Lim Kit Siang

Time to just let MAS crash

– Koon Yew Yin
The Malaysian Insider
February 20, 2014

MAS has just reported a fourth consecutive quarter of losses with a net loss of RM343 million for this last quarter.

For the full financial year 2013, the net loss amounted to RM1.2 billion, compared with a net loss of RM433 in FY12.

The question is whether this eye-popping loss will be the straw that breaks the camel’s back.

In the past, there have been incorrigible cheerleaders for the airline, regularly claiming that the company is in recovery mode and will soon return to profitability.

This time, even the most optimistic experts have given up.

One leading financial house analyst has estimated that there was a 7% financial year underperformance because of weaker-than-forecast domestic yields. As competition heats up in the international space, we can expect MAS to continue another year of losses in 2014.

Savvy market observers have seen the writing on the wall much earlier and bailed out on the share. During the past few months its share has been trying to stay above 29 sen, the lowest share price that the airline share has recorded in the past few years.

Without the support of government-linked funds and left to market forces alone, it is certain that the share price of MAS will drop further.

These government-linked funds must surely be hoping that for the next financial year, MAS will not try to “break the record” loss of RM 1.262 billion set in 2005 or the RM2.5 billion loss in 2011.

Should the government continue to bail out MAS?

The most recent losses bring its total losses to more than RM3 billion. In any normal business, any company incurring large and sustained losses would have closed down or gone into bankruptcy.

This has not happened to MAS yet, but I think the time is long overdue for the government to withdraw the open cheque book extended to the airline.

It is an open cheque book which comes with money from taxpayers who are being hit with price increases left, right and centre while the government merrily pours money into MAS and other inefficient and loss-incurring government enterprises.

When planning the future of MAS, it is important that the government avoids not only the past mistakes but also takes a rational approach based on economic fundamentals.

One line of simplistic thinking is that there is a bright and profitable future for MAS since the number of air travellers continues to increase by about 5% to 7% annually.

This familiar argument is also given prominence in the company’s report filed a few days ago with Bursa Malaysia.

But if you look at the history of airline industry profitability, this is not the case for airlines worldwide.

The fact is the airline industry requires huge capital and produces poor returns on capital employed. Hence, year after year, many airlines produce poor profit margins or outright losses.

Why you might ask is it that an industry with year-on-year rises in sales cannot generate good returns to shareholders?

Part of the reason comes down to the economic structure of the industry. One of the forces that limit profitability is the intensity of the rivalry between the leading airlines.

There is oversupply leading to pressure on prices. This is exacerbated by a high degree of freedom for new competitors to enter the industries.

If, say, a route between two destinations is found to be reasonably profitable, it is not long before new entrants move in or current airlines simply move their planes to this profitable route.

Mismanagement and corruption factor

Although the airline industry is generally governed by the principle of “survival of the fittest”, it is important to note that airlines can not only be profitable – they can be highly profitable.

The classic case is Singapore Airlines. Another classic case closer to home is AirAsia.

Why have these two airlines, SIA and AirAsia, succeeded while MAS has flopped? It does not require rocket science or a Harvard PhD to explain this contrast in airline profitability.

It all boils down to the quality of management, productivity, operational efficiency and the ability to control costs.

Control of costs is not simply tied to obvious items, such as fuel or salaries paid to pilots and crew. It also crucially has to do with the procurement policies and practices of the airlines.

Unfortunately, the factor of mismanagement and leakages and corruption in MAS appears to be an off-limits subject in the mainstream media.

However, just because the mainstream media does not mention them, it does not mean that these factors are insignificant or are of little or no consequence.

An Internet search of “corruption in Malaysia Airlines” will turn up many allegations and charges of leakages and corrupt practices.

None of these allegations has been responded to by the authorities. Apparently, the authorities believe that if they turn their heads away from the problem of mismanagement and corruption, these problems will disappear.

If the problem of mismanagement, leakages and corruption cannot be resolved in MAS, then let MAS crash without further delay. This is the only way forward in national interests and to save taxpayers’ money. – February 20, 2014.