Resurfing from the Crisis: Malaysian Airlines Case Study

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  • Topic: Airline, Singapore Airlines, Malaysia Airlines
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  • Published : April 4, 2009
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The Malaysia Airline System (MAS) reported a loss of over RM1.3 billion for the Financial Year 2005. It was unacceptable to many parties such as the stakeholders and the government especially the announcement was made at the same time as some of MAS regional competitors reported strong profits in the same year. The airlines was expected to cut up to 5,000 jobs and spend a maximum of 850 million ringgit (US$236 million; euro198 million) in compensation packages as part its plan to return to profitability, making it one of the country's biggest corporate retrenchment exercise. The retrenchement was a measure to reduce cost due to crippling fuel prices and lower load factors. The carrier was also battling a cash shortage, overstaffing and an inefficient and unprofitable route network. According to the Managing Director, Datuk Seri Idris Jala 60% of MAS routes were unprofitable. For instance, the pricing of the KL -Manchester route was so dysfunctional that it had to be 140% full just to break even.

Thus, the three-year turnaround plan calls for extensive cost-cutting and axing of unprofitable routes aimed at achieving profits of 500 million ringgit in 2008, which would be an all-time record for the carrier.

the FINANCIAL crisis
In the year 2005, Malaysia Airlines reported a loss of RM1.3 billion. Revenue for the financial period was up by 10.3% or RM826.9 million, compared to the same period for 2004, driven by a 10.2% growth in passenger traffic. International passenger revenue increased by RM457.6 million or 8.4%, to RM5.9 billion, while cargo revenue decreased by RM64.1 million or 4.2%, to RM1.5 billion. Costs increased by 28.8% or RM2.3 billion, amounting to a total of RM 10.3 billion, primarily due to escalating fuel prices. Other cost increases included staff costs, handling and landing fees, aircraft maintenance and overhaul charges, Widespread Assets Unbundling (WAU) charges and leases. (Malaysia Airlines ,wikipedia) On 1 December 2005 the Malaysian Government appointed Datuk Seri Idris Jala as the new CEO to execute changes in operations and corporate culture. Idris was the former managing director of Shell (MDS) Malaysia Sdn. Bhd. and on a three year contract with MAS. Several weaknesses in airline operations were identified as the causes of the RM1.3 billion loss. These included esclating fuel prices, increased maintenance and repair costs, staff costs, low yield per available seat kilometer ("ASK") via poor yield management and an inefficient route network. Under the leadership of Idris Jala, Malaysia Airlines launched its Business Turnaround Plan in 2006, developed using the Malaysian Government's Government-linked company (GLC) Transformation Manual as a guide. (Malaysia Airlines, wikipedia) The most substantial factor in the losses was fuel costs. For the period, the total fuel cost was RM3.5 billion, representing a 40.4% increase compared to the same period in 2004. Total fuel cost increases comprised RM977.8 million due to higher fuel prices and another RM157.6 million due to additional consumption. In the third quarter, fuel costs were RM1.26 billion, compared to the RM1.01 billion in the corresponding period in 2004, resulting in a 24.6% increase or RM249.3 million. Another factor for the losses was high operating costs. MAS substantially lagged its peers on yield. Some of this gap is due to differences in traffic mix, (less business traffic to and from Malaysia than to and from Singapore), but much of it was due to weaknesses in pricing and revenue management, sales and distribution, brand presence in foreign markets, and alliance base. Malaysia Airlines has one of the lowest labor costs per ASK at USD0.41, compared to other airlines such as Cathay Pacific and Singapore Airlines at USD0.59 and USD0.60 respectively. However, despite its low labor cost, the ratio of ASK revenue (millions) to this cost was, at 2.8, much lower than...
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