Major Overhaul Of Malaysia's Airline Sector

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Major overhaul of Malaysia's airline sector

Leslie Lopez

The Straits Times

Malaysia announced a radical overhaul of its airline sector yesterday that features sweeping management changes at state-controlled Malaysia Airlines (MAS), as it forms an alliance with regional budget carrier AirAsia.

Industry executives, surprised by the far-reaching nature of the reform plan, cautiously welcomed the changes. They said if executed well, this could establish Malaysia as a major transportation hub to rival Singapore in a few years.

As reported earlier by The Straits Times, state-owned Khazanah Nasional, which controls just under 70 per cent of the national carrier, and AirAsia's main shareholder, Tan Sri Tony Fernandes, will form an alliance by swopping stakes in each other's airlines.

Mr Fernandes and his partner Kamarudin Meranun, who together hold just under 30 per cent in AirAsia through Tune Air, will sell a 10 per cent stake in the listed budget carrier to Khazanah.

Khazanah will finance the purchase of the AirAsia equity through a share swop exercise that will give Tune Air a 20.5 per cent interest in MAS. Khazanah will also acquire a 10 per cent interest in AirAsiaX, the budget airline's unlisted long-haul arm.

Khazanah nominated two representatives to the AirAsia board and announced the resignation of MAS managing director Tengku Azmil Zahruddin.

The MAS board has also been overhauled. After replacing its chairman - former Securities Commission chairman Dr Munir Majid - with former banker Mohd Nor Yusof last week, the state agency announced the appointment of low-profile businessman Wan Azmi Wan Hamzah and the former chief executive officer of engineering group IJM Corp Krishnan Tan to the MAS board.

Mr Fernandes and Datuk Kamarudin have been appointed as MAS board directors.

The overall strategy is for MAS to concentrate on the premium travel sector while AirAsia will focus on the budget segment.

Like other legacy airlines around the world, MAS has been losing money at a time of high fuel costs, thanks to rigid cost structures that include strong unions and existing service contracts.

The national airline went through a short-lived turnaround in 2007 and 2008 but began struggling again as passengers flocked to upstart carriers such as AirAsia, which keep costs low with automated online sales and stripped-down service.

AirAsia, headquartered in Kuala Lumpur, led the low-cost carrier revolution in Asia, inspiring regional copycats.

Even as MAS continued to focus on creature comforts, passengers were flocking to AirAsia, never mind that they had to walk on airport parking areas to board planes.

The numbers clearly showed who was winning. In the quarter ended March 31, MAS had an operating loss of RM267.4 million (US$88.9 million) on revenue of RM3.14 billion. AirAsia had an operating profit of RM241.72 million on RM1.05 billion revenue.

Analysts say they expect consumer groups to attack the proposed alliance since it could end the healthy price competition which benefited travellers.

But others argue that the radical move is needed. "The whole business model needs to be reworked. If this doesn't work, then MAS is really in trouble," said one financial executive involved in the negotiations.

"If the excesses and weaknesses can be rationalised and not with accounting tricks, then this initiative could emerge as a very powerful aviation play," said Ms Shireen Muhiudeen, managing director of Corston-Smith Asset Management in Kuala Lumpur.

Mr Jason Chong, executive officer of Manulife Asset Management in Kuala Lumpur, said what MAS needs is a culture change. "At this point," he said, "the culture in AirAsia is day and MAS is night."

Proponents of the plan argue that rationalising routes and sharing staff and aircraft could lead to considerable savings for both.

Former prime minister Mahathir Mohamad described the deal as a very good idea. "AirAsia can learn about the experience of MAS and MAS can learn how to reduce costs as done by AirAsia," he said when asked for his comments.

But a major problem would be convincing the powerful union in MAS and neutralising powerful groups that hold service and other contracts.

"If the deal goes through, the real problem will be pushing through changes in MAS from staff cuts, and cutting out vested interest contracts that run through the entire organisation," said one banker who tracks developments in MAS.

"Unlike AirAsia, MAS is riddled with politics."

-- ANN 2011-08-10