Making the right MH moves

Malaysia Airlines in this current form would be forty this October. It had gone a long way from the six B737-200s and six Fokker Friendship F27s as the result of separation from Malaysia-Singapore Airlines (MSA). Now that the share swap reversal is firmly left in the pages of history, Malaysia Airlines management have made positive steps towards the airline’s business turnaround.

For starters, the reversal of the share swap had undoubtably provided the sense of psychological relief and ‘lifted’ morale of the mostly very loyal employees. It was the major murmur in almost all of the 20,000 odd staffs and many folds other retirees. It was an unnecessary business decision that would have prolonged enough to escalate into a major political backlash, at least for BN’s chances of getting back Selangor.

The recent first quarter results were a much welcomed surprise, it no doubt put a spring in the step of many of the national carrier’s executives, fatigued after so many months of bad news. In short, losses narrowed as result of cutting unprofitable routes, fuel expense decreased by 1% mainly from better capacity management.

The longing and much awaited A380-800s has finally arrived after almost four years late delivery. The first of these state of the art planes that have begun flying on some routes puts Malaysia Airlines back into serious competition with its premium rivals, SIA and Cathay. By August, the lucrative KUL-LHR route would be served by this type on daily basis.

Malaysia Airlines A380-800, starting service to London Heathrow 1 July 2012

In the past, we have argued about not having the right product to remain competitive in the 5 star premium airlines’ market. Malaysia Airlines’ A380-800s have been customised to offer a premium flying experience comparable if not better than others in the region. It is first class and business class cabins have fully flat beds, and wider seats in economy. All these, coupled with Malaysia Airlines staff’s world renowned and award winning service, will give premium passengers a ride that they would want to return to time and again.

Over on the business side of things, Malaysia Airlines has also slashed several of its most unprofitable routes to focus on maximizing revenue on routes that are more lucrative. These include long-haul flights to Dubaii, Johannesburg, Buenos Aires, Rome and other low-yielding routes.

A cost saving program, Malaysia Airlines has also given its staff the option of a 2-year Voluntary Leave Programme. This is a scheme similar to what SIA recently offered its pilots, and it is hoped that it would allow the airline to control its operating costs without reducing too much staff. The upside is that the influential MAS union, MASEU, has given its support for the VPL.

The 25 years contract of Brahim-LSG Sky Chef would be renegotiated

More on business side of things. Malaysia Airlines is also actively reviewing its vendor contracts and renegotiating them when necessary. One of the more glaring contracts awarded during PM ‘Flip-Flop’ Tun Abdullah Ahmad Badawi’s time is the one about then MAS Catering. They have recently renegotiated the 25-year contract with LSG Sky Chefs, a contract that many observers thought unusual for its length, and financially onerous, considering the state of the national carrier.

On 1 June 2012, Malaysia Airlines has appointed former Westjet Arilines EVP for Strategy Dr Hugh Dunleavy as the airline’s Director of Commercial. He is also the candidate the eight unions and associations of Malaysia Airlines had recommended to take over as commercial director. The position is important for Malaysia Airlines as it requires the planning of routes to chart the airline’s path back to profitability. He comes with 30 years of experience, having worked with WestJet Airlines, Lufthansa Systems, Star Alliance, Air Canada and at PROS (passenger revenue optimisation systems) Revenue Management.

Good news for some. Unpopular personalities in and out of the company, acting commercial director Shane Nollan and Danny Yusoff are no longer in Malaysia Airlines. Malaysia Airlines could have been spared from the months of banter because of these two. Now, CEO Ahmad Jauhari Ismail could freely chart its path and bring on board really credible ‘airliners’.

Firefly B737-400

On a positive node, the growingly popular Malaysia AIrlines’ answer in the low cost carrier segment, Firefly, is back with the jet service. It will introduce weekly scheduled charter service between Kuala Lumpur and Christmas Island in Australia from July 7, utilizing its B737-400 aircraft, which has a seating capacity of 162.

