Malaysia Airlines System

1. BACKGROUND

Malaysia Airlines' origins began with a joint initiative between the Ocean Steamship Company of Liverpool, the Straits Steamship Company of Singapore and Imperial Airways to the incorporation of Malayan Airways Limited (MAL) on 12 October 1937.

In 1966, the Governments of Malaysia and Singapore jointly assume the control of MAL.

In 1971, Malaysia Airlines System Berhad (MAS) was incorporated with an authorized capital of RM100 million. In 1976 MAS enter the information age when it computerized its whole operation.

In the 1980s, MAS became the first major government agency to be privatized and in 1985, MAS entered the corporate sector by offering 70 million shares for sale. This exercise raised Malaysian Airline System's paid-up capital to RM350 million and brought reserves up to RM227 million.

Today, apart from being a carrier, Malaysia Airlines has diversified its operations into human resource development, training, catering, property consultancy and technical ground support for aircrafts.

However, the expansion program in mid 1990s has given adverse effect to the company. Unfavorable market condition (Asia Economic Crisis) has also worsens the situation. Burdened with debts obligation and inefficient management, MAS needs for urgent transformation.

Presently, government has taken control of the carrier and implemented various measures to turn over the business.

2. ANALYSIS

2.1. INTERNAL ENVIRONMENT - SWOT Analysis

Strengths

a. Government Support

MAS as a national flag carrier have a very important role to Malaysian reputation. The unsuccessfulness of MAS is also meant the unsuccessful of Malaysia. Thus, MAS could depend on the government to protect it from financial distress or any other difficulties.

b. Strong Recognitions

For the past few years, MAS has won numerous recognitions in term of its service in the world.

In the year 2002 for instance, it has coveted the Best Cabin Crew Award from international research house. These recognitions would be of much help in promoting its business. Having received various recognitions and awards, helps in building customers and staffs’ confidence toward MAS.

c. Modern Facilities

MAS is also known as to be the safest airline in the industry. It also has the latest, modern aircraft in its fleet, and excellent facilities and infrastructure at its new base in Kuala Lumpur International Airport (KLIA). Those assets are essential in assisting MAS to provide satisfactory services to its customers.

d. Experiences

MAS has been in industry for more than 4 decades. They have vast experience as compared to new industry players.

Weaknesses

a. Poor Management

For 5 consecutive years since 1997, MAS has suffered losses due to inefficient and incompetence of management. Poor revenue management and expansion decision lead to the negative return of the business. This gives bad impression to our national carrier.

b. Government Interference

The government has interfered much in the MAS management. This also contribute to the incompetence on part of the management to freely manage the business.

c. Debts Problem

Economic recession that started in 1997 had given dramatic impact to MAS, when as at that time MAS was in the process of expanding its operation. The company has ordered 25 new aircrafts from Boeing and set up several overseas freight centers. Sudden market downturn, which in effect leads to unfavorable exchange rate immediately, increase MAS debts burden. This had given tremendous effect to the ability for MAS to run the business.

Opportunities

a. Tourism Industry

The Government through its Tourism Ministry has been focusing on the development of tourism industry in Malaysia. It is said that this industry has contributed a big amount to Malaysian fund and the government has always given full support in this industry. The low exchange rate of Malaysian Ringgit has given more reason for tourists, especially from rich countries, to come to Malaysia especially for shopping and traveling. Thus, the government has been actively promoting Malaysia as a tourists’ destination. One of the steps taken is to make KLIA a regional air hub. Another is the launching of ERL system to connect Kuala Lumpur city with the airport (KLIA) in Sepang. Clearly, this would indirectly benefit MAS.

b. New Markets Segment

MAS has identified some new markets to be captured. It has found that many people used MAS service to travel to Indonesia, China, Thailand and India.

Threats

a. 9-11 Event

On 11 September 01, another dramatic episode happened in US where it effected to most of airlines companies in the world. The event has caused fear to passengers in air travel.

This resulted to major losses for many airline companies where the numbers of passenger using the service has dropped drastically. Consequently, some of the companies choose to merge in order to absorb losses and becoming more competitive. With the merging of these companies they had increased their routes and market which directly give impact to MAS passenger load.

