By Doreenn Leong

AIRLINES around the world are facing even tougher times now that Covid-19 has effectively stalled the travel industry with many countries imposing a travel ban. The situation is so dire that many airlines are already asking for government bailouts.

The International Air Transport Association said airlines will need “emergency measures to get through the crisis.” It has urged governments to consider extending lines of credit, reducing infrastructure costs and easing taxes.

British airline Flybe, which was already in serious financial trouble, was reported to have gone bankrupt. Major carriers such as United Airlines, Korean Air and Mexican airline Interjet may be forced out of their business due to the outbreak.

Other international airlines such as Singapore Airlines, Cathay Pacific, British Airways, Lufthansa, Emirates, Virgin Atlantic and EasyJet are also cutting capacity and salaries and offering staff unpaid leave to counter the impact of Covid-19.

Our local airlines are also not spared from the virus onslaught. To cope with the drastic drop in air travel, budget carrier AirAsia Group Bhd (AAGB) has initiated a series of cost-cutting measures, including cutting employees’ salaries and perks.

Likewise, Malindo Airways Sdn Bhd has halved staff’s basic pay while Malaysia Airlines Bhd (MAB) implemented a 10% reduction in salaries for its senior management beginning March.

It was recently reported that MAB is in a ‘critical situation’ as the virus outbreak has worsened rapidly, causing plunging travel demand and a surge in cancelled bookings. The airline was reportedly saying ‘many airlines are now at the risk of going bankrupt and Malaysia Airlines is no different.’

MAB has already cancelled more than 2,000 flights up to April due to travel restrictions imposed by countries within its network. For the beleaguered national carrier, it was already in a rut even before the pandemic.

Some RM23.6 bil has reportedly been injected into MAB since 2001 in various attempts to turn around the national carrier. Its owner Khazanah Nasional Bhd paid RM1.4 bil to take MAB private in 2014 and laid out a five-year turnaround plan. However, the airline is nowhere near returning to the black.

Last year, Khazanah suffered a pre-tax loss of RM6.3 bil, mainly due to RM7.3 bil in impairments, half of which were attributable to MAB.

MAB narrowed its net loss by a marginal 2.5% to RM791.71 mil in the financial year ended Dec 31, 2018 (FY18) from RM812.11 mil in the previous year on the back of improved revenue of RM8.74 bil versus RM8.67 bil.

The latest pandemic appears to be the final nail in MAB’s coffin as it is now harder to turn the airline around. Hopes of finding a suitor for MAB will be slimmer as potential candidates such as Japan Airlines (JAL) and AAGB are also facing tough times.

This would probably derail Khazanah’s plan to revive the airline’s fortunes. The fund had planned to decide on a strategic investor and execute a term sheet by April and to carry out the definitive agreements by June. Surely, the recent virus onslaught would have thrown a spanner in the works.

With news that MAB may be staring at bankruptcy given the current situation, perhaps it is not such a bad idea to let it go under. Nobody in his right mind would want to buy an airline especially one in a pretty bad shape.

One of the ideas being mooted is merging MAB with the likes of troubled AirAsia X Bhd. This is a terrible idea.

AAX’s net loss increased 62% year-on-year to RM490 mil in FY2019 while revenue declined 4% y-o-y to RM4.5 bil. It had a cash balance of only RM358 mil as at Dec 31, 2019 while borrowings stood at a staggering RM6.32 bil.

As it is, every turnaround or transformation plan MAB presented came up hollow; from its asset unbundling exercise to hiring a foreign CEO to rationalising its route network, so much so that the Malaysian taxpayers would want this to stop by now.

If both the airlines merge, then the government is also bailing out the budget carrier. Surely there is better use of taxpayers’ money than to save two ailing airlines.

Emulate JAL

Instead, the national carrier should consider emulating JAL.

JAL was the world’s top-performing airline in both passenger and cargo transport for five straight years in the 1980s. However, JAL filed for bankruptcy in 2010 as it couldn’t cope with rising fuel prices and shrinking passenger numbers.

The biggest airline in Asia became the biggest case of insolvency outside the financial sector in Japan. JAL was saddled with debts amounting ¥2.32 tril (RM94 bil) when it filed for bankruptcy in 2010.

Its entire board resigned but the airline continued flying even as it filed for protection from creditors under Japan’s version of the US Chapter 11.

The state-backed Enterprise Turnaround Initiative Corporation [ETIC] provided ¥300 bil in fresh capital and a ¥600 bil credit line to cover payments for essentials such as fuel and parts.

The airline stayed in business while it attempted to repair its battered reputation.
JAL returned to the black in 2011/2012, becoming the world’s most profitable airline after recording a profit of ¥186.6 bil. Prior to its successful turnaround, JAL was bailed out by the Japanese government four times in 10 years.

Social responsibility

MAB, unlike other airlines, has a social responsibility – to operate the Rural Air Services in East Malaysia via its regional airline MAS Wings as well as Amal, which is the Haj and Umrah pilgrimage arm of MAB.

Does MAB want to be a commercially viable airline or a community service airline? Something has to give.

Also, will MAB have a better chance of a revival when demand picks up? Can it rely on revenue management to shore up its survival chances?

Granted that the current low fuel prices may provide some relief in keeping costs low but how long can the low cycle last? Surely, when the demand for crude oil picks up when the economy improves, so will the prices of the crude oil.

It will always be a sticky issue when it comes to the fate of our national airline. Nobody wants to see it go under but bankruptcy, which still means that MAB will continue operations, may be the best solution given the circumstances.

That, and a good leader, may be the pressure required to force MAB to perform, the way it did for JAL. – March 19, 2020

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