The Long Journey to Fix Malaysia Airlines Begins

Let’s be clear. While the loss of two 777s last year was absolutely awful for Malaysia Airlines (MAS) as a business, the airline was far from healthy even before that first airplane vanished. Like many a state-run airline, MAS was bloated and directionless. The two crashes last year may have served as a wake up call that something actually had to change, despite that being the case for several years prior. And that change is finally starting to happen.

Fix the Airline, Don't Kill the Prime Minister

MAS’s modern history began in 1972 when, after Singapore gained independence from Malaysia, airline assets were divided up. That led to the birth of Singapore Airlines and MAS. MAS, like most state-run carriers, was never particularly concerned about costs (though labor costs in Malaysia are quite low in general). The airline grew and lumbered along however the government saw fit. Not having to worry too much about competition, it focused on creating a good product but not one that stood up to the top carriers in the world. Consequently, it struggled to charge the premium it needed to justify its costs.

In the late 1990s, things started to turn south. That brought the first of many restructuring plans, some of which resulted in a couple of profitable years here and there but nothing more. It always ended up back in the red. Even when progress was made, something even bigger began working against the airline. For example, Malaysia was ground-zero for low cost carriers when, in 2001, Tony Fernandes bought a little airline named Air Asia. Today, Air Asia is a powerhouse and MAS is no match.

Since that time, MAS has tried pretty much everything it could imagine (much of it bad). It stopped flying a bunch of domestic routes and talked about partnering with Air Asia at one point (which the government shot down). It joined an alliance (oneworld). MAS took a regional airline and turned it into a low cost carrier (MASwings). It also put together a full service point-to-point airline (Firefly). And it cut flag-carrying routes that didn’t make financial sense, like its LAX flight, the only city it served in the US.

All this made it seem like MAS was just fiddling while Rome burned. But it was a slow burn and MAS didn’t seem like it would ever go away… until last year.

When the first 777 disappeared without a trace, people were already starting to book away. But when another 777 was shot down over Ukrainian airspace just months later, it turned into a full panic with bookings down by a third year-over-year. I can’t imagine we’ve seen a shock like that at any single airline since Pan Am 103 exploded over Lockerbie.

With the airline in a free-fall, you’d think it would have gone out of business. But remember, this is a majority government-owned entity. The piece not owned by the government was bought back and the airline was delisted from the stock market. Something had to change quickly or the government would have to give up at some point.

New CEOs get named at the drop of a hat when it comes to state-run airlines. Often it’s the sister or friend of some important person. Or it could be a family member, political donor, etc. So it was surprising when Malaysia actually appointed someone with street cred… Christoph Mueller.

Christoph is considered a turnaround expert, and his last stint at Aer Lingus was highly successful. His track record isn’t all roses (Sabena, most notably), but that’s because he’s a man who takes on the toughest challenges. Sometimes it works, sometimes it doesn’t. It’s not for lack of trying. And he’s good at what he does.

The simple fact that Christoph was chosen shows that Malaysia is serious about fixing this airline. Just consider the backlash that came with appointing a foreigner. Massive job cuts were planned, presumably as a prerequisite for Christoph even considering the job. But I was looking for something tangible to show that Christoph would actually be allowed to do the job he only just started.

At the end of April, that sign came. According to Leeham News, MAS has put a bunch of airplanes up for sale.

First, it’s selling all of its freighters and getting out of its MASCargo dedicated freighter business. Second, it’s selling 4 of its 13 777s. (Remember, it had 15 but saw 2 crash last year, so it will have only 9 out of the 15 it had flying a couple years ago.) Third, it’s selling all six of its A380s, an airplane it had no business buying in the first place.

The end result is an airline with 9 777s to fly a handful of long haul, higher demand routes, 15 A330-300s for other medium to long haul routes, and a bunch of 737-800s to fly short haul routes. That’s a major downsizing and one that’s entirely warranted.

This is certainly just the tip of the iceberg. After all, MAS has to find a way to compete with the likes of Air Asia. But convincing the government to sell its absurdly large flagship aircraft (the A380) is a huge step. It gives hope that the government is acting rationally and actually wants to fix this airline. There’s no guarantee that things are going to end well (odds are still slim in my mind), but the signs are pointing in the right direction so far.

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25 Responses to The Long Journey to Fix Malaysia Airlines Begins

  1. Neil S. says:

    So one hand you’ve got AirAsia to compete with.

    And on the other hand, looks like you’ve got some of the world’s best airlines connecting their main airports to KUL. CX, SQ, JL, NH, LH, etc. I don’t know about pricing, but if the product isn’t leading edge and the MH prices aren’t clearly better, why would anyone – even Malaysian citizens – choose them? Even forgetting the safety thing for a sec. Which is hard to do.

    I wish him good luck. Will be interesting to watch.

  2. SingBlue says:

    I’m sure the gradual liberalisation of Asian airspace accelerated their decline too.

    And oh Brett, “…talked about partnering with Air Asia at one point (which the government shot down).”

    Great use of writing there…

  3. A says:

    I had no idea MH had a fleet of six A380’s! Imagine this is the first sale of that aircraft in the secondary market. That is news all by itself.

