Adam Minter Kuala Lumpur
MALAYSIA Airline System’s fourth and most radical restructuring since its founding in 1972 was announced on Friday by parent Khazanah Nasional, the government of Malaysia’s strategic investment fund.
This one, too, is likely to fail. The real challenge, though, is not overcoming the twin tragedies of Flight MH370 and Flight MH17 and the loss of passenger confidence (and ticket revenue) that followed. Rather, the problem is the spectacular growth of south-east Asian discount airlines, which have wreaked havoc on state-subsidised flag carriers such as Malaysia Airlines that used to have the region all to themselves.
The Economist estimated in May that almost 58 percent of the air traffic in south-east Asia is now flown on discount airlines that offer cheap fares and require passengers to pay for extras such as luggage and bottles of water.
The model holds obvious appeal for a burgeoning south-east Asian middle class that is eager to travel regionally, but still needs to do so on a budget.
Take Kuala Lumpur-based AirAsia. The formerly state-owned airline was taken private in 2001 and transformed into a discount carrier that competes on the lower end of routes flown by more expensive carriers. Malaysia Airlines, with its legacy costs (including a bloated, unionised workforce), did not stand a chance.
By July last year, according to one tabulation, its share of Malaysia’s domestic traffic had shrunk to 37.4 percent, while AirAsia had 47.7 percent.
The gap is visible at Kuala Lumpur International Airport in the newly opened Terminal 2, home to discount airlines such as AirAsia.
During a visit last week the building was thriving and crowded, reminiscent of a buzzing train station, and stood in stark contrast to sleepy Terminal 1, home to Malaysia Airlines and other legacy carriers where shops, restaurants and corridors were empty.
The considerable business hangover that Malaysia Airlines suffered after the July 24 downing of MH17 contributes to the sleepiness.
Can restructuring Malaysia Airlines wake up Terminal 1?
Khazanah Nasional has proposed buying out other investors, cutting 30 percent of the workforce and trimming some loss-making long-haul routes.
These would have all been fine ideas in 2001, before the AirAsia era. According to the Financial Times, a person familiar with the restructuring plan predicted that the airline could only return to “sustained commercial viability” in four to five years – and that assumes the politically sensitive plan is fully implemented.
It also assumes, of course, that Malaysia Airlines can recapture some of the customers lost to AirAsia and other discount carriers in the next five years while remaining a unionised airline even more closely tied to the government.
Instead of trying to beat AirAsia, why not join them? In 2011, the two companies engaged in an equity swap that lasted a full eight months before Malaysia Airlines’s politically powerful unions – fearful of job cuts – succeeded in having it unwound. Since then, AirAsia’s fortunes have soared, often at the expense of Malaysia Airlines.
The benefits to the legacy carrier are obvious: it would acquire a discount partner that could – ironically – help to highlight the full-service luxury available on its planes.
For AirAsia, the co-operation would ease regulatory burdens in Malaysia and other markets while giving it opportunities to carry passengers from Malaysia Airlines’s international routes (and OneWorld alliance partners).
Meanwhile, both airlines would benefit from the efficiencies achieved in areas such as maintenance. – Bloomberg