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Mueller: More Needs to be Done for Malaysia Airlines

Christoph Mueller, Malaysia Airlines

13-May-16 08:05

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Mueller: More Needs to be Done for Malaysia Airlines

Christoph Mueller's concealed reasons for his resignation raises more questions about the restructuring and future of Malaysia Airlines. Certainly great strides have been made in the short term by targeting low hanging fruits through cost rationalisation. But Malaysians would ultimately want to know whether they would have to continue funding a national identity indefinitely.

Listen to the full interview with the new Malaysia Airlines CEO, Peter Bellew on The Breakfast Grille dated 22nd July 2016




Interview Highlights





What factors led to your resign decision? You said it’s due to personal reasons but did you feel a sense of responsibility to sit out your contractual term?



"Yeah, good morning Julian, and thanks for having me, also thanks for the question to clarify. I do understand that this is a business station and I would ask you, which part of personal reasons do you not understand?"



"You might recall that I signed to join Malaysia Airlines as early December 2014, I joined in January 2015, and have been busy working on this case ever since. So, let’s talk what has been achieved so far, and I believe we have moved very very swiftly, and very decisively in our restructuring plan"



Was there an agreement by both parties to terminate this contract so soon after you signed it?



"You might recall that I signed to join Malaysia Airlines as early December 2014, I joined in January 2015, and have been busy working on this case ever since. So, let’s talk what has been achieved so far, and I believe we have moved very very swiftly, and very decisively in our restructuring plan. We’ve seen more than just green shoots in going forward, we have a positive quarter in 2016. Our operating cash flow has turned into positive territory. We’ve stopped the bleeding. "



"So, we ticked a lot of boxes in our restructuring plan which on our projected timeline, were marked as being later. So I think the whole the whole team have 14,000 employees of MAB can look back and say, you know, we’ve achieved a lot, but the job is not done - yet. Certainly. But I believe we can be proud of what we have achieved and that is basically where we are today in May 2016."



Does Khazanah give you a free hand in managing MAS (MAB)?



"We have embarked on MAB from the very first moment in, let’s say, running the company on commercial terms. And since Khazanah has pronounced, as early as August 2014 that they are not in for the long run, but as soon as this airline is marketable again, they will re-float MAB group through the market, as constituted behavior, on our part, as well as our shareholders’ part, we’ve behaved like a normal listed company in whatever we do, so I would strongly object that there is any let’s say undue influence that is different to any listed company."



"We simply haven’t had the work for these 6,000 people. I still believe this was the darkest hour of MAS respectively, MAB, ever, to let go 6,000 people. It was a very hurting moment in our history."



Was Khazanah okay with laying off of the 6,000 staff which has got implications for our national employment?



"Yeah, but let’s face it. We simply haven’t had the work for these 6,000 people. I still believe this was the darkest hour of MAS respectively, MAB, ever, to let go 6,000 people. It was a very hurting moment in our history. But as we see, we have cut cost by 32% year over year. Our payroll cost are down 40% year over year. Our average fare per passenger, increased 22%, our production down merely 30%, we have turned into positive territory."



"I think that most of the people if not all of them, have found new employment, and I want to say once more, that Malaysia is a place to do business, and the economy is very strong…. And literally apart from statistical unemployment, we are operating in an environment where everybody finds its fair place in the society and the economy "



"These were necessary cuts and you know the workforce of Malaysia Airlines was bloated. Processes were inefficient, but on the good side, I think that most of the people if not all of them, have found new employment, and I want to say once more, that Malaysia is a place to do business, and the economy is very strong…. And literally apart from statistical unemployment, we are operating in an environment where everybody finds its fair place in the society and the economy"



"We are often called regional airlines, and I would strongly oppose that because in airline language regional airlines are airlines flying within the country and regional aircrafts. We are an international airline. We transport more than 10 million passengers a year. Our route network is a global network. If you incorporate our partners, we want to connect Malaysia with the world. We want to support the local economy and we are suppose to fly to those places where Malaysian business people want to conduct their business"



Does the strategy to cut staff, cut routes seem counter-intuitive to the other regional airlines?