The injection of fund via RM 9 billion Sukuk will give the turnaround plan stronger legs to carry out what everyone has admitted as a monumental task. The terms and space of this sukuk would allow a lot of room for the turnaround plan to manouvre. This is the much awaited investment that Malaysia Airlines needed to move forward. Malaysia Airlines need to replace some of the older fleets with newer aircrafts and inadvertently infuse new products for the national carrier market repositioning.

Now that A380-800s finally had arrived and soon would start to replace the 23 years old B747-400s, the fleet of 17 B777-200s are also 15 years old. These now aging fleets require replacements too as Malaysia Airlines’ destinations in Europe, Australia, West Asia and East Asia needed the capability and capacity of these aircrafts, as the market is still strong.

The market talking is about Malaysia Airlines intrinsic value:

Monday June 11, 2012

What is MAS’s intrinsic value?

PETALING JAYA: While the share-swap agreement between Malaysia Airlines (MAS) and AirAsia Bhd may have been unwound, there is still the likelihood that a controlling interest in the national flag carrier could be sold in the future due to the ongoing divestment programme by the Government, said industry observers.

“Not to be ruled out is a divestment of Khazanah (National Bhd) stake in the future, in the same vein that it so with other companies in its stable,” said a party familiar with the situation. Khazanah, which holds close to 70% of MAS, has successfully sold down its stakes in Time dotCom Bhd,Pos Malaysia Bhd and Proton Holdings Bhd.

A crucial question though is this: Assuming MAS is to be put up for sale, what would the likely price tag be? The value placed on the carrier may or may not be the same as its market value, which at the current price of RM1.12 per share stands at about RM3.7bil.

MAS’ intrinsic or actual value was likely to be obtained based on the perception of the company’s true value, said analysts and investment bankers.

OSK Research Sdn Bhd analyst Ahmad Maghfur Usman uses the enterprise value (EV) to earnings before interest, taxes, depreciation, and amortisation (EBITDA) method to come up with how much MAS is worth. This method takes into account a company’s debt that its acquirer will have to assume, unlike some other conventional valuation methods.

OSK now values MAS at RM1.38 or some RM4.6bil that is premised on 7.5 times MAS’ EV/EBITDA for financial year 2014 (FY14).

MIDF Research uses the same method but recently adjusted its target price to RM1.16 from RM1.35 previously to incorporate the execution risk for loss-making MAS’ business turnaround plan.

Its valuation is based on FY12 earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs (EBITDAR) by pegging it to 5.9 times EV/EBITDAR, which is the average of its regional peers.

Meanwhile, Maybank Investment Bank uses the price/earnings ratio method, which measures the company’s current share price compared with its per share earnings.

The research house values MAS at 97 sen or some RM3.2bil, implying a projected price/earnings ratio for FY13 of 10 times, the mid-level valuation of the aviation cycle.

Maybank IB, however, is understood to be in the midst of preparing a lengthier and more in-depth report on MAS which will seek to paint a more “real” value of the company.

In order to do this, it is understood that the analysts are likely to break down the different units under the airline such as its maintenance, repair and overhaul sector and its cargo operations, which are doing relatively well, and analyse their real values should these units be spun-off to buyers.

“It’s the international flight routes operation that is truly killing the airline … with the inclusion of this operation, the value of the airline gets massively depressed.

“So, it’s important to separate it from the other units that are doing okay to find out the airline’s true potential,” said an industry observer.

MAS reported its fifth consecutive quarter of net loss of RM171mil for the first quarter ended March 31 amid a RM199mil foreign exchange gain.

When stripped of the non-cash items, MAS’ core net loss for the quarter stood at RM347mil.


These snapshots of market valuation on Malaysia Airlines is rather fair. Then again, when these new investments are being slotted in and new products being introduced, Malaysia Airlines is expected to be able to expand their captive market. Then that would be the right time to value the national carrier.

The physical fundamentals of Malaysia Airlines are strong. The assets, plants and equipments are well endowed and ready, and the workforce is matured. Probably retraining is required to some of them before they could be reassigned, to suit the optimum productivity for the airline. The brand is good and more importantly, there are high potential for the brand to reach out beyond its existing market, sectors and segments.

