Case Study Malaysia Airlines

December 10, 2014 efbusinessschool Leave a comment

Malaysia Airlines has gained unintended brand recognition recently, which has weakened its position in the airline industry dramatically. With the disappearance of flight MH370 and the downing of flight MH17 just a few months later, it dawned on the airline that misfortune never comes singly. One might even think that Malaysia Airlines is simply jinxed. Indeed, misfortune has played a major role in Malaysia Airlines' apparent downfall, but the problem is more complex and widespread than that. Malaysia Airlines has always had trouble keeping up consistent profits, perhaps as a result of mismanagement. Thus, questions are rising on how to save the company from a seemingly inevitable bankruptcy.

The story of Malaysia Airlines starts on October 12, 1937, when the Ocean Steamship Company of Liverpool, the Straits Steamship of Singapore, and Imperial Airways proposed to run an air service between Penang and Singapore. The company was initially called Malayan Airways Limited (MAL) and was only a domestic carrier. Ten years later, in 1947, MAL operated its first flight as an international airline between Singapore and Kuala Lumpur. After that, MAL's fleet kept expanding and their amount of employees kept growing year after year.

The company was only growing until 1997, when Malaysia Airlines (their name changed over the years) went through their first period of unprofitability, connected to the Asian Financial Crisis that year. Their losses were 260 million RM, about 77 million dollar. To get their profits and losses back into black, they cut some of their less profitable routes such as Brussels, Darwin, Madrid, Munich, and Vancouver.

Only two years after recovering from its losses, Malaysia Airlines experienced a new period of unprofitability. They blamed the increasing costs on staff and higher handling and landing fees for these losses, but a later statement revealed the main reasons were poor yield management and an inefficient route network - both internal causes.

Before they could even pay their debt, there was a new difficult period for the company in 2011, again due to internal problems: mismanagement. This time there were also external factors. The higher fuel price made this period even harder for the company. They removed some routes again and tried to make up for their losses in this way.

March 8, 2014, every airline's worst nightmare occurred. Flight MH370 from Kuala Lumpur to Beijing disappeared from the radar, and it still hasn't been found. The company hadn't made a profit since 2010, but after this crash, their ticket sales declined dramatically and their losses were higher than ever. Besides that, Malaysia Airlines had to compensate families for the family members that were on flight MH370, which made their costs even higher.

Only a few months later, another flight crashed on July 17, 2014: flight MH17 from Amsterdam to Kuala Lumpur. After this, their bookings declined with another 33% which made the company sink even deeper. Besides that, there have been claims that about 500 employees resigned after this accident, but that has never been confirmed by the company itself.

Malaysia Airlines has been struggling with competitiveness for a while, but the two crises that hit the airline in March and July 2014 have worsened the airline's economic position considerably. The airline is a good example of how external influence - the disappearance of one plane and the downing of another - has caused big internal and potentially national problems. The leaders have come up with a plan they think will save the company long-term. This plan involves cutting back on staff, spending more energy on Asian flights, having fewer flights, and replacing the chief executive in order to re-create the company from scratch. Whether or not this plan will work is hard to say at this point, and the company admits that the effects will show long-term, not immediately.

However, the airline's problems could be more urgent than any five-year solution can solve. The company had already admitted losses of $96.5 million before in June and therefore doesn't know the full impact of the damage to its reputation that the two (assumed) plane crashes have caused. However, recent improvements suggest that the airline might be working on its customer retention. As of November 2014, exclusive members of the airline flying domestic flights are able to enjoy a newly renovated lounge offering a buffet, a spa, and an extensive improvement in service. Also members of the airline's frequent-flyer program Enrich will benefit from improvements. These come in the form of bonus points that customers will be able to earn by staying at selected hotels. This is made possible by a collaboration MAS has made with Rocketmiles. These new offers might work, especially if the main focus is being moved to Asia - because both frequent flights and the Golden Lounge improvements will occur mostly on a domestic basis - but because they are so recent, that their outcomes are hard to determine now.

