Case B Malaysian Airlines 0 Malaysian Airlines Written by Lau Geok Theng & Wong Wan Ting In September 2014, Mr Ahmad Jauhari Yahya, Group Chief Executive Officer of Malaysian Airlines (MAS) was wondering what strategies MAS should adopt to reverse the impact of the missing plane of flight MH370 in March 2014 and the crash of flight MH017 in July 2014 on its financial performance. In the first quarter of 2014, net loss incurred by MAS increased to US$138 million, up from US$86.3 million for the same quarter in 2013.1 MAS has been losing money for three years as a result of high costs and stiff competition but the tragedies of the missing and crash planes have led to high number of cancellations and decline of long haul travel on the airline resulting in larger losses.2 COMPANY Malaysian Airlines (MAS) is the national airline of Malaysia. Its main operations are carried out in Kuala Lumpur International Airport, and its headquarters are in Subang in the city of Kuala Lumpur in the State of Selangor. History Malaysian Airlines started as Malayan Airways Limited (MAL) incorporated in Singapore on 12 October 1937. The Ocean Steamship Company of Liverpool and the Straits Steamship of Singapore and Imperial Airways proposed to the Colonial Straits Settlement government to begin an air transport service between Penang and Singapore, which resulted in the formation of MAL.3 Its first flight was a charter service between Singapore and Penang on 2 April 1947 with an Airspeed Consul aircraft.4 When Malaysia gained independence in 1963, MAL changed its name to Malaysian Airlines Limited. Over the next twenty years, MAL grew in size - in both the number of employees and aircrafts. The company was home to 2,400 employees in 1955 and boasted state-of-the-art aircrafts such as the thenlatest Comet IV jet and the Fokker F27. In 1965, when Singapore separated from Malaysia, MAL became the national airline of both countries and was renamed Malaysia-Singapore Airlines (MSA). Despite its success with rapid expansion and new flight routes to cities such as Perth and Rome, the two countries decided to split MSA into Malaysian Airlines Limited and Singapore Airlines six years later. On 1 October 1972, it was renamed Malaysian Airline Systems (MAS) and has remained that way ever since. On 1 February 2013, MAS became a member of One World alliance and is now connected to some 850 destinations in 150 countries across the One World alliance network.5 1 http://ir.chartnexus.com/mas/doc/presentation/Analyst%20Briefing%20Q12014.pdf. Viewed 26 July 2014. Sophie Griffiths, \"Missing MH 370 flight leads to sales slump for Malaysian Airlines,\" TTG Digital 16 May 2014. http://www.ttgdigital.comews/missing-mh370-flight-leads-to-sales-slump-for-malaysia-airlines/4691444.article. Viewed 16 July 2014. 3 http://www.malaysiaairlines.com/content/mas/sg/en/corporate-info/our_story/about-us.htm. Viewed 16 July 2014. 4 http://web.archive.org/web/20071012132227/http://tm.com.my/about_TMewsroom/2004/041123_2.htm. Viewed 16 July 2014. 5 http://www.malaysiaairlines.com/content/mas/us/en/corporate-info/our_story/about-us.html. Viewed 16 July 2014. 2 1 Management MAS has a board of directors and two teams of senior management overseeing local and overseas operations.6 The Managing Director as well as the Group Chief Executive Officer (CEO) is Ahmad Jauhari Yahya, appointed on 19 September 2011. The board of directors consists of ten members. MAS uses a functional management structure for the local senior management. Directly under the CEO are directors of various functions, such as Director of Human Resources Zahrah Zaid and Director of Operations Captain Izham Ismail. MAS uses a geographical management structure for the foreign senior management. Selvadurai Sinniah is appointed Regional Senior Vice President for ASEAN and Huib Gorter is appointed Regional Senior Vice President for United Kingdom/Europe. Operations MAS has two main operations: passenger and cargo services. MAS also provides other services. The breakdown of revenue for these operations in 2012 and 2013 is shown in Table 1.7 MAS has 108 aircrafts and serves destinations in over 80 countries. In 2013, MAS operated 121,472 flights (47% domestic and 53% international).8 Route revenue by geographical regions in 2013 are: Malaysia 20.2%, Asia 21.3%, Europe and Middle East 24.3%, Australia and New Zealand 16.1% and Orient and North America 