(Not) Ready for Takeoff
By: Kenneth Cheung & Dorothy Wong
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
In 2014, Malaysia Airlines experienced two major tragedies: the disappearance of Flight 370 on March 8th followed by the crash of Flight 17 four months later on July 17th. Both disasters have been featured in headlines across the globe and continue to appear in various news publications daily. The airline has been targeted by the press with news coverage ranging from technical problems and scandals to photos of empty flights, all negatively influencing consumer perception of Malaysia Airlines.
Furthermore, most airlines in Southeast Asia are experiencing a decline in sales due to stiff competition. Malaysia Airlines has been applying extreme discounts on its flight tickets in an attempt to capture market share and regain consumer confidence. In fact, the consolidated company, Malaysian Airline System Berhad (MAS) has actually experienced five consecutive years of negative gross profit and cash flow from operations since fiscal year 2009, and will be expecting yet another loss for 2014.
Taking Flight
Clearly, a problem with the company has existed prior to the twin disasters. Malaysia Airlines has been poorly managed and the two tragedies simply accelerated its downfall. In hopes to restructure MAS, the Malaysian government’s state fund Khazanah proposes a 12-point plan for reviving the national carrier. The goal of the “MAS Recovery Plan” is to help the company achieve profitability in three years. Khazanah plans to create a new company, Malaysia Airlines Berhad (MAB), which will take over the existing MAS. An administrator will have the ability to address critical issues, including downsizing the workforce, moving around assets, and appointing a new CEO. The administrator will also have the power to renegotiate supplier contracts, which many experts believe to be the key challenge in the past. MAB will additionally have a renewed focus on regional routes, operating on an assumption this can result in a lower cost-operating model. The Malaysian Airline System Berhad (Administration) Bill, which was passed by the Malaysian government in November, will facilitate this process by giving the right to the administrator to change the company as he/she sees fit.
Analyzing this plan evokes memories of Korean Air Lines Flight 007, which was struck down by a Soviet fighter jet in 1983. The company changed the airline’s name slightly to Korean Air and undertook major changes in design, completely different from its past image, which was associated with disaster and lack of safety. This rebranding effort was paired with an internal restructuring strategy, and Korean Air is now one of the safest airlines in the industry. This success story shows one path Malaysia Airlines might take to success; however, it took Korean Air almost two decades to become consistently profitable after these changes, a vast difference in the three years Khazanah is planning for.
In addition, the 12-part strategy proposed by Khazanah explicitly neglects one major aspect – branding. The company’s commercial director, Dr. Hugh Dunleavy, said that Malaysia Airlines has well-developed brand equity, which rebranding would eliminate. On the other hand, the airline’s brand is now firmly connected with tragedy and poor public relations, making it significantly more difficult for the carrier to bring sales volume back up in a short period of time. A series of marketing failures including the “Bucket List” campaign and a controversial post on Twitter further worsen the situation.
Altering Course
MAS is comprised of several carriers, of which Malaysia Airlines is only one. The corporation also has two regional carriers: Firefly and MASwings. Currently, these subsidiaries are about a third the size of MAS itself, yet are still operating at a profit through the corporation’s turbulent times. These two subsidiaries operate shorter-haul flights than Malaysia Airlines. In other words, MAS has two child airlines with strong, unblemished brands, both of which focus on regional and domestic flights, a goal of the Khazanah plan. By transferring planes and routes from the parent corporation to the child ones, MAS can effectively both rebrand itself and refocus its operations on more profitable routes, assisting it back to profitability. Additionally, by using strong, established brands, Khazanah would be more likely to reach profitability faster than it would using either an unestablished or damaged one. Finally, this plan aligns well within the existing 12 point plan, with Khazanah utilizing the same cost cutting and contract improvement methods, while still providing brand relief for MAS.
In addition, each brand of Malaysia Airlines (Malaysia Airlines, Firefly, MASwings) should focus on a distinct distance (longhaul, regional, domestic). Utilizing this strategy allows MAS to achieve cost advantages. For example, Southwest’s fleet only consists of a one-type plane fleet, in this case the Boeing 737 series, and is a strategy MASwings and Firefly could adopt. This strategy of only operating one type of aircraft reduces maintenance costs, including spare-parts inventory and mechanic training. It also cuts crewmember costs as all employees are simply trained to only operate the 737s. Furthermore, in the case of last minute technical problems, the company can quickly switch to a functioning airplane since the entire fleet is interchangeable.
Swapping Parts
To achieve the desired positioning, MAS will need to reallocate its airplanes. The short- to medium-haul B737s currently in Malaysia Airlines’ fleet need to be brought over to Firefly in order to accommodate its massive expansion across Asia.
Firefly’s current fleet of turboprop airplanes should be moved to MASwings so that the newly positioned domestic carrier can take over Firefly’s existing domestic flights. Finally, the A330s and B747s in Malaysia Airlines’ fleet are aging aircrafts, and should be sold or disposed of. Malaysia Airlines will only need its long-range A380s and B777s for the long-haul international flights. These aircrafts will also help the airline maintain its status as a legacy carrier, catering to the luxury segment.
Firefly will then have only one type of plane, the B737, which is sufficient for the budget carrier to compete in the booming low-cost market. Maintaining a fleet of only one type of aircraft will also help achieve greater operational efficiency, as seen in the successful budget carrier Southwest Airlines.
Picking a Destination
To begin with, Malaysia Airlines should divide up its existing routes so that it, Firefly, and MASwings flights fly long-haul, regional, and domestic flights respectively. Next, Firefly should begin expanding its routes to serve the emerging demand for regional routes in Tokyo, Osaka, and Seoul, driven by a rising Malaysian middle class and the rising popularity of Korean entertainment. Finally, Malaysia Airlines should continue to grow its focus on the “Kangaroo Route”, which are traditionally profitable, long-haul flights flying between Europe and Australia that make a transfer typically in Southeast Asia. Malaysia Airlines’ membership in the Oneworld Alliance allows the airline to make codeshare agreements with other airlines in the alliance, which will help stimulate demand and increase revenue in these long-distance routes.
Arrival
The steps taken by the Malaysian government serve to empower the organization, but a lack of focus on the brand issue around Malaysia Airlines will likely prevent any positive change for the company. Even though it may take significantly longer than three years for the airline to rebuild its brand and earn consumers’ confidence, with Korean Air as a precedent, there is hope that Malaysia Airlines will make it through this bumpy ride. All together Malaysia Airlines can see itself reborn through theses trials, but must rebrand itself through Firefly and MASWings.