2.2. INDUSTRY ENVIRONMENT – 5 Forces Model

Threat of New Entrant

a. International Entrants

The threat comes from the competition with other international airlines such as Singapore Airlines and Thai Airlines. This exists because of an outdated regulatory system that guaranteed each sovereign country airlines to the world. As the government is really ambitious to set up and to increase usage for KLIA as the hub in this region, they have signed many MOUs with other players to grant landing on KLIA. This immediately gives threat to our national airlines.

b. Local Entrants

Air Asia, the Malaysia’s first no-frill budget airlines, Transmile Air (for Haj) and Pelangi Air are among competitors which are playing in local industry. Air Asia for example with their hard work efforts and promotions have attracted many local passengers to use their service in local destination.

Power of Customers

These concern with price, quality of services, convenience, schedule and comfort. With plenty alternatives abound, customers are free to choose the airlines that suit to their needs. At international front, companies such as SIA and UAE they are competing to gain market segment in this region by providing quality services to their passengers. In the domestic market, airlines such as AirAsia has given inexpensive rate for its tickets.

Power of Supplier

Boeing is the main supplier for MAS aircrafts and parts. It has dominated the supply of aircrafts in the world, though Airbus tries times and again to repartition the market pie. MAS has been using Boeing aircrafts and services for quiet a long time. Thus, MAS maintenance people have been very familiar with Boeing crafts. Due to this, it is difficult for MAS to switch to another supplier. With no choice on part of MAS, Boeing could demand for a high price.

Substitutes

For long-distance travel, where time is of essence, air travel has no ‘real’ alternative to it. Although, sea and land journey can be of substitutes, they can not match the convenience, time-efficient, and comfort of travel by air. Therefore, we found MAS would not have to worry on the existence of substitutes to air travel, specifically to long-distance, far-reached travel.

However, as to short distance journey, customers would prefer to use the modern land alternatives. For instance, trip within Peninsular Malaysia would be of much cheaper through land than that by air. This, land-travel, may pose as a viable option to what is offered by MAS.

Competitive Rivalry

In the regional market, big and strong competitor such as Singapore Airlines (SIA) gives great impact on MAS. At global market, the event of Sept 11, which resulted to cost escalation and margin erosion, has made US and European airlines to merged, leading to existence of large dominant airlines groups.

2.3. GLOBAL/EXTERNAL ENVIRONMENT – S T E P Analysis

Sociocultural

Malaysia is composed of three major races where Islam is the official religion. Its richness in cultural diversity and could be used as the attracting factor for the tourists to travel to Malaysia, and indirectly helped MAS to improve its operation to include more foreign destinations.

Economic

The Asian economic crisis in the late 90s that has affected the South East Asian region was also a contributing factor that caused MAS to suffer 5 consecutive losses (refer to Appendix 1.1). This situation got worsens as the Malaysian Ringgit currency was devalued, which in turn led to high interest on foreign trade. Investments made by MAS to expand its business by purchasing more aircraft were highly affected by this. The devaluation of RM had also led to low spending power, which caused lesser people to travel by air.

The tragedy of September 11 has also contributed to the reported losses by MAS. Since then, the world economy was on its downturn and the world masses were getting ‘phobia’ to travel by air. MAS have to bear the losses as its main operation is based on the international network.

Politics and Legal

Due to the very bad economic recession, Malaysian Government through Bank Negara had to revise the foreign and monetary policies. As such, Ringgit Malaysia (RM) was pegged to RM 3.80 to 1 US dollar. The Government had to impose stricter and tighter policies for Malaysian to travel abroad to avoid currency outflow, which indirectly caused low rates of travelers for MAS. The situation worsens, when the regional economic recession was coupled with the instability in the political arena in Malaysia in 1998. As a result, the investors lost their confidence, being more cautious and prefer the attitude of ‘look and see’ and some of them have ceased their operations in Malaysia, resulting in more layoffs.

Technology

MAS has also invested in IT and telecommunications advancement to increase the efficiency of its operation. More people can have access to the MAS services just through the Internet where people can book and buy their ticket online. Besides that, more promotions and advertisements can be done through the Internet, which can attract more and more people to travel with MAS.

The growing demand in cargo services has resulted in more airlines opting to convert their passenger aircraft into cargo aircraft. This new trend provides an alternative for MAS to reduce some money on purchasing new cargo aircraft and perhaps enter into other possible profitable operations.

