After 2 Disasters, What's Next for Malaysian Airlines?

Two tragedies have put Malaysian Airlines in the news at a time where it would rather avoid the spotlight.

Aug 14, 2014 at 8:09AM

File
Mayasia Airlines Boeing 747 taking off from London. Source: Wikimedia.org

Before March, few Americans knew about, much less cared about, Malaysian Airlines. But that changed as Malaysian Airlines Flight 370 disappeared with 239 passengers and crew aboard. As MH370 remained missing, the airline was met with another disaster with the downing of Malaysian Airlines Flight 17, resulting in the deaths of 298 passengers and crew.

Clearly, Malaysian Airlines has gone from relatively unknown to being widely known for the worst reasons. But what does the future hold for this much troubled airline?

Turbulent finances
Even before the disappearance of MH370, Malaysian Airlines was struggling financially. Bloomberg notes that in addition to a loss of 4.13 billion Malaysian ringgit ($1.29 billion) over the past three years, Bloomberg analysts expect the airline to lose more than 1 billion ringgit ($312 million) for 2014.

In fact, Malaysian Airlines has a history of poor financial performance, having received a government bailout in 2002, and it accepted more government money through rights issues in 2007, 2010, and 2013.

Growing challenges
Founded in 1937, Malaysian Airlines was once the dominant carrier for its region and grew in size accordingly. But low-cost carriers, including Air Asia and Lion Air, have been eating into the flag carrier's home market and making many routes unprofitable to operate.

But even as competitors brought new capacity to the market, Malaysian Airlines responded with its own by ordering new aircraft and boosting its total capacity nearly 20%. However, with the number of unprofitable routes and excess capacity, any restructuring of the airline will need to take a serious look at trimming down the airline's total size.

Time for an overhaul
With the airline's record for poor financial performance, unprofitable levels of capacity and routes, and two major disasters, the Malaysian government is looking at a restructuring plan for its flag carrier.

Earlier this month, the government released its restructuring proposal for the airline. The first step is for the government's state-owned investment firm, Khazanah Nasional, to buy out the 30.6% of the airline it doesn't already own. At the government's offering price of 0.27 ringgit ($0.085) per share, a premium of 12.5% over the trading price before the offer, the move would cost the government 1.38 billion ringgit ($432 million).

This offer will be taken to the airline's shareholders and, if approved, will allow the government to take over and begin restructuring the airline.

The new Malaysian Airlines
Based on its record over the past decade, it's clear that Malaysian Airlines' core problems would still exist even without the losses of MH370 and MH17.

For Malaysian Airlines to become a viable airline again several things will need to happen in the government organized restructuring.

  1. Reduce excess capacity and trim unprofitable routes. Although Malaysian Airlines would like to be the dominant airline of Malaysia, but this desire is not financially realistic anymore. Excess capacity hurts ticket prices and eats into margins, which reduces profits and incites price wars. As a result, the future Malaysian Airlines is likely to have fewer routes than it does today.
  2. Cut costs to compete. Malaysian Airlines is feeling the pressure from its low-cost competitors, which have lower cost structures, allowing them to sell cheaper tickets and still make a profit. Reduced costs may be obtained through employee layoffs, negotiated cuts to benefits, and selective flight reductions.
  3. Management shakeup. With such a consistent record of losses, the executives at Malaysian Airlines can't argue that the company's performance warrants being able to keep their positions. But removing old management is also a symbolic step to show real change at the airline. The airline's unions have been calling for the resignation of the CEO since 2011, and removing him from the helm of the airline would be a good step toward improved labor relations.
  4. Win back China. Following the disappearance of MH370, Malaysian Airlines' image in the Chinese market took a major hit. The majority of passengers on board were Chinese, and the general perception was that the airline's response wasn't good enough. This opinion resulted in dissatisfaction in the valuable Chinese market and even some boycotts from Chinese travel websites. Malaysian Airlines will need to find a way to improve its relations with the people in one of its biggest markets.
  5. Address the debt. Malaysian Airlines had 11.7 billion ringgit ($3.7 billion) of debt at the end of last year. While it's not threatening to sink the company right now, if the airline can't become profitable again in the near future, the debt level could pose an insolvency risk. Look for the airline's future earnings to be spent more on debt reduction and less on growth.

Rebuilding a flag carrier
Malaysian Airlines appears ready to accept what is effectively another government bailout after posting major losses during its recent history. Its current situation can't be blamed solely on the disappearance of MH370 and the crash of MH17; rather, it's an ongoing financial issue that will require a major restructuring to see this airline become sustainable in the long run.

Based on Malaysian Airlines' current situation, one could expect the airline's shareholders to accept the buyout offer. At that point, the restructuring process can begin to move toward reshaping Malaysian Airlines' place in the aviation market.

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