The Wall Street Journal
By Gaurav Raghuvanshi And Jason Ng
Updated Aug. 29, 2014 10:48 a.m. ET
KUALA LUMPUR—The state fund that controls Malaysia Airlines announced the largest round of layoffs in the company's history, the centerpiece of a plan to revive a carrier battered by two recent air tragedies, as well as years of weak earnings.
But industry experts said the steps may still be insufficient to turn around Malaysia's flag carrier, which like many other national airlines is struggling with a large, costly workforce, an unwieldy network of routes and cutthroat competition from new, low-cost rivals.
Malaysia Airlines has also been pummeled by the unresolved disappearance of Flight 370 in March and the downing of Flight 17 in Ukraine, likely by a missile.
The plan, titled "Rebuilding A National Icon," was announced Friday by Khazanah Nasional Bhd., a government investment firm that owns about 70% of Malaysian Airline System Bhd., the listed company that owns Malaysia Airlines.
Khazanah said it will spend up to 6 billion ringgit ($1.9 billion) to revive the airline, including 1.4 billion ringgit to take it private by the end of the year, 1.6 billion ringgit for layoffs and other restructuring costs and 3 billion ringgit to retire debt and provide capital.
As part of the restructuring, Malaysia Airlines will cut staffing levels by 6,000, or 30% of the carrier's 20,000 employees, the largest layoffs in its history.
The plan also calls for a new board and chief executive, a cutback of routes and a new branding strategy—although Khazanah said it is recommending the carrier keep the Malaysia Airlines name.
Khazanah said it aims to make Malaysia Airlines profitable within three years after new management takes charge next year, and will seek to subsequently relist the company.
Khazanah will also consider selling its equity stake to a strategic investor if Malaysia Airlines becomes profitable, it said.
In a sign of how important the airline is to Malaysia, the plan was prefaced by a message from Prime Minister Najib Razak, who called the carrier "a symbol of national pride, our ambitions and our place in the world. In short, it is more than just a company to us."
Mr. Najib invoked Malaysia's 57th Independence Day on Aug. 31 to seek support from the public for the revival plan, and said that only "wholesale" change will make Malaysia Airlines financially strong and sustainable. The carrier accounts for 0.7% of the Southeast Asian nation's economic output.
Analysts pointed out the carrier has tried similar steps in the past, without success.
"The plan appears very similar to the previous business turnaround plans...we tend to be more subdued in our expectation that it will work this time," said Mohshin Aziz, analyst at Maybank Investment Bank. "It's too early to say they have all the right ingredients just yet."
The proposed job cuts this time go farther than in the past, when the carrier had to contend with opposition from unions.
Malaysia Airlines has 183 employees per aircraft, which is significantly higher than 138 per aircraft at Singapore Airlines Ltd. and 125 at Cathay Pacific Airways Ltd., Khazanah said in its report. Malaysia Airlines also fares poorly in terms of revenue per employee and productivity, it said.
The new plan is similar to the airline's existing strategy but "the job cuts should enable a deep restructuring, putting MAS in a better position in 2015 and beyond," said Brendan Sobie, an analyst with CAPA-Centre for Aviation.
In recent years, "job cuts were always a no go topic, limiting the effectiveness of turnaround efforts," he said.
The airline will take steps to retrain redundant staff and help them find jobs with other companies, Khazanah said.
But job cuts may not solve the problem of competition Asian airlines face from aggressive budget airlines that now account for nearly a quarter of the total seats on offer in the region.
Malaysia Airlines has been among the worst hit, as AirAsia Bhd., the biggest discount carrier in Southeast Asia by passengers, has taken its position as the dominant carrier in Malaysia.
Other state-run carriers in Asia, such as Garuda Indonesia and Thai Airways International PCL have also reported losses in recent quarters as traffic has grown below expectations. Garuda received a bailout from the Indonesian government but has slipped back into the red after a bout of profitability, underscoring the tough environment.
Australian flag carrier Qantas Airways Ltd. reported its biggest loss in the airline's history and announced that it will carve out and sell its loss-making long-haul division to a foreign investor.
The parent of Malaysia Airlines reported on Thursday that its second-quarter net loss widened to 307 million ringgit, compared with 176 Million ringgit in the same period last year.
Malaysia Airlines will focus on flying within the region, including to Japan and Australia, Khazanah said. It has already withdrawn from some of its longest routes that were unprofitable and will look at more routes that can be cut.
The airline will keep some of its important routes such as London, Khazanah said, adding that the details of the route restructuring will be decided by the airline's management.
The company will get a new board with a new chief executive by July 1 next year and Ahmad Jauhari Yahya, the current CEO, will stay on during the transition period, Khazanah said.
Malaysia Airlines will also renegotiate most of its existing supply contracts to bring them in line with industry norms, Khazanah said. The airline has been criticized by analysts for signing contracts that make its purchases too expensive.
There is no plan to break Malaysia Airlines into smaller firms, such as hiving off its profitable maintenance division into a separate firm, said Khazanah Managing Director Azman Mokhtar at a briefing.
- Source: http://online.wsj.com
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