Problems with competitiveness could potentially have a negative effect not only on the airline, but also on the Malaysian government and the country's economy. Previously, Singapore Airlines was MAS's only big competitor on the Asian market, and MAS's popularity mostly managed to exceed that of the other airline's, but now that the financial issues of MAS are increasing, it is bound to have an effect on the company, as well as the tarnished reputation has. Malaysians are proud of their airline and do what they can to save it, but even though this might improve the situation for domestic flights, problems still remain with international flights because Europeans and Americans especially have become increasingly suspicious of the airline. Because MAS is government owned, this ought to have some influence on the Malaysian economy in general. It isn't hard to imagine that with fewer tickets being booked internationally, it will affect the amount of tourism in Malaysia eventually. Thus, the two incidents this year could have quite big consequences for the country's management and economy.

The consequences will not only be measured in the world outside. In August 2014, evaluations showed that employees were deserting their employers within the company, mostly due to pressure coming from friends and family who didn't consider the airline safe or trustworthy anymore. At the same time, part of the company's plan is to cut back on employees and the amount of flights, which means that 6,000 more jobs are at stake within a near future. As a result, employee loyalty is failing: people don't trust the airline enough to stay, and those who don't choose to leave voluntarily could potentially risk being fired later on. Therefore, if neither customers nor employees trust the company, it will be hard for it to start over with a clean slate.

Part of the plan is also to find a new chief executive, but other cases have shown that hiring a new leader is not always the right way to solve a problem. Sometimes the new leader doesn't have the right know-how or doesn't understand the overall structure of the company. This could lead to even bigger internal problems than MAS already has.

Prior to the double tragedies of the Malaysian aircrafts MH370 and MH17, the Malaysian airline company was already aware of the need to restructure the company's operations due to weak financial performance. The two tragedies only accelerated it...

The company operates in a harsh business environment with stiff competition from regional and global carriers and suffers from high operational costs. This causes the company to undergo a thorough re-examination and re-evaluation of the company's business plan and come up with a solid action plan, an action plan that both entails the achievement of sustained profitability and sustained competitiveness through consistency. In order to reach these targets, the action plan involves cutting back on staff, spending more energy on Asian flights, having fewer flights, replacing the chief executive, regain the confidence of their staff and shareholders and, above all, rebuild a safety reputation - which has been destroyed with the disappearance of MH370 and the downing of MH17 in July - in order to re-create the company from scratch and start over with a clean slate.

The new action plan requires fewer staff, which implies that about 6,000 people are expected to lose their jobs and pared with that a reduced flight network, focusing on the Asian region to handle their cost structure.

A decrease in the number of flights could potentially work for a few reasons. One is that in September 2014, the airline's load factor (capacity compared to amount of passengers/load) had decreased by 12% compared to the year before. This means that there are too many planes in comparison to the demand for these, so fewer flights might diminish the amount of wasted space on the planes in the future.

Replacing the CEO with someone chosen by the majority shareholder, Khazanah Nasional Berhad - the state national fund- might just be what the company needs right now. The current CEO Ahmad Jauhari will remain on the job until June 2015. Furthermore, Khazanah Nasional Berhad intends to take full ownership of MAS and delist it from Bursa Malaysia - the stock exchange - in that way, getting the company back on track.

Due to the fact that a lot of the staff members lost their confidence in the airline company, it is important that MAS addresses this problem and tries to restore the confidence among its staff members through boosting the morale the use of regular briefings and discussions. Besides that, they also have to focus on restoring the trust among their passengers. MAS uses aggressive advertising campaigns, service enhancements and cheap fares.

Last but not least: rebuild their safety reputation. By having embraced the public sentiment using sensitivity and compassion during the crises, MAS was able to help raise the possibility of continuing to do business. Furthermore, they need to continuously highlight their on-time performance and that safety is their number one priority through social media

In conclusion, Malaysia Airlines has (literally) hit rock bottom. The company now has to face a number of challenges to insure its future. Most of these issues, such as the airline's lack of competitiveness in its global business environment, already appeared before the MH370 and the MH17 took the media by storm. From there on, however, the situation took a turn for the worst. Existing problems were magnified and new difficulties occurred one after another. Today the company is dealing with a besmirched image, a lack of competitiveness, loss of employees (and customers) and many millions in financial losses. With a new action plan, MAS is going back to its roots as a more regional airline; and while discretely being delisted from the Malaysian stock market and being appointed a new CEO, Malaysia Airlines might just get the opportunity to start over and (in time) restore its reputation. However, every action plan has its drawbacks; thousands of jobs are likely to be lost and there will be a definite impact on Malaysia's economy. Thus, Malaysia Airlines' future remains unstable, yet not without a chance.

Question

1. What is the problem & causes of the problem?