Rising domestic and regional competition, depreciation of the ringgit and a battered image could hinder Malaysia Airlines Berhad’s (MAB) aim of turning itself around in 2017 after an already difficult couple of years.
Having cut capacity by 30 percent including axing routes to Paris, Amsterdam, Frankfurt, Istanbul and Brisbane, and having reduced its workforce from 20,095 to 14,000, its focus has been reduced to little more than that of a regional carrier. London remains the airline’s only European destination.
The pair of infamous air disasters within five months in 2014 put a heavy strain on the carrier financially and its image took a severe beating, with passenger loads dropping to an all-time low. It is almost two years since MH370, a flight from Kuala Lumpur to Beiijing, disappeared from radar screens; and one year, seven months since MH17, flying from Amsterdam to Kuala Lumpur, was shot down over Ukraine. MAB chief executive officer Christoph Muller acknowledges that passenger loads are still low.
With traffic to Europe from the region down at present, MAB believes that dropping Paris and Amsterdam will be a significant contribution to its turnaround plans.
The regional market is crowded with full-service and low-cost carriers (LCCs) engaged in fierce competition for a slice of a shrinking pie. So MAB is left with no choice but to drop its fares to compete in a tough market where LCCs have a whopping 60 percent share. Competing with LCCs in the domestic and regional markets just to fill the seats could prove costly for MAB, as history has shown.
Further afield, the airline surprised the industry when it announced a codeshare agreement with Emirates in December, coming into effect earlier this month [February]. Whether the Malaysian flag carrier will benefit from this partnership remains to be seen, as it is not in the same league as the UAE-based mega-airline.
MAB has to upgrade its product, which has been declining over the past six years, if it wants to retain any hope of seeing improving returns. Opting to codeshare with Emirates instead of Qatar Airways was surprising, as the Qatari carrier is also part of the Oneworld alliance, and has an extensive European network.
The drastic cut in capacity saw the phasing out of the airline’s remaining four Boeing 777-200ERs at the end of January, the last of a 777 fleet that was once 17 strong. The 737-800 fleet will be reduced from 56 to 35 aircraft, when the 21 that are on operating lease are returned to lessors by the end of 2016.
MAB expects to have an average daily utilization of 15 hours, one more than the current 14 for the 737-800, thus reducing the unit cost per aircraft. To save money on hotel accommodation costs for crew overnight stops, the airline has set up seven domestic bases–Kota Kinabalu, Kuching, Labuan, Miri, Penang, Kota Baru and Johor Baru. Flights from these bases will be operated by dedicated cockpit and cabin crew.
The cut in frequencies on almost all routes has paved the way for Malindo Air and AirAsia to capitalize on the situation to add more services. Rising competition will only make it more difficult for MAB to regain lost ground.
Meanwhile the reduction in its fleet size has left the airline with another problem–a surplus of pilots. While some have secured jobs with Asiana Airlines, Korean Airlines, Saudi Arabian Airlines, Emirates and Hong Kong Airlines, many are still wondering what the future holds for them. An estimated 40 percent of its 250-plus 777-200ER pilots have asked to take part in a voluntary Mutual Separation Scheme on an individual basis. Compensation will be paid to those who opt for this.
Those who decide to stay will have to wait for opportunities on other aircraft types with the carrier. This is the first time in the history of the airline that pilots have been affected under a restructuring exercise, which is the fifth since 2000. MAB started operations in October 1972 as Malaysian Airlines System (MAS). The carrier’s huge number of suppliers has been literally decimated, from 20,000 to 2,000 One even had a contract awarded for 25 years; but all contracts were renegotiated. Those suppliers that were retained had to reduce costs.
Still in restructuring mode, MAB’s image took another knock on January 5 when it posted on its website that passengers traveling to London, Paris and Amsterdam would be restricted to cabin luggage of 7 kilograms for economy passengers and 14 kilograms for business class, “in the interest of safety.” Blamed on strong headwinds facing European-bound aircraft, the decision left passengers furious.
Several hours later this decision was reversed for London-bound flights, while the situation returned to normal for Paris and Amsterdam 24 hours later. With MAB finding it tough to regain market confidence, moves such as this will only make it more difficult for the carrier to recover.
The airline claimed that its flights to Paris and Amsterdam were taking longer, 14 hours against the usual 11.5, as it was necessary to avoid Iranian and Egyptian airspace. In reversing the decision, the airline said it had reconsidered the risk assessment and would fly over Iran after all.
The carrier has amassed $1.21 billion in losses since 2011, when it was taken private by the government investment arm, Khazanah Nasional Berhad (KNB), in a US$373 million buyout. In 2015 KNB committed an investment of US$1.5 billion (then) for the restructuring. The amount is expected to escalate with the payouts to B777 pilots who opt for the voluntary separation deal.