    Even with the downsizing it doesn’t address the aspect of disappearing planes and ones flying over hostile territory and getting shot out of the air. My bet is MH just had some very VERY bad luck last year but it doesn’t make me want to book a flight on them. I’m not sure how you address the big white elephant of incidents. With time people forget but a missing plane is too ripe for conspiracy to stay out of the news long enough for people to forget.

    • Arcanum says:

      Yes, it’s the first secondary A380 sale. There’s been a lot of speculation already about who, if anyone, will buy them, especially with Skymark entering bankruptcy and Virgin delaying their deliveries. A lot of people are putting money on Turkish taking them, especially since MAS is apparently willing to consider a lease as well as an outright sale.

  4. Andy says:

    After reading this, the biggest question in my mind is whether MH’s restructuring will affect their standing in oneworld. I seem to remember that there are precedents for airlines being asked to leave (or shown the door) when they no longer serve the needs of the alliance (although no specific examples are coming readily to my mind).

    • CF says:

      Andy – I don’t recall airlines being asked to leave, though airlines have chosen to leave. Christoph’s last airline, Aer Lingus, walked away from oneworld because it wasn’t the right fit. Will be interesting to see if he has similar ideas here.

  5. kt74 says:

    “it’s selling all six of its A380s, an airplane it had no business buying in the first place”

    Hangonaminute… To be fair to MAS, when it ordered the A380 in 2003, the world was a very different place. There had been solid, growing demand for air travel into Asia (albeit muted by SARS that year), MAS flew twice as many passengers as Emirates, Air Asia was a local charter carrier with a handful of used 737s, Etihad hadn’t even been founded, and there was huge demand for travel between Malaysia and Europe’s slot-constrained airports, which existing carriers were unable to service. At the time, nobody knew that the Gulf carriers would be flying 10x a day into KL and that Air Asia would become the pre-eminent LCC in Asia…

    I’m not saying that MAS hasn’t been woefully managed, but you can’t blame them for decisions made in good faith 15 yeas ago…

    Oh, and incidentally MAS also used to fly to Newark too. In fact, initially it flew via DXB, and was, at the time, the only carrier flying nonstop from DXB to the US. Forward thinking, huh?

    • CF says:

      kt74 – I don’t think the A380 was ever the right airplane for just about anyone. It made as little sense back then for MAS as it does today. That’s just way too big of an airplane for most airlines in the world, including MAS.

      • kt74 says:

        But what plane would you have bought instead? It’s 2003, remember. Your 747s are ageing and need replacing. Boeing isn’t selling any more 400s, and hasn’t launched the 8X. 777-300s at the time didn’t have the range, and the ER had yet to launch or be proven. 777-200s are too small and A340s are too thirsty

        For KUL-LHR, and that route alone, MAS was flying 18x 744s per week, near full, reflecting historical business and cultural ties, and KUL-SYD/MEL were then frequency-constrained due to to bilaterals (but not, as they are now, seat capacity-constrained – hence favouring smaller aircraft, more frequently)

        In fact, flights to LHR remain almost full (even if yields have fallen due to the Gulfies) – MAS announced today that it would keep A380s on that route – the Leeham article said 4x A380s were only available from 2016

        Hindsight is a great thing!

        • CF says:

          kt74 – I disagree with your basic premise. The 747-400s didn’t need replacing. The bulk of the MAS 747s were less than 10 years old in 2003.
          Some had only been delivered a couple years earlier. There’s no reason to think that they had to replace their 747s at the time. But if they did, the 777-300ER had been launched in 2000, was rolled out in 2002, and was flying by early 2003 so that was a completely viable option without some massive increase in capacity. The A380 was an ego play.

  6. James S says:

    I wish him luck. The “old” MAS was chock-full of sacred cows like LAX (a way for connected Malaysians to get to the US on the cheap), the A380 (basically the airline saying “us too!” in the face of SQ and TG ordering the aircraft), and everyone’s favorite – the hilariously impractical Kuala Lumpur-Johannesburg-Cape Town-Buenos Aires route, which was rumored to operate only because certain higher-ups owned land in Argentina. Don’t forget the domestic routes, which were constantly being tossed back and forth between MAS mainline, Firefly and MASwings and a dizzying variety of aircraft gauges – all it took was one official in Kuching or Miri complaining about not getting a first-class seat for a route to get bumped up.

    MAS cut a bunch of fat back around 2008 (including Buenos Aires) but didn’t go far enough. Encouraging to see them more determined this time around. The airline can play a very important role for Oneworld in southeast Asia with the right focus (Cathay Pacific only serves major cities in the region), and KUL is a fantastic airport for transiting passengers.

  7. David SF eastbay says:

    Didn’t know they flew to EWR via DXB at one time, but while living in Los Angeles I remember 3x a week that LAX flight went on to Mexico City and they had local traffic rights and cheap fares for that segment.

  8. Jim says:

    I flew Malaysia one time when they used to serve LAX. They were an excellent airline, with service comparable to the top Asian airlines like Singapore or Cathay. Unfortunately, such airlines rarely make money, because air travel has become a commodity. Virgin America is facing the same problem domestically. I really hope this turnaround plan works, but it’s going to have to involve something more than just shrinking. Maybe a name change or re-branding is in order?

