A MALAYSIA AIRLINES A350XWB TAKING OFF FROM TOULOUSE. PIC/AIRBUS
Economics

Massive losses at Malaysia Airlines, again

Flag carrier Malaysia Airlines Berhad (MAB) has a special gift for Malaysians celebrating Malaysia Day on 16 September; and we’re not talking about this video it has just released.

To all Malaysians out there… drum roll please… MAB lost a staggering MYR812 million (USD196 million) for the financial year 2017 (see below), adding to the MYR439 million and MYR1.13 billion losses in 2016 and 2015, respectively. Yes, Malaysians, that’s your money gone down the drain. Again.

MAB losses 2017

The airline – which received a MYR6 billion bailout from Khazanah Nasional in 2014 – has now accumulated total losses of nearly MYR2.4 billion in the last three years since it was delisted end-2014. It filed its 2017 financial statement only in August.

In an interview with The Edge on 8 September, the airline’s CEO spun a sexy story that MAB doesn’t need more money from the government but he cleverly omitted one key point: the MYR812 million losses in 2017.

He also failed to mention that by 2022, MAB would need to come up with a MYR5 billion payment for a Sukuk bond the company issued in 2012. How will MAB pay for this?

Of course, there’s the possibility that the CEO – who is on a three-year contract – will no longer be around in 2022 and whoever replaces him then (or earlier) will face the daunting task of raising the MYR5 billion.

He said: “I am here to turn around the airline, to make it efficient and hopefully profitable.” Hopefully? Turning an airline around isn’t as simple as turning an aircraft around, Captain… And the national carrier isn’t paying you a couple of million a year to be hopeful.

In July this year MAB’s CEO even had the audacity to say the company was on track to breakeven in 2019 . How can MAB break even in 2019 when it lost MYR812 million in 2017 and with jet fuel prices, intense competition and other prevailing industry factors stacked against it?

In the same article, the CEO claimed Malaysia’s Council of Eminent Persons (CEP) “advised the company to continue with its progress”. If that was really the case, then the CEP doesn’t understand airline economics.

Are three years of consecutive losses at MAB considered “progress”?

If anything, MAB is showing signs of a company deep in distress. Poor management and persistent leakages are part of the losses. MAB’s business model is completely outdated and the carrier is out of its depth competing against low-cost airlines. In short, management is clueless.

But MAB’s penchant for profligacy knows no boundary.

In August the carrier decided it could do with a change of fortune and promptly summoned a fengshuimaster to alter the luck of the company, starting not surprisingly, with the finance department.

Nobody knows how much the fengshui master was paid but that it was done showed utter recklessness and a complete disregard by management in frittering taxpayers’ money. It is believed the CEO is an ardent follower of fengshui, and had engaged in a similar act during his tenure as chief of MAB subsidiary MASwings.

MAB’s misfortune is largely self-inflicted. The national carrier is on its way to self-destruction.

The airline has to pay GBP2 million (MYR11 million) in 2018 – money it can scarcely afford – to Liverpool Football Club as part of a foolish sponsorship it undertook under a previous expat CEO in 2016.

Safety and technical issues

Whilst the company’s financial situation has worsened, there are other serious issues concerning the airline’s safety and aircraft maintenance.

Aside from the already well-documented recent incident in Brisbane, Australia – where MAB’s crew allegedly failed to follow mandatory pre-departure checks – there had been other technical troubles afflicting the airline recently.

A MAB Airbus A380 was grounded for 11 days at London Heathrow airport from late July to early August due to a fuel quantity indicator issue. MAB said the problem was a faulty fuel tank probe.

But according to sources in MAB the A380 in question – 9M-MNF – had a fuel issue when it flew from KUL to LHR on 25 July. Apparently it started with an indicator problem in Tank 2, which was resolved.

But oddly fuel from Tank 2 allegedly got transferred to Tanks 1 and 3, resulting in a contamination of both tanks, forcing the aircraft to be grounded at Heathrow.

There was a chain effect following the grounding of this A380. Due to the A380 (9M-MNF) being stuck in London, MAB decided to fly another A380 (which had dropped off pilgrims to Jeddah), to London. There wasn’t a problem with that, except for the small matter that MAB forgot to inform London Heathrow that its A380 was heading there!

In August four of the six A380s in MAB’s fleet had technical problems. One A380 (9M-MNB) had to undergo a C3 check, one (9M-MNF) went for tank cleaning, another (9M-MNE) grounded to replace a probe and another (9M-MNC) suffered a pack problem and spares had to be ordered from Airbus in Hamburg.

The grounded A380s not only resulted in costly repairs (estimated over USD10 million) but more importantly, lost income.

MAB now deploys its Airbus A350-900s to LHR and while these are excellent aircraft suitable for the job, they don’t come cheap. Each A350-900 is being leased at a price of USD1.2 million a month (MYR5 million).

Fragile finances

MAB’s financial health is in a critical state, yet the airline has sent out an request for proposal (RFP) to raise money to pay for nine Boeing B737 MAX aircraft due in 2020. The airline is hoping to raise USD800 million.

But the most critical issue facing MAB must surely be the MYR5 billion bond payment due in 2022. In November 2012 MAB raised MYR5.3 billion via an Islamic bond instrument to help pay for the six A380s, one A330-300 and an A330-200F.

Failure to pay would result in a default, which would be financially disastrous for the airline.

That said, there are a couple of bright spots…

A memorandum of understanding (MoU) signed between MAB and Boeing during a visit by ex-premier Najib Razak to Washington – for eight B787 Dreamliners – has lapsed.

And MAB has hedged 78% of its jet fuel needs for 2018 at USD70 per barrel. Not bad.

Additionally MAB has reserves of MYR3.1 billion – a tidy sum but one that could dwindle fast given the weakness of the ringgit and rising fuel prices.

What’s more worrying, however, is the CEO confirming the airline has issued a request for information (RFI) for widebody, twin-aisle aircraft to add to the six A380s, six A350s and 17 A330s it already operates.

Does MAB need more widebodies when its network has shrunk to just regional routes? The furthest it flies to is Auckland in New Zealand.

And how does Khazanah via Malaysia Airlines Group (MAG) justify subsidising MASwings to the tune of MYR70 million a year when just MYR40 million would suffice to run the airline? That’s not all. Aside that generous MYR70 million, MAG pays USD175,000 a month (MYR717,500) in lease rentals for each of MASwings’ 10 ATR72-500 aircraft!

Contrary to the CEO’s remarks that MASwings and low-cost carrier Firefly “play good supporting roles in MAG”, the reverse is true: both are bleeding and dragging the parent company deeper into the abyss.

According to him, Firefly’s revenue “improved by 50% YoY in 1H18” – after reducing capacity (from 18 planes to 12) and cutting its network. This is only possible because Firefly is cannibalising on MAB’s capacity via code-sharing. Firefly lost MYR37 million in 2017.

But here’s the real deal: MAB is only a small part of the bigger picture. Khazanah has spent years – failing miserably – trying to prop up the airline to make it look good by shifting all the airline’s aircraft, including the hugely loss-making six Airbus A380s, into separate holding companies called MAB Leasing and MAB Pesawat under the MAG umbrella.

However slick anyone spins it, the fact is: MAG is perennially losing money. Lots of money.

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