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Restructuring In Battle For Survival : Izham Ismail

CAPTAIN Izham Ismail was named group CEO of Malaysia Airlines Bhd (MAS) in 2017, marking him the company’s fourth CEO since Malaysian Airline System Bhd was relaunched in 2014. Due to overcapacity and thin margins, the loss-making airline had been battling to turn things around in a difficult operating environment. The Covid-19 epidemic has exacerbated the situation, and it is being proposed that restructuring its debt in a bid for survival.

Since the Malaysia Airlines Recovery Plan (MRP) was implemented, MAS has had a difficult time (which was announced in 2014). Many of the results fell short of the MRP goals. The explanation for this is overcapacity in the marketplace, which many people dismissed. Despite this, we shrunk and didn’t realign ourselves as expected to some extent. We dropped off in our qualitative index and customer experience, our staff became so demotivated, and so forth. In late 2017/early 2018, I asked myself, “How do I address this?” As a result, I told myself that the first thing I needed to address was the people. People became my Qibla, or true north. After that, I began to leverage customers since, at the end of the day, business is nothing without customers. Customers became the organization’s centre of gravity from then on. Everything we did was for the benefit of our clients. It took a long time for us to put it together. As a result, when I took over the office, my first year’s focus was on people and customers. Thankfully, the figures for Customer Satisfaction Index, on-time performance, and mishandled baggage began to improve in late 2018. (to show improvements).

In 2019, I was able to restore (staff) morale. People claim MAS employees are slackers, but we rallied them. They are dedicated, and the culture has evolved to one in which we stand unified, the organisation is united, and the focus is on the consumers. We began designing items and filling in the holes in our offerings. We witnessed the results in the third and fourth quarters of 2018.

Then we turned our attention to revenue in 2019. We had been competing in the same market as the low-cost competitors for the previous few years. This can’t be, I said. MAS is a high-end airline. We would never win if we continued to compete in the same market. We performed a 180° turn in late 2nd Quarter 2019. We created items by concentrating on our core market niche, which offers a really premium client experience. We exceeded our net income after taxes objective by 18% in 2019. We generated RM800 million in passenger revenue in the third and fourth quarters of 2019. We were 4 percent ahead of budget for the first half of 2020 with our cargo and passenger forward bookings in January 2020.

The year twenty-nineteen was a good one. In comparison to our competition, we experienced hockey stick growth. We were still in the negative, but with that (growing) velocity, we would have been back in the black by 2nd Quarter 2022.

There is an oversupply of goods on the market. Even before the Covid-19 pandemic, the amount of tickets available in Malaysia in 2019 was almost 1.5 times that of demand. For example, AirAsia Group Bhd, Malindo Airways Sdn Bhd, MAS, and FlyFirefly Sdn Bhd all operated flights to Penang. So, what is the most effective strategy for gaining customers? Price. A 45-minute flight from Haneda to Osaka (Japan) costs US$300; Jeju to Gimpo (South Korea) costs US$290; whereas KL to Penang costs only US$20. It’s completely illogical. So, notwithstanding the balance sheet that we inherited, how do you anticipate MAS to recover in that environment?

When Covid-19 occurred, I realised it was the perfect time to reset the balance sheet. But, whatever plan we devise, it will be unfair to ask the government and Khazanah for additional money because the company will never be able to turn around due to market realities. In the context of having a long-term business plan (LTBP 1.0), which was released in 2019, I strongly believe we should get our home in order. We are rebasing our business plan slightly for us to meet the future. And we are confident that LTBP 2.0 will work. Why? Because of the credibility we had in 2019 by executing LTBP 1.0.

The goal of this restructure is not to cause hardship, but to ensure the industry’s long-term viability — from aircraft maintenance through lessors and manufacturers, travel agents, caterers, and our own employees.

