Navigating the cloudy skies
Shalini Kumar 
Malaysia Airlines’ fleet is also going through a revamp, with Bellew seeking good deals from Boeing and Airbus
When Peter Bellew took over as head honcho of Malaysia Airlines Bhd (MAB) a year ago, he knew it would not be a walk in the park.

The new group MD/CEO had a set of issues waiting for him to tackle. The national airline was still grappling with the scars of the twin tragedies of MH370 and MH17 and a weak and fluctuating ringgit. The 52-year old Irishman also had to keep flight and inflight improvements within budget, while ensuring the airline’s turnaround was on track.

“It has been very tough but there are no regrets,” he tells FocusM. And things are starting to look up. There has been a recovery in terms of its loads on routes that were affected by the twin tragedies some three years ago.

“Year-on-year (yoy), we had quite a strong second quarter and we saw a significant increase in overall revenue. But we need to build on that further and we need to generate another 5-6% in overall gross revenue over the next 12 months on a like-for-like basis. That will get us back into sustainable profit.

“I believe this is achievable by furthering the improvement in the business-class segment. We want to get 5-6 % extra revenue – there’s a bit from code shares, business class bookings, travel agents’ distribution and brand recovery,” says Bellew.

Although he was under heavy and close scrutiny from stakeholders, MAB’s shareholder Khazanah Nasional Bhd has been an unwavering pillar of support. He sees the government investment arm as a “free consulting service” to whom he runs his decisions by. He concedes that Khazanah may not be used to his constant updating approach.

Bellew also says there has been support from Tourism Malaysia and the Ministry of Transport. “Tourism Malaysia helped us with some funding in terms of advertising. [The] Ministry of Transport was instrumental in levelling the playing pitch on charges between KLIA and klia2,” he adds.

Bellew had asked for a level playing field from the government by reducing the disparity in passenger service charges (PSC) at both terminals.

Last October, the Malaysian Aviation Commission (Mavcom) revised the PSC upwards in a move to equalise it for domestic and Asean destinations.

The PSC equalisation also enables Malaysia to be better aligned to international guidelines, including the International Civil Aviation Organisation’s (ICAO) principle of non-discriminatory pricing at airports.

En route to profitability?

While the PSC equalisation is seen as a positive move for MAB, the RM6 bil question still remains. (Khazanah is pumping RM6 bil into Malaysia Airlines to turn it around). Can the company turn a profit according to plan and maintain it in a sustainable manner?

Bellew certainly believes so. Despite the airline being budgeted to make a loss again this year, he maintains there will be a profit in the second half of next year.

“Unfortunately, we will make a loss this year. The ringgit makes it quite difficult and also the competition, particularly in the domestic and Asean market where fares are somewhat depressed.

“The second half of the year has seen a little bit more rationality in terms of pricing of flights and competition,” he says. For the first quarter ended March 31, MAB did not disclose earnings or revenue figures, but reported a higher load factor of 79.4% from last year’s 68.9%, but lower than Q4FY16’s 80.9%.

In its statement, MAB also noted total passengers carried rose 12.9% yoy to 3.57 million in Q1FY17, with a 45% improvement in forward bookings for the next six months (June to November) compared with the same period last year.

“Financially, this year has been very tough. The change in the value of the ringgit against the US dollar is really difficult for us. That created additional costs for us of about RM400 mil. If we didn’t have that situation, life would be much easier, but we can’t control the election of the American president.

“We’re furiously trying to find cost savings in procurement, usage of fuel and efficiencies within operations at the moment. For the current calendar year, we have identified about RM300 mil worth of savings but it’s going to be very difficult to squeeze that much extra savings out of the system. But we are working very hard to do that,” says Bellew.

The group’s second quarter results are expected to be released early September so it remains to be seen if there will be further improvement in passenger numbers and yields.

However, Endau Analytics analyst Shukor Yusof points out an increase in yields does not equate profitability. “The market is the best judge of how an airline is performing – is it profitable or loss-making?

“In Malaysia Airlines’ case, it is hard to say because it’s not listed and I haven’t read that it is making money. Only that its load factors are phenomenal. As I understand it, an airplane can be full and still not make money,” he says in an email reply to FocusM.