Institutional

MAS is fully supported by the government even though it reported losses for the last 5 consecutive years. The Ministry of Transportation and Ministry of Tourism could help MAS whether in terms of improving the public services and developing new infrastructure as well as promoting the national air carrier. The financial institutions have also show their support by providing MAS with loans, lenient debt settlement and restructuring.

Physical

New infrastructure like the Kuala Lumpur International Airport (KLIA), the speed train Expressway Rail Link (ERL), Light Railway Transit (LRT) and public transport were designed to give maximum access for user to the MAS services. Besides that, the cargo facilities infrastructure such as the international port has also helped MAS in providing an added value to its cargo service.

3. KEY ISSUES & PROBLEMS

Basically, MAS’s problems can be categorized into 3 key issue namely financial problems, operational problems and management problems.

3.1. FINANCIAL ISSUES / PROBLEMS

In 1995, MAS’s management had launched a strategic initiative to aggressively scale up its operations and international network. As such, MAS has placed an order of 25 new Boeings aircraft which are to be delivered in 5 years time. The purchases of the aircraft were made in US Dollar and no hedging method was used at that time because of the stable currency between Ringgit Malaysia against U.S Dollar. Unfortunately in 1997, Asian countries including Malaysia incurred economic down turned which, has resulted the devaluation of Ringgit Malaysia and an increased of interest rate. Consequently, MAS’ cost of purchase increased tremendously.

Due to the above scenario, MAS was reported to incur 5 consecutive losses for the past 5 years. In 2001, MAS’ after tax loss was reported to be RM1.3 billion. Prior to the restructuring exercise in 2002, MAS had incurred a net loss of RM900 million and its total debt was amounting up to RM9.2 billion.

3.2. OPERATIONAL ISSUES / PROBLEMS

Prior to economy downturn, MAS’ management was aggressively expanding MAS’ operations. The management was emphasizing on quick visibility, to be present around the world. Many new destinations (which most of them were not viable) have been introduced. (such as Denmark, Finland, and South Africa). In addition to that, MAS’ product marketing and yield management division focused merely on selling their products to fill the quotas and not to improve the profit yield.

3.3. MANAGEMENT ISSUES / PROBLEMS

MAS were facing the problems of management competency. Most of its subsidiaries, like MAS Catering and MAS Cargo were in bad financial shapes (i.e. operating at loss). Besides, some of the subsidiaries were transferring money for the directors’ personal use. The previous management has also failed to lead MAS efficiently and makes a viable decision on its expansion program.

4. SOLUTIONS

To address the above mentioned issues, government and the MAS new management team have taken several steps. Followings are those actions that have been taken or planned:

4.1. FINANCIAL SOLUTIONS

Due to MAS bad financial standing, the government has to step in to save the entity from further deterioration. It has outlined and implemented a restructuring plan which details are as follows:-

· RM6.9billion liabilities would be transferred to Penerbangan Malaysia Berhad (PMB) (government-owned)

· 73 aircraft worth RM5.1 billion would also be transferred to PMB

· 482.5 million new shares at RM3.85 per share would be issued for assumption of net liabilities of RM1.85 billion

· 70% of MAS Catering would be sold for RM175mil to Gubahan Saujana Sdn. Bhd.

· RM1.48 billion worth of various MAS properties would be sold to Ministry of Finance Inc

· After the restructuring process, the new MAS will operates international passenger & cargo (domestic& international) services.

· But, MAS would still operates domestic routes on behalf of government for fees

· MAS would remain listed on the Exchange market.

4.2. OPERATIONAL SOLUTIONS

MAS is trying to revive its operations by introducing rationalization program where MAS will terminate its existing 12 unprofitable destinations. By doing this, MAS is saving approximately RM190 million per year. Further, MAS will also re-deploy its aircraft to more profitable routes such as Indonesia, Thailand, Philippines, Europe and to explore Japan market. (more focus Asia destinations).

New destinations to be developed which to penetrate markets that will provide high yield. MAS will increase flight frequencies to those destinations. MAS will also going to improve its Revenue Management System, so as to generate high returns and cut down the operating costs.

In addition, MAS is also planned for aggressive global advert campaign and trying to seek a strategic alliance with other reputable airlines.