This restructure plan, in my opinion, will give us some hope in making MAS a powerful organisation after Covid-19. The goal of the restructuring plan we put in place is to reach an amicable agreement among all stakeholders involved in this value chain. Once we reach an agreement with our creditors, we shall portray our ultimate position. We believe that if MAS is able to survive this pandemic by reorganising its finances, creditors will benefit as well. Because we completed LTBP 2.0 in 2019, and this business plan is not a table-top exercise, I am confident that it will succeed. It was calculated in the year 2018/2019.

I have no idea what the world will be like after Covid-19, but we have some ideas. Customers want flexibility, their safety and security to be ensured, and they want to be able to select things, but they also want it to be premium and have reasonable rates. That is the type of customer we will be targeting in the future. We are confident that LTBP 2.0 will be successful.

Restructuring our financial situation, or balance sheet, is one option. The LTBP 2.0 is a five-year plan that will run through 2025. We anticipate reaching break-even in 2023. This is based on a recovery model in which the domestic and Asean markets return to 2019 levels in the second or third quarters of 2022 or 2022, respectively. In 3rd Quarter 2024, we anticipate a resurgence in international and intercontinental markets.

But first, I need to get to 2022, and second, I need some money from my shareholder to get MAS up and running for the following 18 months. If you ask me, I don’t need money for the next 18 months (that is not true). I’m short on cash. The airline sector as a whole, as well as travel agents, are in desperate need of funds.

Even if I succeed in achieving these two goals, we as a society must consider how to control market capacity. If not, it is preferable to simply shut down the airline. Since 2018, I have been one of many who has campaigned for this. If the country can not agree on how to make MAS operate, we will shut it down. I don’t mean (forcing) Malaysians to fly with us when I say “collective vision” I’m taking a look at the policy side as a country.

If MAS is shut down, we have to handle just the 12,500 staff. However, across the value chain, there will be others such as the travel agents and caterers affected — easily 200,000 people who contribute to the GDP of the country. With that 200,000 figure, you multiply by four as a standard household number, it is close to one million people being affected. So, today, MAS is doing (this restructuring) with the spirit for us to survive for the future. I know that across the value chain, the margins of our partners are higher than the airline’s itself. Airline margins are +/–1% to 2%.

This restructuring plan involves not only the lessors but across the supply chain, aircraft manufacturers, spare parts providers, maintenance, repair and operations providers, banks that give us term loans for hedging, forex, revolving credit and partners in our booking engines, etc. They will have to sacrifice for the better of the future.

An organization with a more well-structured cost base that will make us more competitive in the marketplace. Then, we will have room for capital investment to enhance our products and make it better for the consumers. I believe post-restructuring, MAS will be a more agile and competitive organization, and in the long run, hopefully, less dependent on our shareholder and the government.

We have to be realistic. The industry’s L-shaped recovery is bordering on W-shaped. As such, the number of aircraft that I need for the next 18 to 24 months is half of what I have today. When domestic and Asean markets start to recover in 2022, that’s when we will start to build our capacity again. We should normalize ourselves in 2024 when international/intercontinental recovers. (MAS currently operates six Airbus A350s, 21 Airbus A330-200s/300s, 48 B737-800s and six A380s.)

The way I look at the future is, if I am able to reset this balance sheet, have a little bit of money for me to reboot the business post-Covid-19 and the over-capacity issue being managed by our country effectively, then I don’t see any reason airlines and the entire value chain could not succeed. It will.

I don’t expect the overcapacity issue to be resolved within one year. It is policy (that the government has to decide). I hope the nation is looking into it. Malaysia has a population of 32 million, but last year, we had 37.5 million seats in the marketplace.

If we can address the over-capacity in the market, do you know who the winner will be? Not (only) MAS but my competitors (as well). The aviation and hospitality industry will also flourish, and the rest of the value chain too. Covid-19 is a time to reset. Let us prep ourselves as a country — Malaysia Inc per se.

All of us can survive this stormy weather safely and come out stronger and profitable. That indirectly feeds the economy of the country.

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