost efficiency as the newer generation aircraft are more fuel efficient. The deployment of widebody aircraft also makes economic sense on routes where airport slots are constrained,” she said.

Png said for now, MAB would need financial support from the government to weather challenges including unhealthy financial account, weaker ringgit, rising jet fuel and intense competition from regional peers.

“However, depending on government bailouts is not sustainable in the longer term. MAB needs to work on finding its niche in the industry and look at ways to boost ancillary income,” she said.

Png said many long-haul routes between Malaysia and Europe/North America were still under-served and could present growth opportunities, if MAB can improve its cost competitiveness versus sector peers.

Maybank Investment Bank aviation analyst Mohshin Aziz said with little financial information on MAB available publicy, the airline’s yields were too low against its higher operating cost.

“The 2017 numbers were particularly disappointing because it was a record year for Asia Pacific and global airlines. Many airlines made record profits, including AirAsia and AirAsia X,” he said.

On whether MAB was on track to break even in 2019 and be profitable in 2020, Mohshin said it was almost impossible to quickly solve the problem due to severe pilot shortage, said to exceed 150 pilots.

“We noticed MAB has cut its capacity and increasingly merged its flights due to pilot shortage issues,” he said.

Mohshin said while MAB was a substantially smaller airline today than what it was in 2014, the airline’s fleet composition was still fragmented.

“MAB’s fleet consists of ATR, Boeing 737-800, Airbus A330/A320, Airbus A350 and the Airbus A380. It would be more efficient to narrow down the number of aircraft type in the fleet. The A380 is the aircraft that needs to be removed as soon as possible,” he said.

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