Maybank IB Research regional aviation analyst Mohshin Aziz says compared with its financial position a couple of years ago, things appear to be improving but the airline’s profit still seems elusive.

“Thus far, it seems like the numbers are still far away [from showing profit]. It’s all well and good to talk about the improvements that had been made, but if there is no profit shown, then it seems like a false victory,” he says.

Currency battles

It seems the ringgit woes don’t weigh much on Bellew, who says “it would take an unforeseen shock to the currency to truly derail MAB’s plans to return to profitability”.

“We have to assume it [ringgit/USD exchange rate] has stabilised over the last six to seven weeks at 4.2. If it stays at 4.2-4.3 it’s manageable. If it moves appreciably, you can hedge a certain amount of your currency requirement but that’s also gambling. If the ringgit changes significantly, it’s going cause major problems for us,” he says.

Nonetheless, he admits that MAB’s management has considered the possibilities of a further depreciation in the ringgit. Should it happen, the airline will look at rebalancing and strengthening its international network, particularly in markets where the currency is relatively strong.

Most analysts are cautiously optimistic on the ringgit’s performance for the rest of the year, driven by the expected improvement in gross domestic product (GDP) growth. For Q2 ended June 30, the economy grew at its fastest pace since Q1 2015, expanding 5.8% and exceeding economists’ forecast of 5.4%.

Standard Chartered expects the ringgit to appreciate to 4.1 against the dollar by year-end, keeping its overweight call on the currency over both the short and medium term. AmBank Research is maintaining its ringgit outlook against the US dollar at 4.31-4.33 for the full-year average.

RAM Ratings expects the exchange rate to average around 4.25 to 4.50 this year, which is at the higher end of its initial expectation of 4-4.50.

As for MAB’s re-listing on Bursa Malaysia by 2019, Bellew maintains it should be possible by then. He had reportedly said the airline has briefed several local and foreign banks on its proposed listing. According to reports, there are plans to issue a formal request in early Q2 2018 to appoint bankers for its initial public offering.

Enter the dragon

Part of Bellew’s strategy is to increase passenger yields and ultimately put MAB back in the black. It is looking at opening up new routes, especially in China. He wants the Chinese market to make up about 20% of the airline’s business within the next three to five years from the current 8-9% .

This year alone, Malaysia Airlines will have nine new routes in China, some of which have started. The rest are expected to be running before year-end.

Bellew knows there are challenges expanding in China as there will be many competing carriers. “The other carriers are not going to stand by just waiting for us to take the business. But it appears to me there’s enough business to go around for everybody and there’s plenty of room for growth,” he says.

What Malaysia Airlines is doing differently this time, Bellew says, is getting tour operators to take up about 30-40% of seats on the routes in advance, which gives some revenue certainty.

Additionally, the group has also negotiated and fixed airport charges for the routes which it intends to operate. Currently, MAB flies to eight destinations in China: Haikou, Guangzhou, Xiamen, Fuzhou, Shanghai, Nanjing, Wuhan and Beijing. Most of the new routes will be to high-growth tier-two cities such as Chengdu, Chongqing, Hangzhou and Tianjin.

Mohshin says Malaysia Airlines may have been a little late to the starting line in establishing these new Chinese routes. “No one denies that China is hot right now, but no one knows how long that will last.

“The markets that Bellew is talking about expanding to are secondary and tertiary routes, with which Malaysia and China have open sky agreements on. “Other airlines, including local Chinese carriers, have already started moving into expanding their route network in China,” he says.

MAB’s push into China stems from the government’s target to bring in four million visitors by year-end and some eight million by 2020.

For the first quarter, total Chinese tourist arrivals grew 7.5% yoy to 551,000. China ranked third in terms of visitor arrivals, accounting for 8.3% of total visitors after Singapore (48.5%) and Indonesia (10.6%).

Aside from the China market expansion, Bellew also plans to reopen the Brisbane-Kuala Lumpur route, as well as look at the potential of increasing flight frequencies to Adelaide and Perth.

“Overall there will be more routes added rather than consolidated. I think there is scope for many more routes in China, Japan, Korea, Taiwan, India and some restoration or polishing of the routes in Australia,” he says.

That said, Bellew admits not all the routes are profitable.

“We lost money on a number of domestic routes in Malaysia. There’re [also] a number of international routes that are still losing money. We will rectify that in the next 12 months, but I’m not going to indefinitely operate routes that have no hope of making money.”

