Air Asia-MAS divorce aftermath: Can the bleeding stop?

(This post was originally published at

Koon Yew Yin -5th may 2012

Tun Dr Mahathir Mohamad, speaking at a media conference after his lecture on ‘The Challenges Faced by Muslims Now’ organised by the Terengganu state government on May 3 was reported to have said:

“Air Asia fares are so cheap, sometimes free, but it has been able to provide service for the last 10 years. Logically the company should have gone bankrupt, while MAS which has received government aid up to RM3 billion, is still losing money every year.”

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It is good of Dr Mahathir to point out this key paradox of a poor performing government-linked company (GLC) as compared with a private sector driven one.

It would have been better and more educative for the country had he explained why, as the Prime Minister of the country for more than 20 years, he gave orders to pump government aid and taxpayers’ money into MAS.

Also what role did he play in orchestrating the numerous bailouts which helped enrich Tajudin Ramli and other cronies who milked MAS dry and brought the airline to the doors of death?

Economics of the airline industry

In a statement issued on May 2, MAS parent Khazanah Nasional Bhd said it had on Monday terminated the share swap with AirAsia major shareholder Tune Air Sdn Bhd. It was reported by the press that both Tony Fernandes and Kamarudin Meranun resigned from the MAS board the same day.

“Under the earlier agreement, MAS was to be only a full-service premium carrier, while AirAsia and AirAsia X will be low-cost regional and medium-to-long-haul low-cost carriers respectively. The new collaboration terms allow the airlines to enter each other’s domain if they wish to,” said The Star in its report ‘It’s official, MAS-AirAsia share swap is off’.

When planning the future of MAS, it is important that the government avoids not only the mistakes of the past 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 5-7 percent per year.

But if you look at the history of airline industry profitability, this is not the case for airlines worldwide.  In fact, if you add up all the profits of all the airlines over the last 100 years the total would come to less than zero. The years of losses outweigh the years of gains.

 Financial History of MAS and SIAIn 1972 Malaysia-Singapore Airlines (MSA) became MAS and SIA. In the last 10 years from 2002- 2011 SIA reported a total pretax profit of Singapore $13,992 million, averaging S$ 1.4 billion per year.

MAS reported losses in 1997 RM 260 million, in 2005 Rm 1,300 million and in 2011 reported a stunning loss of Rm 2,520 million (Wikipedia).

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

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

It all 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 over-supply leading to pressure on prices. This is exacerbated by a high degree of freedom for new competitors to enter the industries.

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

It is truly an industry governed by the principle of “survival of the fittest”.

The ego and elections factor

It would seem that every developing nation wanting to show off to the world its progress MUST have its own airline, regardless of the impact on an industry already grossly over-supplied, and regardless of whether they have the ability to manage efficiently. So there is a regular stream of announcements of new airline ventures.

Now that Malaysia has also done it and failed dismally, the next logical question to ask is why doesn’t the Malaysian government allow MAS to fold up or go under?

There are two main reasons:  Firstly, the perennial optimism of managers and shareholders. “Just one more chunk of money will see us break through into profitability as we rout the opposition!” seems to be the credo of these parties based on their self and not national interest.

Secondly, there is government interference.  Around the world we see many governments come to the rescue of their airlines despite perennial losses. Malaysia has not learnt these lessons – initially for reasons of national pride tied to the ego of leaders but now increasingly apparently to save jobs and to prevent the retrenched employees from voting for the opposition.

It is an expensive mistake to continue MAS. Mahathir who has on more than a few occasions bailed out MAS from liquidation using enormous sums of taxpayer money should answer this question instead of beating around the bush on the divorce event.

Honouring Dr. Mahathir

Finally, MAS should be a case study in all MBA programmes on how not to set up an airline industry or how to bankrupt the nation quickly.   Perhaps it can be a course offered in the Institute of Tun Dr. Mahathir Mohamad’s Thoughts (IPDM) established on 19th August 2003 by the Malaysian government at Universiti Utara Malaysia.  And Dr. Mahathir should certainly be invited to provide guest lectures on this financially disastrous chapter in the country’s history when he was at the helm.

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