One Year After MH370, Malaysia Airlines Fights For Its Life

After a year marked by the catastrophic losses of two jetliners and 537 lives, Malaysia Airlines is on life support itself. The mysterious and still-unexplained disappearance of its Flight 370 over the Indian Ocean a year ago and the downing of its Flight 17 over Ukraine about four months later were crippling blows to a national carrier that was already hemorrhaging money. The airline lost some $1.5 billion during the five years before MH370 went missing -- and that’s despite several previous restructuring plans.

“A lot of people define Malaysia Airlines’ issues around MH370, but they’ve had structural issues for years,” said John Thomas, head of the aviation practice at L.E.K. Consulting, a global management-consulting firm. “And the whole Asian market has become very competitive.” Indeed, low-cost carriers such as AirAsia and Lion Air have been expanding at a rapid clip, capturing more and more passengers in the region’s growing middle class. And, at the other end of the market, regional full-service rivals such as Cathay Pacific Airways and Singapore Airlines boast sterling reputations that are tough to beat.

While the loss of MH17 was not Malaysia Airlines’ fault -- and it’s impossible to say at this point whether the loss of MH370 was, either -- aviation history has proven that the toxic combination of fatal crashes and longstanding financial problems equals certain death for an airline. (See Pan Am and TWA, which failed in 1991 and 2001, respectively, after crashes compounded other issues.) This last year has borne that out: Malaysia Airlines’ passenger traffic was down despite slashed fares, and it lost $170 million during the third quarter of 2014, its biggest loss since 2011.

“Malaysia’s turnaround is as difficult as trying to run a marathon with molasses stuck on your running shoes. It can be done, but it will take a lot of effort,” said Henry Harteveldt, an airline-industry analyst at the Atmosphere Research Group.

But Malaysia Airlines is not ready to give up. Khazanah, the Malaysian sovereign wealth fund that controls the airline and took it private last year, unveiled a five-year, $1.7 billion restructuring plan in November. Reforms included the hiring of a new CEO, eliminating unprofitable routes and shrinking a bloated workforce. With these and other changes, Khazanah expects to return to profitability by 2017 and relist the airline by 2020.

Whether it will succeed is a hotly debated issue among industry watchers. Saj Ahmad, chief aviation analyst at StrategicAero Research, is not optimistic. “Even before MH370, the airline had been languishing. It was losing money hand over fist,” Ahmad said. “And I haven’t seen much in the way of Malaysia Airlines really demonstrating how it’s going to support these so-called changes.”

Of course, Khazanah would disagree. The fund released a quarterly progress report on its recovery plan Monday, adding the airline would emerge as a very different company by July 1 of this year. The progress report detailed the airline’s plan to cut its fleet capacity by 10 percent and eliminate routes to Europe and Middle East, in an effort to more finely focus on its Asia routes. To accommodate the changes, Malaysia Airlines would “realign” its fleet accordingly. Khazanah also planned to eliminate 6,000 jobs in a workforce of 20,000 and was renegotiating a 25-year-long catering deal that many analysts have criticized because of its costs and unfavorable terms.

The company also highlighted what it hopes will be its ace in the hole, the appointment of CEO Christoph Mueller, who took the reins March 1. Mueller comes from Ireland’s Aer Lingus, where he reversed the fortunes of that struggling airline by shifting to more profitable routes, cutting costs and staving off the competition from budget carriers such as Ryanair.

But Ahmad indicated it’s not Mueller’s talents that will ultimately prove whether he can be successful, but the climate surrounding him. “Will they let him do what he wants to do?” asked Ahmad, citing a corporate culture that is resistant to real change.

Thomas agreed: “Mueller has very successfully turned Aer Lingus around. But because of the sovereign importance of Malaysia Airlines, what degrees of freedom will he have to make tough cuts?”

Ahmad added that the airline should be taking advantage of currently low fuel prices to hedge its fuel costs for the future, a common practice among airlines, in which they lock in fuel prices for the future at a rate set today. “They are running around with some of the oldest airplanes in Asia, yet I have seen no evidence that they are locking in low fuel prices now,” said Ahmad. “If they’re not going to capitalize now, when oil prices are down, when are they going to do it?” (Older airplanes burn more fuel per passenger than do newer models.)

But Skift aviation editor Marisa Garcia said Malaysia Airlines is taking steps to offload unnecessary costs, such as eliminating elements of its fleet that aren’t serving the airline efficiently. Case in point: the carrier’s six Airbus A380 superjumbo jets that aren’t flying at full capacity. “The A380 is a very difficult aircraft to manage and carry, and unless you’re using it to its full capacity, it’s too expensive.”

That’s why initial rumblings of a deal for Malaysia Airlines to lease two of its A380s to Turkish Airlines would be a positive step, although nothing has been finalized. If it happens, it could significantly reduce costs on the airline’s balance sheet. “Malaysia has a lot of opportunities like that to help them get back on their feet,” Garcia said.

Of course, cutting costs and gaining efficiency can only do so much if perception of the brand isn’t positive, which is uniquely important in aviation as it’s linked to safety. If an airline is perceived as unsafe, people will avoid flying with it. Shashank Nigam, CEO of the aviation marketing-strategy firm SimpliFlying, said the way the airline manages its brand during a period of change is critical.

“While they restructure the airline and business operations, the brand cannot be ignored,” Nigam said. “Malaysia Airlines will have to cut costs behind-the-scenes, but portray the airline as still open to the world, still offering a quality product. They need to depict themselves on being focused on what they do best rather than just cutting.”

To do so, Malaysia Airlines should take its cues from Air New Zealand and Virgin Atlantic, which both experienced turbulence, dramatically cut their international route networks to restructure costs and emerged profitable. “Virgin framed the changes as a position of strength -- they said we’re focusing on fewer destinations, but we’re doing a better job with them. So Malaysia Airlines needs to aim to be both profitable and well regarded. Of course, MAS has a larger gap to bridge,” Nigam said.

As for whether it can encourage spooked flyers to reconsider Malaysia Airlines, Nigam said the carrier should leverage its connected travelers to do the evangelizing for it. “The brand shouldn’t toot its own horn, but get its passengers to talk -- on social media, for example -- about why they’re flying Malaysia Airlines. Brand affinity is something that needs to be built organically.”

There’s no doubt the task is a Herculean one. But some analysts won’t write Malaysia Airlines off just yet. With the right moves, it can become healthy once again.

“It’s not impossible,” Skift’s Garcia said. “Nothing is impossible in aviation -- that’s why we make big things fly.”