18.1%. Table 2 shows the passenger kilometre flown and the passenger load factor for 2012 and 2013.9 MASkargo is the cargo arm of MAS and operates scheduled, chartered air cargo services, ground handling services as well as airport to seaport cargo logistics via ground transportation.10 MASkargo currently provides freighter services to Kuala Lumpur, Penang, Kuching, Kota Kinabalu, Labuan, Bangkok, Jakarta, Sydney, Ho Chi Minh City, Manila, Hong Kong, Baku, Taipei, Kansai, Tokyo, Pudong, Chennai, Colombo, Sharjah, Amsterdam and Frankfurt using two fully-owned Boeing 747-400 and four A330-200 freighter aircrafts. It also offers belly space capacity to over 100 destinations across six continents. Table 2 shows the load tonne kilometres and cargo load factor for 2012 and 2013. Launched on April 3, 2007, Firefly is a wholly-owned subsidiary of Malaysian Airline System Berhad. Operating out of the Penang and Subang hubs, Firefly provides connections to various points within Malaysia, Southern Thailand, Singapore and Sumatera of Indonesia, aligning itself with the IndonesiaMalaysia-Thailand Growth Triangle (IMT-GT) agenda.11 MASwings, Malaysia's first commuter airline was officially launched on 1 October 2007. It caters to the air travel needs of Sarawak and Sabah's travelling population by providing affordable fares, convenient schedule and connections within the two states in the Malaysian Borneo. Being a subsidiary of Malaysia Airlines, MASwings takes advantage of its link with Malaysia's national carrier to provide Sabah and Sarawak with greater connectivity to the global network already serviced by MAS.12 Marketing In the past, MAS engages in little promotions but in 2013, MAS launched the 'Journeys' campaign which resulted in an improved brand awareness worldwide. Top of mind brand awareness increased 58%, unaided awareness improved 32% and the MH brand health matrix growth surpassed competitors post'Journeys' campaign.13 6 http://www.malaysiaairlines.com/us/en/corporate-info/leadership/board-of-directors.html. Viewed 16 July 2014. Annual Report 2013, page 7. http://ir.chartnexus.com/mas/doc/ar/ar2013.pdf. Viewed 16 July 2014. 8 Annual Report 2013, page 13. http://ir.chartnexus.com/mas/doc/ar/ar2013.pdf. Viewed 17 July 2014. 9 Annual Report 2013, page 6. http://ir.chartnexus.com/mas/doc/ar/ar2013.pdf. Viewed 17 July 2014. 10 http://www.maskargo.com/about-us/overview. Viewed 18 July 2014. 11 http://www.fireflyz.com.my/about/company-profile. Viewed 18 July 2014. 12 http://www.maswings.com.my/en/About-us. Viewed 18 July 2014. 13 Annual Report 2013, page 11. http://ir.chartnexus.com/mas/doc/ar/ar2013.pdf. Viewed 18 July 2014. 7 2 Table 1 - Breakdown in Revenue Revenue Composition 2013 RM Million 11,663.5 1,661.9 256.9 250.4 715.5 Passenger Revenue Cargo Revenue Airport Services Charter Services Others 2012 RM Million 10,573.1 1,681.4 212.6 267.7 551.8 Table 2 -Operating Statistics Operating Statistics Available Seat Kilometres Passenger Kilometres Flown Passenger Load Factor Available Tonne Kilometres Load Tonne Kilometres Cargo Load Factor 2013 58,381.4 million 47,286.2 million 81.0% 6,989.5 million 5,485.7 million 78.5% 2012 49,741.6 million 37,169.6 million 74.7% 6,157.6 million 4,548.4 million 73.9% The focus of e-commerce in 2013 was to drive more bookings and revenue through online booking. The online booking site recorded 51 million visits in 2013, equivalent to 41% increase year-on-year. Online booking revenue jumped 28% to RM2.24 billion, with more than 6,000 transactions daily. MAS engages in search engine marketing and it achieved revenue growth of 19% above target in 2013. There was a 5-fold growth in social media engagements in 2013 compared to 2012. MAS Facebook crossed the 1 million fans mark in October. 