Market conditions threaten Malaysia Airlines’ survival

Malaysia Airlines’ long awaited recovery plan was announced in August, but the tragedies of this year coupled with a fiercely competitive market mean its revival is under threat

Malaysia Airlines plane
A Malaysia Airlines plane is seen on the tarmac at Kuala Lumpur International Airport. The tragedies of this year, coupled with financial woes, mean the airline's future is not certain 

The centre of not one but two of 2014’s biggest news stories, no one can deny that Malaysia’s national carrier has had a rough year. Following the unsolved disappearance of Flight MH370 on 8 March and the alleged shooting of Flight MH17 over Ukraine three months later, major restructuring is crucial if Malaysia Airlines is to survive.

Even before the first disaster struck, the airline had been haemorrhaging cash for years – over a 13 year period, a cumulative Rm17.4bn ($5.3bn) has been pumped into the company. In August the carrier announced losses of Rm8.4bn ($2.6bn) over the same period. A total of four restructuring plans have been introduced over the years and gradually phased out, and the central thread is always efficiency. With approximately 19,500 staff, Malaysia Airlines’ workforce is 30 percent larger than that of comparable airlines and its revenue per employee is just 51 percent of Cathay Pacific’s and 38 percent of Singapore Airlines’: its two main competitors.

Further parallels can be drawn between Swissair and Malaysia Airlines in that both were facing a dire financial situation before the tragedies struck

In addition to its financial woes, the reputation of Malaysia Airlines has taken quite a beating. The damage can be seen by browsing the company’s most recent press releases, with many dedicated to debunking rumours of further disasters reported on by the world’s media. A statement from 17 September, which addresses the authors of a book claiming to offer the ‘scoop’ on MH370, reads: “An independent assessment by self-proclaimed experts with no access to reliable data is hearsay at its most extreme, or fantasy at its most benign. The authors and publishers should quite simply be ashamed of themselves for what is nothing more than a cheap and maligned publicity stunt, seeking to simply cash in on the suffering of the families and undermining the dignity of all of those onboard.”

Rebranding, or at the very least, restructuring, is necessary for the airline to have any hope of returning to the market as a genuine contender. So when a recovery plan was announced in August by Khazanah Nasional, the airline’s biggest shareholders, many waited with baited breath.

A number of external factors, which have contributed to Malaysia Airlines’ difficulties since 2001, are mentioned within the plan, ranging from the September 11 attacks and the SARS pandemic to the rise of new low-cost carriers and the financial crisis of 2008. Whereas privately-owned, discount competitors in the region are expanding rapidly, the combination of state ownership and a powerful union has hindered Malaysia Airlines’ efforts to adapt to a changing climate, and the carrier has been unable to keep up with its younger rivals. The airline’s struggle to compete takes place in a time when air travel supply in Malaysia is growing at ten percent per year, outstripping an eight percent growth in demand.

The recovery plan involves the creation of a new company, the delisting and eventual relisting of the airline’s shares and the relocation of its headquarters to Kuala Lumpur International Airport. Also mentioned is the investment of a further Rm6bn ($1.9bn) into the business, a 30 percent reduction of the existing workforce, resulting in the loss of 6,000 jobs, and major alterations to leadership – including the appointment of a new CEO. There are further plans to reduce the amount of unprofitable long-haul routes flown, which Professor Mohan Ranganathan, Head of the Mechanics and Systems Department at the University of Tours, agrees with. He added that to contend with discount competitors in the region, the airline would need to focus on reducing prices on routes within Asia.

The mammoth task Malaysia Airlines has on its hands brings to mind memories of the US’s first international carrier, Pan American World Airways. The airline shut up shop in 1991, citing the effects of the Gulf War and subsequent economic recession on commercial travel as the main contributing factors. However, the 1988 crash of Pan Am Flight 103 over Lockerbie, Scotland, which killed all 259 people on board and a further 11 on the ground, seemed to have a detrimental and irreversible impact on consumer opinions of the carrier. And, while one tragic incident cannot be identified as the sole driving force behind its demise, many patrons expressed reluctance to use the airline following the disaster.

