By James Hookway, Mark Magnier and Jeffrey Ng
May 15, 2014 5:31 p.m. ET
KUALA LUMPUR, Malaysia—In its heyday, Malaysia Airlines was the toast of this steamy Southeast Asian capital.
It flew far-flung routes from Argentina to Croatia to South Africa, even though Malaysia was a developing country. Its $3.5 billion home airport, opened in 1998, was codesigned by a Japanese architect to look like a modernist masterpiece in the jungle, with natural rain forest between terminals. Employees wore uniforms designed by an Italian couturier. The airline regularly topped rankings for cabin service.
"It was like 'Catch Me If You Can,' " said retired pilot Nik Huzlan, referring to the Leonardo DiCaprio movie that portrayed flying as glamorous in its earlier days. "Our friends thought we were so cool."
Now, following the disappearance of Flight 370, Malaysia Airlines finds itself locked in a struggle for survival.
The jet that vanished March 8 has triggered an anguished and seemingly unending wait for relatives and friends of the 239 people aboard. For the airline itself, a collateral effect has been to worsen finances that were already precarious, pressured by a wave of low-cost competition.
Malaysia Airlines had a loss of 1.17 billion ringgit, or $359 million, last year. On Thursday, it reported a 443 million ringgit loss for this year's first quarter, a far deeper loss than the 279 million ringgit of a year earlier.
The outlook for the rest of 2014 is grim, with passengers canceling flights, weak new bookings and much of the company's advertising pulled for a time. While insured, the airline also faces uncertain costs from payouts to families and potential lawsuits. There is no indication the carrier's financial troubles played a role in the disappearance of Flight 370. Malaysia Airlines has had a strong safety record.
Yet getting back on track is more than a matter of regaining the confidence of fliers. Malaysia Airlines' difficulties reflect wider problems plaguing major Asian carriers as they confront the same competitive forces, especially the rise of budget airlines, that began transforming U.S. and European aviation markets more than a decade ago.
Malaysian Prime Minister Najib Razak acknowledges it might be too late to save Malaysia Airlines in its current form. Bankruptcy might be one among several options as a way to restructure the firm after years of losses and bitter conflicts with its labor unions, he said in an interview. The airline's parent is considering selling a stake in its profitable maintenance unit to help balance the books, The Wall Street Journal reported this week.
"We have to look at it from all angles," the prime minister said, "bearing in mind that Malaysia Airlines is a government-linked company. It's not a private company, so there are certain repercussions in what you want to do in terms of how it is received by the employees and the general public."
The airline is 69%-owned by a state investment fund. Its stock has fallen about 43% over the past year, while the broader Malaysian market is up about 5%.
The Asian-Pacific region has long enjoyed faster-growing demand for air travel than other parts of the world. In 2011, it became the biggest market with a 30% share of all global passengers, compared with 29% for North America and 27.5% in Europe.
But it has also become a harder place for an airline to turn a profit. There are now 47 low-cost carriers in Asia, from India to Indonesia to Japan. That is up from around 30 in 2009, and the total is expected to approach 60 by year-end. The low-cost airlines, led by Kuala Lumpur-based AirAsia Bhd., command a quarter of Asia's air travel, versus less than 10% in 2007.
The new entrants are driving ticket prices down while leaving Asia's once-vaunted national champions, including Malaysia Airlines but also Singapore Airlines, Thai Airways and Hong Kong's Cathay Pacific, with fewer easy ways to make money. Travelers now can make the 65-minute flight between Kuala Lumpur and Singapore for as little as $20, roughly what it costs to hire a taxi from Singapore's airport to its downtown.
Qantas, the Australian carrier, recently said it was cutting 5,000 jobs and delaying orders for 11 jumbo jets after a loss of US$210 million over six months. Singapore Airlines this month said it filled only 78.9% of its seats in the latest fiscal year, when it needed to have a load factor of 82% to break even.
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The budget-carrier competition is starting to rise in China, too, after a government decision last year to liberalize the market. Since then, one private airline has said it would transform itself into a low-cost carrier, another company has applied to launch a budget carrier.
"What we saw in the U.S. is a precursor to what we are going to see over here," said Vinay Dube, Delta Air Lines' senior vice president for Asia-Pacific. "As demand grows and as China, Malaysia and Indonesia's middle class spends more…they would wonder if they should pay $500 more for a Singapore Airlines seat over Scoot or Jetstar or AirAsia just to get a better meal," he added, citing three budget airlines.
In addition, deep-pocketed Middle Eastern carriers such as Qatar Airways and the United Arab Emirates' Etihad Airways are pushing deeply into Asia, drawing Europe-bound traffic away from legacy carriers.
Malaysia Airlines is in one of the weakest positions. Saddled with a sprawling route network built up in earlier expansions, it is also competes directly with AirAsia, the region's most successful low-cost airline. After years in a grubby hangar, AirAsia recently moved into a new hub adjacent to Malaysia Airlines' glittering terminal.
To fans of Malaysia Airlines, the national carrier is more than an ordinary airline—it is a symbol of the country's sweeping ambitions.
Its precursors started out in British-ruled Malaya, shuttling passengers above the tropical heat with chilled bottles of beer on board.
After independence, Malaysian officials including longtime leader Mahathir Mohamad embarked on an aggressive push to raise the country's profile. Malaysia set up its own auto maker, Proton, and erected what for a time were the world's tallest buildings, the twin Petronas Towers.
