MAYDAY

08.01.14

Malaysia Airlines Is Going Down

The disappearance of one flight and shooting down of another has pushed the inefficient carrier to the brink of collapse. Is there anyone who can fly them out of danger?

The double catastrophes that struck Malaysia Airlines within a few months have left a business that was already weak in a desperate fight for survival.

Even before the Ukrainian atrocity, analysts predicted that the airline would run out of cash some time next year. Now the cash situation is more critical amid reports from travel agents in Asia that many passengers are cancelling flights booked on the airline.

Earlier this year Malaysian reported its worst first-quarter loss, of $137 million. Before the shooting down of Flight 17 the value of the company’s shares had dropped 16 percent. They are now down by 29 percent.

The airline has given few clues to its thinking. There have been reports from Kuala Lumpur, not confirmed by the airline, that it is considering changing its name and restructuring its operations, including cutting some routes and adding others. Whatever the outcome, none of the experts I have spoken to believe that the airline can continue in its existing form.

“The most obvious option might be to let the airline go bust,” Craig Jenks, an analyst at Airline/Aircraft Projects, told The Daily Beast. “But that is politically impossible.”

It’s politically impossible for two reasons: The airline is a flag carrier, a symbol of national pride—and it’s bankrolled by a state-owned strategic investment fund, Khazanah, that doesn’t want the value of its investment to be wiped out. Among the 50 or so companies that the fund backs, the airline has proved to be an incessant headache: In 10 years it has swallowed more than $1.6 billion with no sign of a lasting turnaround. And that was before the disappearance of Flight 370 in March and the missile strike on Flight 17 two weeks ago.

For its size, Malaysia Airlines has a huge staff of 20,000, most of them organized by a very militant group, the Malaysia Airline Systems Employees Union, MASEU. In the past the union has effectively blocked attempts to trim staff, but this time it could face a tough ultimatum: accept layoffs or see the whole business tank.

In 10 years it has swallowed more than $1.6 billion with no sign of a lasting turnaround.

If it cannot declare bankruptcy, what can be done?

“There are two other options,” says Jenks. “The airline could be de-listed and re-nationalized by the government, with the aspiration of re-privatizing at a much later date. The recent resurgence of Japan Airlines suggests that it is possible for a flag carrier to be declared insolvent, privatized and radically restructured.”

“Or another option would be an asset transfer where a possible taker would be AirAsia, a Malaysian airline that has a very different low-cost business model but also has a long-haul subsidiary and aspirations.”

As Jenks suggests, tying up with AirAsia would make sense as the most savvy business decision.

Air Asia is run by a flamboyant character called Tony Fernandez. At the recent Farnborough Air Show it was Fernandez who became the first customer for the new Airbus A330neo, ordering 50 of them. He had been urging Airbus to introduce this upgrade of the ubiquitous A330 because it will provide optimum efficiency for his low-cost long-haul operation, AirAsia X.

When Fernandez got control of AirAsia it had been a limping, government-subsidized flop. By adopting the U.S. and European no-frills budget model he transformed it and tapped into a huge pent-up demand—he estimated that half of AirAsia’s passengers took their first flight on his airline, and he attracted them with the slogan “Now everyone can fly.”

Just how inefficient Malaysian Airlines is was rubbed home earlier this year when the magazine Aviation Week published its annual assessment of airline financial performance. In the category of airlines with annual revenues of between $2 billion and $6 billion, Malaysian came second to the bottom, at No. 23.

Asia is one of the fastest-growing airline markets in the world but profit margins are thin. Older “legacy” carriers like Malaysian feel that they have to support long-haul international routes to the U.S. and Europe so that they can appear to be major players. Malaysian bought five superjumbo Airbus A380s as much as a matter of prestige as of business logic. But at the same time their own domestic markets are being raided by a new generation of budget airlines, and they can’t compete.

Another threat comes from the Gulf states, particularly Emirates based in Dubai. For example, Australian airline Quantas has teamed with Emirates to provide 14 daily nonstops between Australia and Dubai. The message is clear: The most competitive long-haul airlines will overfly some of Asia’s key hubs like Kuala Lumpur, Singapore, and Bangkok on routes where an Asian connection is not important.

However, Fernandez’s AirAsia X sees that threat as an opportunity to build a low-cost long-haul fleet that serves Asian hubs (including India and China) and simultaneously feeds passengers into its regional network served by the low-cost AirAsia.

As for changing Malaysia Airline’s name, there is a precedent. A no-frills airline called ValuJet served cities in the eastern U.S. and Canada in the early 1990s. It operated a fleet of very old airplanes and had such a woeful safety record that FAA inspectors wanted to ground it. But before the FAA acted an ancient ValuJet DC-9 crashed in Florida, killing 110 people. The cause was a fire that originated in cargo that had not been properly inspected.

ValuJet was then merged with AirWays Corporation and rebranded as AirTran. In 2011, Southwest Airlines bought AirTran; by next year that name, too, will disappear and then the original stigma of ValuJet will be long forgotten. But the problem of Malaysian Airlines is really much deeper than something that can be wished away by a makeover: The airline is a midget in a world of giants with yearly passenger loads of around 4.2 million. American Airlines carries more than 193 million passengers a year and Europe’s largest international airline, Lufthansa, carries 76.3 million. Airlines like Malaysian are too small to be competitive internationally, and as long as they carry crippling overhead costs they are trapped in a cycle of diminishing returns.

Time to call Tony.