  9. Andrew says:

    Who needs 6 used A380’s? It’s a nice turn-key package for someone, but the discount from new (very discounted as it is) must be massive. Selling them one at a time to charter airlines or current opperators could work, but a few may sit in Victorville for a while if that happens.

    • Arcanum says:

      Turkish has been rumoured to be interesting in getting the A380, especially if they can trial the plane through a lease or get some on the cheap.

    • Delta likes warmed over slightly used planes. I’m sure they’ll buy em, stick em on the ATL-MCO and MSP-MCO runs.

    • Jeremy McMillen says:

      I don’t think an A380 could land at Victorvill with out having the seats removed at say LAX or SFO as a stop over I think they would rather lease them to say maybe EK I kid it will probably be Turkish like the rumors have been saying.

  10. Ray says:

    MAS originally stood for Malaysian Airline System. Locally, it was cruelly called “Mana Ada System”, which in the Malay language loosely means “Where is the system?”/”There is no system” :)

  11. Harold says:

    I flew Malaysia last year, just a few weeks after it lost the second 777. Short flight, Singapore to Kuala Lumpur, but in an old rattling 737. We took off in one thunderstorm, and landed in during a second one, bumping the whole way. It was a tense hour!

  12. Cedarglen says:

    On one level, I feel for the folks at MAS, both for last year’s horrible losses and the substantial job cuts in progress and expected. Majority government owned or not, all airlines must produce at least a little profit over the long term if they are to survive (Business 101).
    Trimming their remaining 777 fleet seem appropriate and many folks still wonder why they acquired SIX of the A380s in the first place. At this point I am more than a bit curious about AB’s reaction to the MAS plan to unload all SIX of those monsters. The A380 is still new enough that few if any other operators are unloading them. With SIX semi-used ones entering the market, I have to wonder how this may affect AB’s already struggling sales of truly ‘new’ airframes. Does CF have any thoughts about what AB can and cannot do to support the resale price of these airframes? Frankly, I know nothing of the terms under which MAS acquired their A380 fleet. Are they leased? Is AB a participant in the lease arrangements? Or, were those frames acquired as direct purchases? What does CF think about this new availability of ‘used’ A380s?
    Since I have no plans or need to visit any city served by MAS, at least without several, far better options, the outcome will have no impact on me, personally. Frankly, even if MAS was a contender for a little of my business, I’d likely bypass them anyway. Thanks. -CG

    • CF says:

      Cedarglen – I believe they’re owned but MAS would be willing to lease them out if needed. Anything to get them off the property and making money.

      I have no idea if anyone will want them. You’d think Emirates could just pile on to its existing fleet if it wanted. I’ve also heard the Turkish rumor as mentioned above. But there just aren’t a lot of airlines looking for A380s at this point.

    • Jimbob says:

      Could Ryanair take them? That would be hugggggeeee

      No. Not cheap enough and the wrong aircraft. But a ‘fun’ thought.

  13. StarBlue says:

    I have flown MAS a lot as my wife is from Malaysia. MH IMHO until recently was a very good and safe airline to fly on, I would have taken them over CI or KE in the late 90s / early 00s with their horrible accident rates.

    MH has always been the Malaysian Gov’t’s farm for cronyism and the constant mismanagement is apparent. The problem is you have SQ to the south and WSSS, TG to the north with VTBS. Both Singapore and Thailand dumped huge amounts of money into both the airline and airports. KLIA was sadly a “me too” but without MH being in a alliance it hurt them. The other large regionals or even US airlines avoided WMKK because of commitments to Star Alliance or Oneworld. MH had long been in the running to join Skyteam as they had codeshares with almost all of the original four founding members. But AF constantly rejected them and then GA was allowed in, it was the death nail and thus they joined Oneworld. All again too late to be effective.

    One of MH’s most profitable routes is the Sydney-KL-LHR route, also known as the Kangaroo Route by QF. When QF ordered A380s the status of having them was competition to 1980s 744s MH flew. This route is heavily flown by AF, BA, LH, EK and KL; all fly A380s except KL. So it was only natural in order to compete and order an aircraft they did not need. I think at their best they were doing this flight three times a day and it was never all that full.

    MH used to always be in the top five airlines in the world for service, it used to be a national symbol of pride. But you can guess where it is today and it may not survive tomorrow. It does have a better chance with Christoph Mueller at the helm.

  14. Adrian in NZ says:

    I flew MH in January this year – AKL-X/KUL-HAN // BKK-KUL-SYD (then QF SYD-AKL). They were ok, but nowhere near the quality of SQ. Their inflight video system is pretty antiquated, and the meals provided were rather ordinary. I also got the feeling that the cabin crew were just doing their job, but not much more. I fear that MH might pull out of AKL as part of this restructure – that would be a shame, as they’ve given us some wonderful fares in the last year to Asia & Europe. They have also commonly offered cheaper companion business class fares to Europe. It will be interesting to see how this pans out.

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