What’s going on, Malaysia Airlines?

On Sep 20 Malaysia Airlines Berhad (MAB) managing director Peter Bellew told The Malaysian ReserveMAB would not pay for the acquisition of 16 Boeing aircraft, but rather leased them. This contradicted a statement made by the Malaysian premier on Sep 12 that “Boeing planes to be purchased by MAS… within five years, the deal will be worth beyond USD10 billion.”

Is this some kind of legerdemain to lull us into thinking Malaysia is making a major investment in the US economy, when all it really is, is Malaysia Airlines (MH) leasing some Boeing planes, plain and simple?

On Sep 15, when the PM arrived home at KLIA he reaffirmed his statement made at the White House and said: “The decision was made by MAS. I merely conveyed the message to US President Donald Trump.”

So what is it, MAB – did the PM not get a full briefing on how the aircraft are to be acquired, did he misunderstood or was it just a case of words being lost in translation?


Sweet Dreamliners are made of these…

In an email sent out to MAB staff on Sep 15, Bellew explained MAB had inked an MoU with Boeing in Sep 2017, switching eight of a firm order for 25 B737 MAX8 to eight B787-9 Dreamliners. On top of that, MAB also placed “purchase rights for an additional eight B737 MAX8, all while maintaining the total firm order at 25.”

The 737s will be funded through current progress payments along with sale and leasebacks done with international lessors. As for the Dreamliners, Bellew said the carrier plans to buy direct from Boeing and subsequently fund them via sale and leasebacks and operating leases with leasing companies.

At list prices, the 787s cost USD2.5 billion. Typically an airline receives anything between 20% and 40% discounts, depending on its financial strength and how badly the aircraft maker wants to sell the planes.

Nobody’s disputing the efficiency and economics of the Dreamliner but what’s uncertain is how it fits into MH’s game plan, if MH has one, that is…

Bellew claimed it’s being acquired to “add capacity to our widebody fleet and provide a high level of quality on our most lucrative routes.” From what it looks, the planes, which will start arriving in 3Q19, are being sought for use on routes that are as yet to be determined because MH’s network has shrunk considerably.

The initial Dreamliners are, according to Bellew, for use on Asian sectors; he emphasised that their range capabilities allow for flights from Kuala Lumpur to “any point in Europe” and “cities on the West coast of the USA.” The Dreamliner, he added, offered MH “great flexibility… over the next 20 years.”

Huh? On the one hand Bellew is keen for MH to stay ahead of the competition with new state-of-the-art aircraft. On the other hand, he suggested MH stick with the 787s 20 years down the road? Does anyone in the airline’s management seriously believe MH can make money offering premium seats from KLIA to the US west coast? Or any point in Europe, for that matter?

Why is MH investing heavily in premium products when traditionally strong premium carriers in Asia like Cathay Pacific and Singapore Airlines are struggling with theirs?


Cutting capacity, adding capacity… A330, A350, A380…

The confusion doesn’t stop there. Bellew said in March this year he wants to cut capacity in the single-aisle segment while raising capacity in the twin-aisle fleet. If we understand correctly, he wants to cut capacity and then increase it?

“I need bigger planes. It’s kind of a no-brainer,” Bellew said in that article. What about the six A380s MH has in its fleet, each with almost 500 seats – are those not big enough for you?

As part of Bellew’s grand plan to make MH’s restructuring as the “greatest turnaround” ever, the company is taking no prisoners when it comes to other aircraft acquisition.

Two of six A350s on operating leases are slated to start delivery starting January 2018 (to London), and four more A350s will join the fleet by June 2018 ostensibly when MH reopens flights to Amsterdam, Frankfurt or Paris or maybe all three?

And that’s not all. The MH boss is on a no-holds barred shopping spree. Bloomberg reported he’s also going after Airbus A330neo planes!

MH’s desire to add widebodies is nothing short of mind boggling. It is already running a fleet of 15 A330 aircraft, including three A330-200 freighters and 12 relatively new A330-300s (see table below).

Malaysia Airlines A330 Fleet

Regn Build Year Type Engine Owner Financier
9M-MUA 2011 A330-200F PW4000 MAB
9M-MUB 2011 A330-200F PW4000 MAB
9M-MUD 2012 A330-200F PW4000 MAB
9M-MTA 2011 A330-300 PW4000 Standard Chartered
9M-MTB 2011 A330-300 PW4000 Standard Chartered
9M-MTC 2011 A330-300 PW4000 JSA Int’l Syndicate of banks
9M-MTD 2011 A330-300 PW4000 JSA Int’l Syndicate of banks
9M-MTE 2011 A330-300 PW4000 MAB BNP Paribas
9M-MTF 2012 A330-300 PW4000 FE Novus Fin 1 Ltd NordLB
9M-MTG 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTH 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTI 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTJ 2012 A330-300 PW4000 MAS A330 Cayman I Syndicate of banks
9M-MTK 2013 A330-300 PW4000 MAB
9M-MTL 2013 A330-300 PW4000 MAB DVB Bank
9M-MTM 2013 A330-300 PW4000 MAB DVB Bank
9M-MTN 2013 A330-300 PW4000 Sama Aircraft Fin 1 Ltd BNP Paribas
9M-MTO 2014 A330-300 PW4000 MAB

Data compiled by Endau Analytics

Bellew argued he needed new A330neos and used A330s to replace “older” B737-800s but where will all these planes fly to – China? We know the MH chief is extremely optimistic on Chinese traffic. “I will expect China to move from about 8% to 9% of our business currently to about 20% in the next two to three years,” Bellew told the media on the sidelines of Invest Malaysia 2017 recently.

But even if it does reach 20%, isn’t it unwise to splurge on all these widebodies, especially when MH is still a structurally frail airline? The best way, in our view, to make money from China is not by using widebodies but with A320s or B737s or even regional jets on some sectors between Malaysia and southern China. Don’t believe? Ask Tony Fernandes…

Remember, the airline industry is notoriously cyclical. This cyclicality is due partly to the relative high-income elasticity of demand for air transport services. Demand and revenue-cyclicality on airlines’ financial performances is multiplied many times by their financial leverage. In other words, interest-bearing debts surge. Before MH was delisted, it was paying around USD420 million annually on interest alone.

Airlines typically order aircraft when the going is good and take delivery of them when the economic cycle becomes bearish. Overcapacity will be worsened, resulting in many planes being stored.

In his email to staff, Bellew concluded by saying “management will continue carefully evaluating all options available to us to ensure our purchases make both business and operational sense.”

It’s hard to see how all these acquisitions make sense. Unfortunately for MH, old habits die hard, and this avaricious appetite for widebodies will likely do it more harm than good.

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