Malaysia Airlines Bhd (MAB) will need to successfully implement a new business plan and restructuring to compete more effectively, amid extremely challenging market, according to analysts. NST pix by Eizairi Shamsudin

KUALA LUMPUR: Malaysia Airlines Bhd (MAB) will need to successfully implement a new business plan and restructuring to compete more effectively, amid extremely challenging market, according to analysts.

Khazanah Nasional Bhd managing director Datuk Shahril Ridza Ridzuan recently said the Malaysian aviation industry was experiencing overcapacity with four local airlines providing too much capacity given the size of the market.

MAB, which includes turboprop subsidiaries Firefly and MASwings along with Malaysia Airlines, competes with AirAsia, AirAsia X and Malindo.

The sovereign wealth fund said overcapacity in the local aviation sector has continued to impede MAB’s restructuring plan as the airlines was struggling to maintain its profitability this year.

“This (phenomenon) has affected MAB’s restructuring plan as it has not been smooth and failed to achieve its intended target in light of the industry’s overcapacity,” Shahril said in his statement to Parliament’s Public Accounts Committee (PAC) recently.

The sovereign wealth fund said the national carrier requires about RM1 billion of capital annually from the government if the latter intends to sustain MAB’s operations under the current management.

Khazanah had expected to inject RM1.3 billion for this year, an investment required to keep the airline going and cover operational costs.

Year-to-date, Khazanah had injected about RM800 million into MAB through its holding company Malaysia Aviation Group Bhd.

MAB reported a net loss in the financial year ended December 31, 2018 (FY18) of RM792 million, representing a marginally smaller loss compared to the loss of RM812 million from the prior year.

MAB's revenue's in FY18 improved by only 0.8 per cent to RM8.74 billion from RM8.67 billion previously.

There was no explanation for the financial results given in the report filed with CTOS recently.

However, MAB group chief executive officer Captain Izham Ismail had in March said the airline’s overall performance for FY18 was affected by intense competition with supply outstripping demand, volatility in fuel and foreign exchange.

Khazanah has said it has injected huge capital in Malaysia Airlines Group over the last five years under the restructuring of MAB.

However, the restructuring plan did not go smoothly as it missed its target. Based on the business plan provided when Malaysia Airlines was delisted in 2014 and MAB was established, as the latter was initially planning to break-even in 2018 and be profitable in 2019.

Market observers now expected a loss this year similar to 2017 and 2018 as market conditions remain challenging.

Singapore-based independent analyst and consultant Brendan Sobie of Sobie Aviation recently said that for MAB to successfully overcome challenging market conditions it was crucial to allow the MAB executive team to implement major changes, including to the airline’s fleet and network without any interference.

“Expect a possible reduction in the size of narrowbody aircraft as a solution to the overcapacity issue that would enable MAB to focus better on the full service end of the market while increasing frequencies,” he told the New Straits Times recently.

He said a reduction in narrowbody aircraft size would result in better schedules for business passengers and connecting traffic while ceding low fare point to point passengers to low cost carriers (LCCs) such as AirAsia.

Sobie said the evaluation of smaller Airbus A220s and E195-E2s to replace some of Malaysia Airlines' 737-800 fleet as part of a request-for-proposal (RFP) with Airbus and Embraer marks an intriguing attempt to consider new solutions.

“The decision to delay for a few years 737 MAX deliveries, initially slated to begin in 2020, is sensible as MAB contemplates a down gauging strategy under its new business plan,” he added.

Sobie also urged the government to quickly approve the phase out of the superjumbo A380s, as the airline is now being been forced to keep for more than another decade although they are way too large and are highly unprofitable.

He said the decision to delay for a few years plans to select and order new widebody aircraft was sensible.

“MAB should relook at medium size new generation widebodies once a decision is made on the future narrowbody mix, which may also include long range A321XLRs,” he said.

Sobie added that along with fleet changes MAB is expected to pursue network and schedule adjustments as part of its new business plan.

These changes will "improve connectivity and reduce reliance on markets suffering from overcapacity while increasing the focus on city pairs that are less competitive or are supported by partners".

Quoting an example, he said several route or market specific joint-ventures (JVs) are in the works following the now implemented JV with Japan Airlines on Japan-Malaysia routes and a recently applied for JV with Singapore Airlines and SilkAir on Singapore-Malaysia routes.

“The increased focus on partnerships, which could also result in new routes, is logical as MAB needs to reset its business in the current challenging environment,” he said.

Sobie said the current market conditions including overcapacity, making MAB’s sole shareholder, Khazanah’s task of finding new investors very difficult.

“However, there is an opportunity to finally right the ship by implementing a sound new business plan and securing full support from the government and stakeholders without any interference,” he said.

Khazanah recently said it plans to decide on a new investor for MAB by the end of this year.