4.3. MANAGEMENT SOLUTIONS

In order to revive MAS back into its healthy condition, the previous management was replaced. A new professional management team spearheaded by Datuk Md Nor Yusof, a Chartered Accountant were hired to manage MAS. Key figures like Datuk Azman Yahya and senior executives of Qantas Airlines were promoted into the new team. A few reputable consultant firms were also appointed to advise and consult MAS on how to transform the losing company into efficient and profitable one (such as BinaFikir Sdn Bhd).

5. RECOMMENDATIONS

Having gone quite thoroughly with the analysis, we would like to make several recommendations to the MAS new management team. These recommendations and proposed solutions shall enable the management to have some ideas from the viewpoint of a third, independent party. Our recommendations and proposed solutions are as follows:

5.1. NEW BUSINESS MODEL

MAS is entering into a very high-risk kind of business where they are subject to external factors such as economic downturn and global political scenario. In this event, MAS should be more cautious in undertaking their long-term investment.

Amongst the recommendations that we would like to propose with regard the new business model are as follows:

· To pursue more opportunities in some other destinations perhaps by spreading their wings to the third world country.

· To further review its route rationalisation by focusing on more profitable routes. In this instance, such routes may not be high volume but yet profitable. This is base on the principle of differentiation and niche market.

· MASKargo, its cargo arm should concentrate on the cargo shipping and transshipment activities on the region closer to Malaysia such as North Asia, East Asia and the other part of its.

· To initiate a regional training base for say, southeast Asian region.

· To convert some of its aircraft to airfreight due to high demand of airfreight services. This is in line with its plan on MASKargo as mentioned earlier.

5.2. PLANNING PROCESS

One of the reasons for the failure of MAS was due to its drastic expansion plan undertaken by the previous management. In order for MAS to avoid doing more mistakes in the future, MAS should be more careful in assessing their resources and deploying the resources for more appropriate purposes. For example, although it is a right decision for MAS in the redeployment of their aircrafts to more profitable routes, such as Indonesia, Thailand and Philippines, we strongly recommend that MAS should continue to pursue opportunities in other key markets such as India, China, Japan and perhaps the Middle East. Beside that, MAS should also take the opportunity to enter into that market of international destinations, which are withdrawn from by other big players.

5.3. STRATEGIC MANAGEMENT

We would also like to make recommendations in regards to the strategic management. We are of the view that the management should try to focus on the following issues:

· MAS should focus on their customers, where Customer Oriented Service Philosophy can be applied. Service orientation must be well managed and clearly defined.

· MAS’ Mission and Vision must be clearly understood by and communicated to all staffs so that they would together strive to achieve desired goals. To achieve this, perhaps we would recommend that MAS should have a new corporate culture, of being more prudent and careful, service oriented and helpful, instilled among the staffs especially the top management. Apart from these, all staffs should be motivated through proper rewards and incentive programs. This would create the sense of belonging among the workers towards the company.

· Management team should also show their managerial competencies and train all the staff to improve their performances. This can be done by allowing the staffs to participate in decision making process, wherever appropriate. We would also recommend that MAS should introduce the decentralized management structure as this model has been widely accepted in United States and Europe.

5.4. OTHER RECOMMENDATIONS

a. Foreign Equity Participation

We strongly recommend that the Government of Malaysia to allow Foreign Equity ownership in the company. This strategic alliance works very well such as that happened when Port of Tanjung Pelepas in Johor has managed to secure the participation of one of the giant shipping company, MAERSK as their strategic partner. With this alliance, Port of Tanjung Pelepas has managed to secure more business opportunities earlier on enjoyed by Singapore Port Authority when MAERSK was using their port facilities.

MAS has taken the first step by signing an alliance agreement with KLM Dutch Airlines sometimes in June 2001.

b. Implement Efficient Financial System

To introduce an efficient accounting and financial system for monitoring funds flow and for preparing a proper budgetary system.

c. New Fare Structure

To introduce a reasonable charge structure that would enable MAS to achieve full cost recovery. Please take note that normally users are prepared to accept higher level of charges provided that corresponding improvements in qualities are offered. The quality improvements should cover time and cost benefits namely direct routings and elimination of holdings during arrival and en-route phases.