Malaysia Airlines MRO facility; well equipped to push the national carrier forward

Malaysia Airlines had been successful to balance the important axis of an airline; the service and management of technology. They have maintained high service standards, on the ground and particularly onboard and they impeccably managed the air operations.

Moving forward also requires market confidence on the management. This is important to give the extra motivation for the staff to bring Malaysia Airlines to its glory days. It is all about the factors of production working in tandem. The national carrier is a national project. Regardless what had happened in the past. Its time the nation should come together and follow it through.

*Updated 1600hrs

Published in: on June 11, 2012 at 14:30  Comments (14)  

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14 CommentsLeave a comment

  1. Read the edge Man!!
    Sukuk No Takers!!
    Government Bailout Inevitable!

    • Whats wrong with bail out?

      MAS should hv the privilege just like any govt agency.

      After all, MAS is the national carrier. It has a specific national agenda as an extension to Malaysia’s trade & foreign policy, esp overseas to make sure that Jalur Gemilang is flown, 24/7.

  2. Oh oh..25 years contract. Makan tak habis….

    • I think its about time also PM Najib dismiss Pak Lah as the ‘adviser’. It was his brother’s co Brahim who got the LSG Sky Chef contract for 25 years. And he was then the PM.

      • Not only it was for a loooonng 25 years but at exorbitant rate which is killing MAS. The ‘adviser’ post may be a package deal for Pak Lah to retire from being PM so it will be hard for Najib to terminate him. This is the problem when we have Machiavellian leaders handling the nation, anything goes as long as you get a deal.

      • If rates are exorbitant or duration too long, why not MAS just terminate them, engage a new contractor, and fight it out with Tun Dol’s brother or whoever in court?

        All contracts must be equitable. When not, they may be thrown out. The law allows for that. Engage good lawyers and fight to the highest court of the country if necessary.

      • Pardon my ignorance, but if Tun Dol is still on MAS Board as Chairman, we urge DS Najib to change that, so that the Board with a new Chairman can decide to empower the Management to act on the non-equitable MAS catering contract.

        Najib will lose votes if he allows such anomalies to go on.

        25 years is far too long by any standard. It’s not an industry which requires a lot of investment in plant and machinery to produce the service under the contract. Najib must stop the mengarut. And we must speak loudly, often, and in numbers. In here and everywhere else.

        For goodness sake, it’s the national airline, the flag carrier of our country, friends. Let’s say them out against the unfair contract now.

      • MAS Chairman is Tan Sri Mohd Yusof Nor. Appointed last August. PM ‘Flip-Flop’ Pak Lah is just the Adviser

        Thank you and Regards

  3. Biggie,

    MH got to do serious catching up. SQ is going for 4th daily to LHR. They hv better business/first class products. And Changi is a better hub, on top of being a better airport compared to KLIA.

    Khazanah should put in very serious money into MH and KLIA.

    Like you said, MH is an extension of the Malaysian trade. Needs strategic investments. It means, Fed Govt got to get very serious with this as well. MH and KLIA are strategic assets of Malaysian Inc. (if that concept still exist today). Getting this right means that part of making Malaysia a serious destination for services industry & better position in global tourism, is done.

    • QED

      That’s an interesting analysis, albeit brief.

      The salient point is that the federal government has not as yet come up with a National Aviation Strategy, short-, medium- or long-term.

      For instance, how is Malaysia positioning itself as a business and financial hub against Dubai, Hong Kong and Singapore?

      You need corporate traffic to generate the loads for the first and business class cabins in any premium full-service airline, which in turn can account for around 40% of an airline’s revenue.

      How is MAS served in this regard by KL, against Emirates and Dubai, Cathay Pacific and Hong Kong and SIA and Singapore?

      Just refleeting with A380s, A350s, B787 Dreamliners and B777-300 ERs ain’t going to cut it.

      • That’s right.