"We want to be the national airline of Malaysia and so far our mission is very clear. We have to support the economic aspect and our route network has to reflect that. If you compare 2000 and 2001 and let’s say 2016 and you analyse the trade relationship Malaysia has with the rest of the world, there are some significant changes."



"For example, the UK was number 10 in year 2001, it dropped to 17. The United States has been number 1 in year 2001, it is now placed number 4. Overwhelmingly China, has conquered place number 1, no big surprise that in our route networks and destination portfolio and that is exactly what we were supposed to do. "



"We are often called regional airlines, and I would strongly oppose that because in airline language regional airlines are airlines flying within the country and regional aircrafts. We are an international airline. We transport more than 10 million passengers a year. Our route network is a global network. If you incorporate our partners, we want to connect Malaysia with the world. We want to support the local economy and we are suppose to fly to those places where Malaysian business people want to conduct their business where we generate inbound tourism for Malaysia and we support the Malaysian economy."



"We have as many 100 interline agreements with global airlines and why do we do that ? You compare that with the telecommunications industry, if you are customer of let’s say Celcom or Maxis and you travel wherever in the world you want to go, it’s very convenient if your local mobile phone provider has a roaming agreement with a local company because you get out of the airplane, and you are immediately connected with very preferable charges set. That’s not dissimilar to what a codeshare agreement in the airline world is."



Would you say that internalisation of the footprint is to a great extent due to your code-share agreements with Emirates and that you depend on them for a lof of this footprint?



"No, I think this is absolutely over exaggerated. If the airline in itself is not viable, it’s not profitable no partner can help you make a positive result. We are a very proud member of the Oneworld Alliance, we do cooperate with Cathay Pacific, we cooperate with Qantas, British Airways and all these major carriers. The new partnership with Emirates is just one out of many. "



"We have as many 100 interline agreements with global airlines and why do we do that ? You compare that with the telecommunications industry, if you are customer of let’s say Celcom or Maxis and you travel wherever in the world you want to go, it’s very convenient if your local mobile phone provider has a roaming agreement with a local company because you get out of the airplane, and you are immediately connected with very preferable charges set. That’s not dissimilar to what a codeshare agreement in the airline world is. So our customers now enjoy the pleasure to travel on a Malaysia airline ticket to 39 destinations in Europe, to remote places like Stuttgart, like Barcelona, Birmingham and Edinborough all on a Malaysian airline ticket. That’s customer convenience, so we try to serve our customers"



Does the strategy of Malaysia Airlines according to trade routes put you in a position where somebody like Emirates would call the shots in terms of cutting your revenue and so on?



"Not at all, Not at all, I believe it’s always the second best choice to use a partner to bring your customer to the final destination, you would always prefer to fly yourself but certain routes are simply too thin to serve them or you don’t have the right equipment. We cut some routes in Europe. Europe has been our largest source of losses ever. We lost more than half a billion ringgit per year flying to Europe and so it has largely contributed to our positive result in the first quarter when we stopped flying there. Will we return? Of course we will return with the right aircraft, for example the Airbus 350 I can perfectly imagine that we will reconsider some destinations but you are absolutely right, we are business driven, we have to analyse the traffic streams, global traffic streams, and we have to serve the existing markets but it doesn’t make sense to fly to where rich people’s kids go to school"



"We had a little less than half of it in our hands so we really had to accelerate the process of restructuring. It’s been very hard in the beginning, the worse is all over. We are now really embarking on growth again, we had a board meeting yesterday and for the first time we discussed an expansion strategy and of Malaysia Airlines I am very proud to make the announcement that we really want to expand in emerging markets as soon as we are sustainably profitable"



How has the 6 billion ringgit from Khazanah been used by Malaysia Airlines?