For instance, MAS’ local competitor Air Asia has introduced the no-frills flights for domestic destinations. This has been accepted well by the local consumers. Not to be left behind, MAS has follow suit by introducing an offer discounts of 50% on its airfares for up to 14,000 seats a week for domestic destinations. Although this is quiet an improvement, MAS should continuously improve the fare rate.

c. Tapping Profitable Markets

MAS may also focus on some specific regions after considering the number of competitors, opportunities and spending power in those regions. For long haul destination MAS may have MOUs with other players so they can share the cake of profit rather than gain nothing. Besides focusing on passenger services MAS can focus on freight service where there are high demand from the markets.

6. APPENDICES

APPENDIX 6.1 : Malaysia Airline System Organizational Structure

APPENDIX 6.2 : Malaysia Airline System Historical Timeline (compiled from various sources)

1937

Straits Steamship Company, Ocean Steamship Company and Imperial Airways jointly formed Malayan Airways Ltd

1963

Renamed Malaysian Airways Ltd (MAL).

1965

Borneo Airways was amalgamated into MAL

1966

Renamed Malaysia-Singapore Airlines Ltd (MSA) to reflect the joint controls by the governments of Malaysia and Singapore

1971

As a result of Singapore’s independence from Malaya, a corporate restructuring exercise took place in MSA, which led to the registration of Malaysian Airline System Bhd (MAS).

1985

In order to implement the government's policy of privatisation and to obtain listing and quotation for the Company's shares on KLSE, MAS made a share offer to the public and approved Bumiputera institutions. A special share, which may only be held by the government, was also issued to enable it to ensure that certain major decisions affecting the operations of MAS as a national airline are consistent with its policy. Government in aggregate owned 53.5% of MAS's enlarged share capital and a special share.

1987

Offering 34 domestic routes and 27 international destinations.

1989

MAS participated as an equity member in an Asian Computer Reservations System for the travel industry

1989

As part of its fleet modernization programme, invest RM9.6 Bil to expand its fleet aircraft.

1993

Tajudin Ramli’s Malaysia Helicopters Services (MHS) acquired 32 per cent stake in Malaysian Airline System Bhd from Bank Negara Malaysia (BNM) for RM1.79 billion, or RM8 per share. It involved a share swap. In return for the Malaysia Airlines equity, BNM obtained 112 million new RM1 MHS shares, issued at RM16 each.

1994

Group pretax profit for the year nose-dives to RM16.3 mil from RM157.9 mil previously

1995

MAS expanded its international network and penetrated new markets due to strategic alliances entered via code-share agreements with major airlines. MAS increased its services to 111 new destinations by the end of 1995.

1996

MAS announces purchase of 10 B777-200s, five B777-300s, and 10 B747-400s from Boeing Aircraft co for an estimated RM10b as part of its rationalization programme

1998

Asian crisis erupts, MAS buckles under high cost of borrowings For the first time in seven years, it reported a loss of RM254.1 million

1999

Losses burgeoned to RM604.6 million.

2000

Losses of RM41.3 million

2001

As at 31.3.2001 MAS had a total of 100 aircraft in its fleet, of which 81 were owned and 19 were leased. The operating fleet comprised 90 passenger aircraft and 5 freighter aircraft.

Government take over 29.09 % in MAS from Naluri for RM1.79 bil / RM8 per share. The stock is trading around RM3.50 level at that point

Management changes:

Tan Sri Azizan Zainul Abidin & Dato Md Nor Md Yusof are appointed to the board of MAS as non executive chairman & managing director respectively, while Tan Sri Tajudin Ramli resigns as chairman

Dave Condit and Kim J Kelly, former executive of Qantas Airways, are appointed as senior executive.

Datuk Azman Yahya, chairman of Corporate Debt Restructuring Committee (CDRC), is appointed to the board as an independent non-executive director.

The new management implemented series of measures, a domestic fare hike, fund raising through a special purpose vehicle, tax exemption, RM1.6 bil asset sale plan.

2002

Moves to split the airline & restructure its operation and organization. Unveiled of WAU (Widespread Assets Unbudling) programme –

The main purposes are to transfer

1. aircrafts & liabilities, and

2. domestic business

to a ‘special purpose vehicle’ (i.e. Penerbangan Malaysia Berhad / PMB) owned by Ministry of Finance Inc.

2003

MAS is aiming for a modest net profit of RM94mil for the financial year to March 31, 2003

APPENDIX 6.3 : Malaysia Airline System 5 year financial performance