        Federal Govt got to decide, Malaysia Airlines is national carrier first (priority of serving the national agenda) OR a plc (a corporate entity with responsibilities to all stakeholders, incl debtors, minority shareholders \& regulators).

        The deliverables would be adverse. Some could overlap. But the KPI would naturally be worlds apart.

        For quite sometime, Malaysia Alirlines been tasked to strike a balance in between. At the end of the day, the target on both axis have not been met and Malaysia Airlines didn’t get anywhere.

  4. Biggie,

    A very reliable source whispered into my ear that the share swap was not TF’s idea. It came from one of the Board member who worked it vigorously to achieve certain personal objectives. TF just latched into the idea and portrayed it as his for he has nothing to lose there.
    This particular Board member is still with MAS. Sometimes back, I personally suspect this particular Board member’s allegiance lies with that sodomite SOB. I could be right about it after all.
    Therefore, the only logical thing for the Gomen to do so that MAS can be saved and focus on its business is to replace the current Board member wholesale. Get people who put the nation’s interest first before individual’s to be the new board member. Otherwise, we’ll likely see a different form of “share swap” exercise initiated by this particular Board member. He’s akin to a mole. He lies deep, unsuspected and would not harm a soul. But therein lie the deceit and hatred.
    The sleepy adviser should also go. He did not know a thing. Anyway he is not an honest person judging from the Brahim’s/Skychef episode. Perhaps he failed to find his Ghazali. Replace him and get all the law books thrown at him as well. If this cant’ be done, just throw him into the open sea. Maybe he finds his Ghazali there.
    Just my 2sen worth.


    • It’s worth more than 2 sen, my friend. I support your idea.

      But to throw the entire Board out may be too drastic for Najib, maybe just the sodomizing bloke’s friend and 1-2 others cukup lah. So, you’d need to give indications who the bloke is so that Najib’s people can mention it to him, if they don’t already know. But make sure not replaced by Omar Ong!

      As for the sleepyhead, throw him the farther away the better – maybe the middle of the Pacific Ocean. He’s the cause of all the troubles we are facing after Tun Dr Mahathir. If he’s only Adviser, anything in writing that requires serious undoing? Or just simply chuck him out, remove all the furniture from the office room allocated to him, amacam?

  5. QED

    One wishes that the Malaysian government would have shown the same clarity of purpose with regard to a National Aviation Strategy as the Singapore government has done with regard to it’s own aviation policy.

    Simply put, the Singapore government has made it explicitly clear that maintaining and enhancing Changi Airport’s regional air hub status takes priority over the welfare of SIA and any other Singapore-licensed airline.

    For Singapore, it’s all about international connectivities, international passenger traffic and the value-add therefrom for the city state’s domestic services sectors.

    Has there been the same clarity of purpose and focus from the Malaysian government with regard to KLIA, MAS and other Malaysia-licensed airlines?

    Just today I read that AirAsia is setting up AirAsia Asean, headquartered in Jakarta, alongside AirAsia Indonesia.

    It’s small consolation to read that AirAsia Malaysia will continue to be based in KL and listed on Bursa Malaysia.

    It doesn’t take rocket science to understand that Tony Fernandes is spreading his eggs over several baskets (Indonesia, Thailand, the Philippines and Japan), besides Malaysia. More power to him in his quest to transform AirAsia into a pan-Asian brand.

    I read yesterday that the Indonesian LCC Lion Air is planning to set up a medium- and long-haul operation (a la AirAsia X?) with a possible hub in Singapore, and that it could also venture into the premium full-service arena to compete with Indonesian flag carrier Garuda.

    SIA, on it’s part, is ramping up with it’s premium SIA brand being augmented by Silk Air, Scoot and Tiger Airways.

    How is MAS going to face up to these challenges when it’s raison d’être hasn’t been clearly defined, and when the Malaysian government is ambivalent over it’s priorities in the National Aviation Strategy?

    That’s one reason I get upset with politicians who make lofty (and no doubt well-intentioned) statements about MAS and AirAsia, without being cognisant of the situational realities of the airline industry.

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