Other carriers have been more fortunate, or perhaps strategic, in recovering from similar crises. Following a crash off the coast of Nova Scotia in 1998, which killed all 229 passengers and staff onboard, Swissair, the national carrier of Switzerland, was forced to liquidate its assets in 2002. A new national carrier, Swiss International Airlines (known as simply ‘Swiss’) rose out of the ashes, and the country’s self-proclaimed “quality airline” saw a major turnaround with respect to both its reputation and profits.

A total rebrand can have an adverse effect, though. “Malaysia Airlines may be tempted to rebrand entirely. However, by doing this, it faces the danger of a far greater backlash. By trying to distance itself from the tragic events too quickly, Malaysia Airlines may be perceived as attempting to disassociate itself from any responsibility for them,” says Frances Ingham, Director General of the Public Relations Consultants Association. He suggests that maintaining the brand, and dealing respectfully with the aftermath of the tragedies is their best course of action.

Further parallels can be drawn between Swissair and Malaysia Airlines in that both were facing a dire financial situation before the tragedies struck, and the public’s interpretation of Swissair as a symbol of national pride was a key saving grace in its recovery.

By trying to distance itself from the tragic events too quickly, Malaysia Airlines may be perceived as attempting to disassociate itself from any responsibility for them

Citizens felt committed to the brand, in much the same way Malaysians support their national carrier, but Malaysia Airlines has been on the receiving end of heavy criticism for how the crisis was handled. Accusations from the media include withholding vital information from victims’ families and intentionally flying over an internationally recognised combat zone, meaning the airline will need more than the goodwill of the Malaysian people to recover its reputation. Former Malaysian prime minister Mahathir Mohamad was quick to voice his doubts, writing on his blog: “Khazanah has been in full control of MAS all this time. And all this time MAS has been bleeding profusely…So why should anyone believe that with 100 percent control, Khazanah will not keep on losing.”

The recovery plan recognises the failings of the past, as well as just how important a total overhaul is to the future of the airline, and the fact that changes were already under consideration before the two disasters is stressed repeatedly. Taking an optimistic outlook, an excerpt reads: “This unique combination of attributes – MAS as a national icon, economic enabler, domestic bond, and link to the world – makes the success of the national airline an imperative for the Government and the Malaysian people.”

The national pride tied to the airline is referred to often, and it is repeatedly emphasised that the involvement of the Malaysian public is crucial to its success. An article in The Sun Daily, Malaysia’s national free newspaper, encourages the support of the masses, claiming: “There’s no higher calling for us Malaysians and friends of Malaysia now than to embark on this gigantic journey to nurse our national carrier back to profitability. If we need a mass movement to galvanise support to bring back Malaysia Airlines to its glory days, so be it. Let us invoke our sense of nationalism to help achieve this objective.”

The debate over the economic viability of national flag carriers in modern society is nothing new. Pressures from the government and demanding unions leave these airlines struggling in a fiercely competitive and constantly evolving climate. As a result, most state-owned airlines have failed to adapt to the influx of low-cost competition since the privatisation and liberalisation of the industry. Those that have been successful, Emirates and Singapore Airlines for example, differ from Malaysia Airlines in that they enjoy the financial benefits of state ownership whilst operating as commercial entities. Meanwhile, Malaysia Airlines is now 100 percent government owned and, without smaller stakeholders weighing in on major decisions, further mistakes could be made.

The fundamental problem is that few other options are available. Privatisation plans are rarely successful because the potential losses and debt incurred scares investors away, yet slashing thousands of state jobs and fears of a disconnect from the rest of the world ensure liquidation remains a last resort. These fears are largely unfounded though, countless nations have survived after the demise of their flag carrier: Belgium and Greece to name a few.

National pride is a noble sentiment, but that alone is far from enough to sustain a failing business in an increasingly challenging global market. Despite Malaysia Airlines boasting one of the world’s best airline safety records prior to 2014 with just two fatal accidents in 68 years, the ongoing controversy surrounding MH370 and MH17 means that the restoration of its reputation will be an uphill battle.