Malaysia Airlines was part of the plan. National leaders poured in cash. It became the first Southeast Asian carrier to fly to Latin America. A picture of a Malaysia Airlines Boeing 777 was added to bank notes.
Top brass turned to Gherardini, a Florence designer, to spruce up crews' sarong-style uniforms. Malaysia Airlines had the world's best cabin service for four years running starting in 2001, and later three more times, said Skytrax, a British consultancy.
The airline also became a vehicle for advancing social aims, including a 1970s policy crafted to raise the economic clout of ethnic Malays and help them catch up with wealthier ethnic-Chinese after race riots in 1969.
As with other government-linked companies and the civil service, ethnic Malays dominate top management positions at Malaysia Airlines, with members of minority groups sometimes saying they prefer to seek employment in the private sector.
"Malaysia Airlines is more than just a business," said Ibrahim Suffian, executive director at Kuala Lumpur polling company Merdeka Center and an expert on the country's politics. "It also serves a social and political purpose. When it runs into trouble, it is very difficult for the government to behave in a commercial way."
Those pressures and the carrier's heavy spending repeatedly landed it in financial trouble despite its growth. Often it has been enlisted to provide routes to underserved parts of Malaysia, called "missionary routes." Local dignitaries sometimes demand upgrades to business or first class, employees said. And many long-haul routes, while prestigious, have been money losers.
The problems intensified in the past decade as AirAsia built up its business in Kuala Lumpur and inspired other startups to do the same elsewhere. AirAsia has strung together an unbroken series of profits since entrepreneur Tony Fernandes relaunched a defunct airline of that name as a budget carrier in 2001.
In recent years, Malaysia Airlines began to cut unprofitable routes and trim some costs, but this wasn't enough. Its controlling shareholder, the state investment fund Khazanah Nasional, in 2011 devised a share swap with AirAsia. The idea was to let Malaysia Airlines drop more routes and share some expenses with AirAsia. Khazanah Nasional got 10% of the budget carrier, while AirAsia's Mr. Fernandes and his business partner got 20% of Malaysia Airlines.
The deal was welcomed in many quarters as a fresh start for Malaysia Airlines. Even Dr. Mahathir, the no-nonsense leader who ruled Malaysia for 22 years before retiring in 2003, approved. "AirAsia must know something that perhaps can be applied by Malaysia Airlines," he said at the time.
The two airlines quickly began cooperating on some ground operations and procurement plans to save money. Mr. Fernandes and other managers tried to renegotiate what people familiar with the situation described as lopsided supply agreements at Malaysia Airlines, including a 25-year catering contract held by a firm controlled by a brother of a former prime minister.
Employees were less enthusiastic. Union leaders worried that AirAsia and Mr. Fernandes stood to gain more than Malaysia Airlines. Some were put off by the way Malaysia Airlines spent money on projects that dovetailed with Mr. Fernandes's personal interests. Soon after the share swap was reached, Malaysia Airlines agreed to pay £2.1 million ($3.5 million) from its marketing budget to sponsor jerseys for Mr. Fernandes's English soccer team, Queens Park Rangers. Mr. Fernandes didn't respond to requests to comment.
The president of the Malaysian Airline System Employees Union, Alias Aziz, said Malaysia Airlines's 20,000 workers were afraid the AirAsia founder would make sweeping cost cuts and slash thousands of jobs.
Some lawmakers likened his business model of low-base fares and add-on fees for things like meals and luggage to gouging villagers, a critique to which Mr. Fernandes responded angrily. "Villagers could never fly before," he wrote on his Twitter account. "We have worked so hard to make flying affordable."
Union chiefs threatened strike action to undo the share swap. They courted politicians, knowing that an election loomed by early 2013 and that union members' votes could be pivotal in some areas. They also met with Mr. Najib, who is finance minister as well as prime minister and who had sanctioned the share swap.
In May 2012, AirAsia and a state investment fund that controls Malaysia Airlines unwound the share swap. At the state fund, managing director Azman Mokhtar blamed "the unintended and unfortunate confusion and distraction of the share-swap agreement" for undermining the task of reviving the airline.
Mr. Fernandes left to concentrate on his soccer club and his Formula One car racing team, Caterham F1. He also launched a new joint-venture budget carrier in India and took up the Donald Trump role in the Asian version of the television show "The Apprentice."
Malaysia Airlines' chief executive, Ahmad Jauhari Yahya, now is focused on stripping more losing routes to the U.S., South Africa and South America from its schedules, and seeking ways to increase passenger loads on popular routes.
The aftermath of Flight 370 is worsening the situation, though, with passenger bookings under pressure, especially on routes to China.
The carrier's unions say they hope the government provides more money. "We need the government to help us. We need them to help us to serve our customers," union chief Mr. Alias said. "We're a government-linked company. We should get the help we need."
By contrast, Some analysts say Malaysia Airlines needs tough love, even to the point of allowing it to go through bankruptcy, as Japan Airlines did a few years ago.
"There will be a line crossed where the government will look at it and ask whether they should declare bankruptcy," predicted Shukor Yusof, an independent aviation analyst formerly with Standard & Poor's. "The only way out is creative destruction: Kill the airline and rebuild it from scratch."
Mr. Ahmad Jauhari, the CEO, said he thinks there is still time to revive Malaysia Airlines without an expensive bailout or a move to seek bankruptcy. "We know what we need to do to get the airline working," he said.
—Gaurav Raghuvanshi contributed to this article.
Source: http://online.wsj.com