"Ya, that was the assumption under which I joined in December 2014 and I immediately discovered when I joined in March then finally that more than half of that amount had been spent in MAS the old company, we lost approximately 500, 600 million per quarter so the bad news is that we never had close to 6 billion for the restructuring. We had a little less than half of it in our hands so we really had to accelerate the process of restructuring. It’s been very hard in the beginning, the worse is all over. We are now really embarking on growth again, we had a board meeting yesterday and for the first time we discussed an expansion strategy and of Malaysia Airlines I am very proud to make the announcement that we really want to expand in emerging markets as soon as we are sustainably profitable and I believe from today’s perspective at the current fuel price and at the current currency exchange rate even at less than half the amount you know pledged by the Malaysian taxpayer; we’re gonna make it"



"It is not a contradiction to have low cost and to offer a premium service where you can attract higher fares"



I’m wondering if you could have used that remaining part of the undefined 6 billion that Khazanah had promised to build your revenues to create routes, to go on campaigns rather than cutting them down.



"Ya, I know but I’m not here to give a lecture on the airline business but to give the facts. Our revenue per passenger is up 22% in the first quarter year over year, our cost is down year over year. That is basically what matters. And it is not a contradiction to have low cost and to offer a premium service where you can attract higher fares. It is inconceivable to offer tickets from Subang to, let’s say, Penang for RM20 where the road toll is twice RM47 plus 60 litres of fuel and that is not supposed to be. I believe the Malaysian domestic market in particular suffers from overcapacity and the myth of low fare, low cost is the better deal has to stop. If you compare all-in-travel price on Malaysian airlines against our low cost competitors, you will see that Malaysian airlines is the better deal. If you add all these hidden charges by the low cost carriers on their websites for credit card utilization for excess baggage and so forth, you are better off to buy a Malaysian airlines ticket from us. If you compare the all in price, it’s a better deal and it’s a better service "



Does this mean that you’re moving towards the direction of becoming a budget airline?



"Yeah well, if you compare the cost base, of course you have to argue from a level playing field. We do not have a level playing field. Our main competitor, AirAsia, does not pay their airport charges, they owe the Malaysian Airport Authority a huge amount of money, and if they pass this on to their passengers, I would simply say this is not a level playing field; this is not fair competition and we most welcome the foundation of the Malaysian Aviation Commission to take a closer look at that. Right?"



Is there a case that you would have to look at your yield management quite closely? Tan Sri Abdul Aziz Abdul Rahman, former CEO of MAS, says that the cost per available seat kilometer is higher than revenue per available seat kilometer

"Well, all former CEO’s of Malaysia Airlines are certainly not the most desirable advisors in our current situation because we just escaped bankruptcy. Let me come back to your initial question; what kind of product offering do we have in mind? We serve different markets and we have a large spread of service offerings in order to meet demand. Let’s start on the bottom of the list. We bring millions of foreign workers to Malaysia every year from markets like Nepal, from markets like Bangladesh and so on and so forth. These people have a completely different demand as opposed to the business traveller going to Singapore for a day trip and the banker going to Hong Kong and so on so forth. So, one wants 50 kilos of free baggage allowance because he’s going to stay here for more than one year, as opposed to the business traveller with absolutely no need for baggage allowance but with a need for fast track security to lounge access, free wifi on board, etc, etc."



"Then, we have the third group of inbound tourism, again completely different demand profile. And we have to resolve the difficulty to serve all these different demand structures on the same piece of metal, with the same crew, with the same galley, with a differentiated catering concept. And that is what we want to embark. We want to offer the full service passenger to those who are prepared to pay, who are in a rush, we call them the time-sensitive passengers. And we want to offer the best deal possible for what we call the price-sensitive passengers: the backpackers who want to spend a weekend in Bali, the foreign worker, and to a large degree also, the huge amount of Malaysians visiting friends and relatives in East Malaysia and vice versa. This is what we have to work on, we have to be more differentiated. Its very easy to be put in a box, in saying this is a full service airline this is a low cost airline. It does not meet, really, the customer’s expectation to have only two differentiations of the product and that is what Malaysia Airlines of the future will be. We will meet customer’s demand and we will meet it at the lowest possible price, because we will have lower costs than what our low cost competitors pretend to be today."



