Malaysia Airlines problems run far deeper than the crashes

This could be Malaysia Airlines’ last chance to get its house in order. EPA

Following the catastrophic losses of flights MH370 over the Indian Ocean and MH17 over Ukraine, Malaysia Airlines (MAS) has received a bailout of nearly £1.2 billion from the Malaysian government. The airline is to be de-listed from the stock exchange and taken over entirely by Khazanah, the government’s investment arm. As part of the restructuring, 6,000 jobs – or 30% of the workforce – will be axed, along with yet-to-be-announced cuts to unprofitable routes and the appointment of a new chief executive.

With yet another attempt at reform, MAS employees themselves joke about that same circus with different clowns. And Khazanah is almost wishful about the promised overhaul, as if this has to be believed to be seen. The government has insisted that the cash injection is not a bailout, but an “investment” to turn MAS around for a possible re-listing in the future. Call it what you may, but the airline has been burning cash and receiving intravenous drips for years amounting to billions of pounds, and was already teetering before the twin disasters.

Too prestigious to fail?

As in most countries, the airline is a symbol of national pride. Most Malaysians believe it will never be allowed to fail, never mind the record losses and the poor taxpayer. Because of this belief, emboldened MAS unions had been stonewalling staff and wage cuts for years. That the airline is a bloated organisation is beyond argument; it has a staff count comparable to bigger and more profitable carriers such as Cathay Pacific and Singapore Airlines.

Tough unions have made reform difficult in the past. EPA

The unions’ belligerence included torpedoing the proposed share swap in 2012 between MAS and AirAsia, the successful upstart budget carrier that shows up everything that’s wrong with Malaysia Airlines. To resist lay-offs and change, the unions even threatened to withdraw support for the government in the run-up to the 2013 general elections. By all accounts, they succeeded, and the AirAsia tie-up was called off.

But those heady days for the unions are numbered. MH370 and MH17 might just have been the tipping point. The new plan to slash the fat appears uncompromising, and rightly so. And one of the new chief executive’s key tasks will be to tame the unions and convince them to place the company’s long-term survival interests above their own.

A bloated and unproductive workforce isn’t the only problem. The airline has long been milked by vested interests keen to exploit its links with the government and ruling party. Critics have pointed to onerous contracts with local suppliers, including a 25-year deal with a well connected company to cater in-flight meals. Whether such contracts will be re-negotiated remains to be seen.

The problem with regional focus

Then there is the issue of routes. MAS once flew to Buenos Aires via Johannesburg and New York via Stockholm. It is doubtful if such prestige routes were launched on the basis of hard-nosed profitability assessments. These loss-making flights have since been dropped.

As part of the new reforms, there are indications that marquee routes such as Paris and Amsterdam may have to be reduced or axed as well, along with Istanbul and Dubai. Profits have been hammered by brutal competition with the deep-pocketed Gulf carriers that have better networks and products.

MAS will henceforth concentrate on regional routes, says Khazanah. Presumably, that means a focus on China, Japan, India, Australia and south-east Asia. But that brings the airline into head-long competition with regional specialists AirAsia and AirAsia X, who fly not just backpackers but increasingly also businessmen.

Without a culture of keeping both eyes on costs, this is a fight MAS cannot win. There can only be one outcome: it will have to discount heavily to fill seats, and this will damage yields and profits severely. A check with online-travel sites already shows up MAS fares as among the cheapest on many itineraries, yet it is struggling to attract passengers due to the lingering effects of MH370 and MH17.

Those fears will pass soon enough. But the structural problems will not. These will take years for senior management to fix, requiring the most uncompromising professionalism in staying abreast of the competition, managing costs and the unions, as well as resisting political interference. No doubt the process will be painful. This may well be the last chance, and the promised changes will have to be seen to be believed.