Premium push

Malaysia Airlines’ fleet is also going through a revamp as part of Bellew’s vision to promote it as a premium brand.

“We’ll be focusing more on the fact that it’s a business-class travel brand with some luxury. That’s the push. Over the last 12 months, most of our bookings on business class doubled, partly due to working closely with travel agents again,” he says.

Maybank IB’s Mohshin says the business-class market has somewhat improved since last year. “Last year was bad due to the major slump in the oil and gas industry which saw many companies near the brink of bankruptcy and a lot of corporate travel reduced.

“Now that seems to be normalising. However, the issue of what Malaysia Airlines can offer in terms of scheduling, pricing and product offering is important if it hopes to be successful,” he says.

He explains that in the past, the airline had swung to both ends of the spectrum in terms of focusing on either the premium or economy travel, and Bellew must find the right balance. He believes in getting the right fleet of aircraft to ensure the airline operates efficiently.

The group will be rebalancing its portfolio to push the percentage of wide-body aircraft from the current 15-16% to 40% of its fleet in three to five years. Bellew is in the midst of negotiating to lease aircraft from either Boeing or Airbus.

“We’ll make the decision only if we can get the price that works out right. It’s the easiest thing in the world to start buying things and saddle the next CEO and the one after him with something that doesn’t make financial sense.

“If we can do a great deal now on aircraft, that should pave the way for future success and profitability of Malaysia Airlines over the next 20 years. If you get wide-body aircraft that are going to last 12-20 years, you got to get them right now. It’s a buyers’ market,” he says.

Bellew says there will be more investments to improve food and overall onboard experience over the next 12 months. The airline also aims to regain its former Skytrax ratings over the next 18 months.

He says there is enough of the RM6 bil budgeted to carry out the turnaround and there will be no need for more funding.

The road ahead is not easy for the tenacious Irishman. With the deadline for profitability looming in the very near future, it remains to be seen if his calculated decisions will bear fruit.

Bellew has had no shortage of challenges since taking the helm of Malaysia Airlines

A man of many passions

Despite the taxing nature of his job, Malaysia Airlines CEO Peter Bellew still finds time to pursue his other interests and passions.

As can probably be expected of a man in charge of running an airline, Bellew enjoys travelling. He recently made several trips to around Sabah and Sarawak, and says he enjoys meeting Malaysians on his travels – just interacting on a personal level, rather than for business.

Bellew also likes playing the guitar and singing, much like another former Malaysia Airlines chief, Datuk Seri Idris Jala. In Malaysia, Bellew has performed with local country and western, blues and jazz musicians. He has even found himself performing at weddings and other events, quipping that his hiring fee consists of two plates of rendang with some watermelon juice.

His work-life balance seems to be paying off as he looked fresh for our interview, despite it being the end of a long day. Bellew gave a bright smile and had a bounce in his step as he walked into the café to greet us.

Q: It’s been a year since you took on this post. What’s it been like?

A: It’s been a lot tougher than I expected. I think the fact that we probably raised our game [means] everybody has to as well. It is the lowest fare market in the world at the moment, so without all the other challenges we have anyway, that’s made it very tough. I think there is an enormous level of expectation among the public.

Malaysia Airlines means the world to many people in the country. It’s not like a normal job. Most people in this country want this airline to be the pride of the nation again, and when you’re running an airline with that level of expectation, it’s not a normal thing.

So for me personally, I am really proud to work for Malaysia Airlines and be its CEO. I never expected to be the CEO as it wasn’t my intention when I came here. Things do happen for a reason which I’ve believed all my life. I came here because I thought it was one of the most challenging things I could do for the rest of my career and life.

Q: So you’ve no regrets about saying yes a year ago? 

A: No, no regrets. We [my siblings and I] were brought up not to take the easy road in life, not to take the easy challenges, and certainly this is not an easy thing to do. In a way, the willingness of the people of Malaysia who want this thing to be a success again, we need to take that on.

We’ve made a lot of progress in the last 12 months, so maybe toughness and steel are running through their backbones now. Maybe that’s what’s going to make this airline a great success over the next three, five or 10 years. It’s our goal to make Malaysia Airlines the pride of the nation again.