Could you give us an insight into your yield trend at the moment?



"As I said before our yield per passenger is up 22.4% year over year. That is a large achievement. That is not because we increased prices. The opposite is true. Even lowered the prices but we changed our demand structurally. And we launched a lot of sales campaigns in the last couple of months. Your listeners might have recognised that. It’s a fantastic deal to travel business class on Malaysia Airlines. And so in some cases we have tripled our demand in Business Class just by offering good deals in conjunction with our enrich programme."



"So we are really trying to get ahead of the power curve again. So the yield trend is moving upward. The unit cost trend is going downward. That is exactly how we make money."



There are a few other targets in the Khazanah 12-point plan which is to reduce gearing from almost 300% to just over 100% and to become profitable by 2017. Where are you in this plan?



"Well of course we started from the low base. And the restructuring according to the MAS Act has certainly had one a significant downside. We are not able to impair a lot of assets but we weren’t able to impair or to reduce our liabilities. So the opening balance sheet of MAB was a terrible piece of paper to look at."



"But yes we got the funding finally at the end of January 2016. We are equity positive which is is very important if you want to be in the airline business because most countries, absolutely justified, would only grant you an airline operating licence certificate if your equity is positive."



"So we are in that space. We are very proud. As I said before our operating cash flow is positive, we still incur a lot of restructuring charges but that will be largely over in the third quarter of this year. So I believe we will be able to repair our balance sheets in the projected time frame, maybe a little earlier. So we can demonstrate our capability to be re-listed again."



"The problem has been that cost control has been completely out of synch. Number one, we had too many suppliers. And not only too many, we also didn’t negotiate really very professionally with most of them so the money has been taken out on the cost side."



You were right in saying that Malaysia Airlines was close to bankruptcy, the company sucked close to RM20 billion in bailout money. What can we learn from MAS’ past, about pitfalls to avoid in running an airline?



"More attention to detail. And I believe Malaysia Airline lost the money on cost side not on the revenue side. And Malaysia Airlines has always been famous, and still is famous, for exceptional customer service. We have brilliant people, we have fourteen thousand professionals working very very hard to satisfy our customers. That has never been the problem."



"The problem has been that cost control has been completely out of synch. Number one, we had too many suppliers. And not only too many, we also didn’t negotiate really very professionally with most of them so the money has been taken out on the cost side."



"And that is basically what we have to avoid going forward. We now have a very professional procurement management which will probably be the main contributor to the turnaround. "



"Cost consciousness, attention to detail are the two things we have to learn."



"Most people think that national airlines must be in some shape and size subsidised to fulfil his mission. I would strongly object to that because you see most countries of the world do have a national airline. In most cases they are listed companies, they are run very professionally, and still they do fulfil the mission."



MAS have got good service, it wins awards but its accounts bleed. Is this a special case, an identity where profit maximisation has to be mixed up with some other social programme?



"Well most people think that national airlines must be in some shape and size subsidised to fulfil his mission. I would strongly object to that because you see most countries of the world do have a national airline. In most cases they are listed companies, they are run very professionally, and still they do fulfil the mission. I think it is a symbiosis. It’s a very natural kind of agreement because if we serve the economy right we will make money automatically. And that is basically where I would like to see Malaysia Airlines going forward that we initiate new business to be conducted for the Malaysian economy, emerging markets like Cambodia, Vietnam that have not been on our landscape like 15 years ago."



"And then it’s a give and take. We contribute to the local economy and we don’t want to be subsidised for that because we make good business out of it. "



Should Malaysia Airlines always have a foreign boss for the sake of independence?



"No, definitely not. That has been part of my agreement when I signed. I would like to see a local CEO of Malaysia Airlines very soon. And we have very very concrete plans to embark on that and reach that target very soon."




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