'Enrich' is MAS' frequent flyer and loyalty programme and it saw its membership base grew 8% and revenue increased 13% in 2013. Joining the One World alliance on 1 February 2013 enables 'Enrich' members to earn 'Enrich' and 'Elite' miles across an expanded network as well as providing more opportunities to redeem miles on the One World partner flights. A comprehensive logo change and brand refresh exercise, system wide, began in 2013. Key initiatives include logo trademark registration, brand architecture review and redesign as well as communication of the corporate identity guidelines. MAS was again rated a 5-star airline by Skytrax UK at the World Airline Awards 2013, one of just seven airlines to receive the 5-star rating in that year. Strategy MAS seeks to be the preferred premium carrier. The foundations for establishing this vision are branded customer experience, continuous operational improvements and simplicity, and winning organization.14 The shorter term priority focus is to get revenue uplift for quickest P & L impact and to initiate longer term structural cost reduction. The medium term recovery plan is to build a profitable network, win back customers, have relentless cost focus and bridge the funding gap. The longer term game changers are to capture regional point-topoint traffic, to form partnerships and strategic alliances, and to spin off profitable ancillary businesses. 14 http://www.malaysiaairlines.com/content/dam/malaysiaairlines/mas/PDF/Malaysia%20Airlines%20Business%20Plan.pdf. Viewed 20 July 2014. 3 Performance MAS has faced a few significant financial difficulties since its inception, and has alternated between excellent profits and disastrous losses. In the late 1990's, MAS suffered significant losses of RM260 million. While they recovered slightly in the following years, their performance worsened with losses of RM 417 million in financial year 2000/2001 and the losses nearly doubled to RM 836 million in the next financial year.15 This led to the airline severing unprofitable routes such as those to and from Brussels and Vancouver. MAS' second significant period of unprofitability began in 2005, when they reported a loss of RM 1.3 billion, right after its high profits in 2003 and 2004. While revenue increased by 10.3%, costs increases nearly tripled, attributed to a rise in fuel prices, an inefficient route network, and poor revenue management. The Malaysian government appointed a new CEO for MAS, Idris Jala, to combat these problems and put MAS back into the black. Idris Jala launched the first Business Turnaround Plan in 2006. In 2011, MAS faced its largest loss in its history, with a loss of RM 2.52 billion. This caused their Group CEO, Ahmad Jauhari Yahya, to appeal to shareholders for support of its Business Plan, saying \"Malaysia Airlines is in a crisis.\" 16 Once again, they cut unprofitable routes, such as those to Johannesburg, Rome and Dubai. The efforts that MAS took to cut losses appeared to be successful as on 28 February 2013, MAS reported a profit of RM 51.4 million for the fourth quarter of the financial year. Appendix A shows the Income Statement of MAS for 2012 and 2013.17 MALAYSIA Malaysia is a country in South-East Asia (SEA). It consists of thirteen states, two in Eastern Malaysia and eleven in Western Malaysia (see map in Appendix B). It shares borders with Thailand, Singapore, Vietnam and Indonesia. Its capital city is Kuala Lumpur. Islam is the religion that is most predominantly practised. History Malaysia's strategic sea-lane position is arguably the most important factor contributing to its history. Ever since the 17th century, English traders had passed through Malaysian waters. In 1815, Malacca was handed back to the Dutch. British governor Stamford Raffles acquired Singapore shortly after in 1819. The British colony Bencoolen was exchanged with the Dutch for Malacca and the British thereafter was able to control the trade coming through the Straits of Malacca. When Malaya gained independence on 31 August 1957, it had significant economic advantages in its trading position as a leader in producing rubber, tin, palm oil and iron and it was keen to reduce its dependence on foreign imports. Demographics According to the 2010 census, Malaysia has a population of 28.33 million, making it the 42nd most populous country in the world. 50.4% of the population are Malays, 23.7% are Chinese, and the rest are Indians, indigenous, or others. Its total fertility rate is 2.64, and its life expectancy is 74.04 years. 15 Malaysia Airlines, Wikipedia. http://en.wikipedia.org/wiki/Malaysia_Airlines#Beginnings. Viewed 20 July 2014. Business Plan: Our Way Forward. December 2011. http://announcements.bursamalaysia.com/edms/edmswebh.nsf/all/482576120041BDAA4825795F0031D170/$Fil e/MAS%20Business%20Plan%202012.pdf. Viewed 20 July 2014. 17 http://ir.chartnexus.com/mas/statements.php. Viewed 26 July 2014. MAS Annual Report 2013. http://ir.chartnexus.com/mas/doc/ar/ar2013.pdf. Viewed 26 July 2013. 16 4 The Bumiputeras, literally translated \"sons of the soil\