Q: How has the Liverpool partnership been so far?

A: It has been good. If your brand is really in trouble, people don’t buy off you. The business from the countries that were most impacted by the tragedies – Australia and China – has recovered fairly dramatically over the last 12 months.

The second thing was we had to make an impact on travel agents pretty fast because they are the core of our higher yield business.

If we were keeping the brand, we needed to get it out there on the global stage quickly. It seems to me the only real way to grab people’s attention are live events.

To get our brand back out there and get people to see it is via the biggest sports franchise, the English Premier League (EPL). Liverpool Football Club is the top two brands in the region for the EPL. I knew them and we managed to strike a very affordable deal to become their global airline partner.

The extra business that we got from the UK in the first six weeks after we did the sponsorship more than paid for the total cost of the sponsorship for a year.

Q: What will you be focusing on moving forward? 

A: The biggest thing an airline can ever do is change its reservation system. We switched from our previous system called SITA to a totally new reservation system called Amadeus in June. That went much better than I expected.

Next year, the big focus will be on improving customer service. All our staff are getting retrained in customer service and we’ll be making further investments in food and inflight entertainment. A huge amount of work is taking place at the moment to improve our food, particularly where the kitchens are catered from overseas, inbound to Malaysia.

Q: Are you having any more retrenchments or cost-cutting exercises? 

A: No.

Q: What kind of challenges have you seen dealing with Khazanah? 

A: I’m by nature somewhat impatient, but I guess that’s harder for them dealing with me. I think the level of transparency that we are trying to operate at, and involvement with the shareholder, for them perhaps, has been unusual. I think everybody is happy with that. It’s a good thing, it’s just they’re not used to experiencing that, and as I said, I can be a bit of a nag, because I keep saying “What do you think?” It’s a bit like a kid at the back of the car going, “Are we there yet?”

Q: Isn’t Khazanah supposed to be asking you “are we there yet?” 

A: They’re supposed to be asking me that, yeah. They’ve been a huge support to me personally, and I couldn’t have asked for more help than I’ve received. I keep tapping them for that resource of double checking. You know, I think nobody has the monopoly of wisdom on most matters, so they’re a mine of information. They’ve got a lot of clever people. 

However, despite higher passenger traffic, the commission foresees average fares declining, continuing the trend observed since 2010

Local air passenger traffic to grow this year

Local air passenger traffic is poised to grow this year, says an industry report by the Malaysian Aviation Commission (Mavcom). 

In its inaugural report Waypoint, Mavcom says growth is expected to be higher than last year’s 5.6%. It forecasts 7.8% to 8.8% this year, which is equivalent to 98.3 million and 99.2 million passengers.

As such, the report says significant capital expenditure would be required to address capacity requirements for key airports which have exceeded their theoretical terminal designs or are expected to exceed these capacities in the next five years. These include airports in Penang, Subang, Langkawi, Kota Bahru, Miri, Kuching and Kota Kinabalu.

However, despite higher passenger traffic, the commission foresees average fares declining, continuing the trend observed since 2010. Average fares for domestic and international routes have decreased by 5.9% and 8% per annum respectively.

Malaysian carriers are expected to increase their capacity by 14.3% this year. According to the report, the total fleet size of Malaysian carriers increased from 213 to 278 aircraft in the six years to 2016, and is expected to rise further.

The higher capacity coincided with lower average fares, and as such has contributed to local carriers reporting negative spreads between revenue per available seat kilometre (RASK) and cost per available seat kilometre (CASK) from 2010 to 2016.

The report also notes that Malaysia has seen improvement in its connectivity with the number of international destinations served, growing from 107 in 2010 to 116 last year.

Going forward, Mavcom plans to raise passenger service charge for international flights from klia2 to RM73, from the current RM50, to match KLIA’s.

It says the fee equalisation will likely happen by January. It is needed to ensure better services for consumers as well as to promote fairer competition among airport operators.

Mavcom also plans to implement a RM1 levy on departing passengers from Malaysia, except those flying the Rural Air Services in Sabah and Sarawak.

This follows a move by the government to stop financing Mavcom by next year.

Waypoint will be a bi-annual report, which aims to provide an outlook of the local aviation industry, along with commentary on current issues impacting the sector. 

This article first appeared in Focus Malaysia Issue 248.