Land of the Giants


Economic News

22 Jul 2010
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When the world's largest passenger jetliner swooped onto the runway at Kuala Lumpur last week, the event marked new hope for the future of Malaysia Airlines.

The national flag carrier will ultimately take delivery of six of the mammoth Airbus A380s - despite struggling to stay out of the red throughout 2005.

The event at Kuala Lumpur International Airport (KLIA) on November 16 drew a hoard of VIPs and curious onlookers. The A380 in question was on a three-stop tour of Asia-Pacific clients who will all take delivery of some of the first airframes to come off the new Airbus production line.

Over seven storeys high and with a capacity of 555 passengers in three classes, the A380 can fly up to 15,000 km without refuelling, whilst a freighter version, the A380F, can take a 150-tonne payload over 10,400 km. The enormous aircraft is fitted with a new generation of jet engine, which when combined with the plane's enormous wingspan allows the aircraft to take off over a shorter distance than other large jetliners.

However, considerable runway length is still required for the aircraft's take-off and landing. Yet KLIA stands prepared. Its modern facilities make the airport one of only 20 worldwide that can already accommodate the super-jumbo. It is expected that a further 18 airports will be ready to accommodate these goliaths by 2008 and a total of 60 by 2010.

However, whilst the runway has adequate length, some work is required on other ground facilities to make them ready for the new planes.

"Now we just need to upgrade the terminal area to cater for the double-decker plane," Umar Bustamam, general manager of commercial division at Malaysia Airports Holdings told the press at the event. "We need to build double-decker aero-bridges to receive the passengers."

He went on to add that Malaysia Airports are calling for tenders for the construction of the necessary infrastructure to be ready by the end of 2006. With the airbus delivery already delayed by six months to July 2007, this should leave plenty of time.

Meanwhile, the boost to business from operating the new aircraft couldn't come soon enough for Malaysia Airlines.

The firm reported a net loss of RM280m ($74m) for the first quarter of 2005 and many expect further and greater losses to be posted in the second quarter, with talk among industry watchers and analysts producing loss estimates of between RM300m ($79m) and RM400m ($106m).

However passenger load factors have been more than healthy recently and most analysts agree that the cause of the airline's woes is a more general problem affecting carriers these days.

"The difficulties are actually not much more than a problem with increasing jet fuel prices," says Lim Chee Sing, director of the RHB Research Institute. "They didn't see the problem before it happened and didn't hedge their position."

Yet others point to further strategic mishaps with the firm - with some even dubbing the problem as a classic case of a state-owned company's general inefficiency.

"Fuel prices are a problem, but wider inefficiencies are to blame," one international observer told OBG recently. "They could have spotted the problem sooner if they had been better setup. A lot of people talk about overstaffing as well. Anecdotally, you can see they have loads of staff - which is great if you're a passenger, but how it affects the bottom line is another issue."

Calls from other quarters to cut these staffing levels have naturally caused concern among employees.

Speaking at a press conference in Parliament House recently, Hilmi Yahaya, parliamentary secretary for the Ministry of Finance, made the suggestion that the airline trim some of its 22,000 staff - although only after consulting with unions.

However, staffing cost is one area where the airline has already been taking some steps, with a freeze on recruiting currently in place.

First-quarter staffing costs were 12% of total operating costs, a figure expected to be closer to 10% for the second quarter and a marked drop on the 14% recorded in the second quarter of 2004. Experts point out that this is in line with international standards.

It is not just rank and file staff taking the strain though. Whilst the A380 was coming down, so were top manager's salaries. Reportedly, division heads reporting to top management are expected to see their salaries reduced by between 15 and 30%.

Whilst no official comment has been made on this by Chairman and Acting Managing Director Munir Majid, he has confirmed that he will forgo his salary as acting managing director until the position is filled next month by newcomer Idris Jala.

The pay reduction is voluntary, but is unlikely to have a real impact on the bottom line, since only around 10 executives will be affected. The move would of course be a welcome gesture of solidarity with the rest of the airline's staff though, who may feel pressure as the purse strings are tightened.

Indeed, union bosses have already been putting their own opinions forward on why the airline needs to make cuts. They blame a poorly timed cabin refitting schedule and frivolous sponsorship of sports and cultural events.

At the same time, earlier measures to try and lessen the impact of the losses and turn them around have been criticised for making the situation worse. Singled out in particular has been the policy of increasing airfares to the US by between 48 and 167%. This has made the airline one of the most expensive among regional carriers on the trans-Pacific route, whereas it used to be one of the cheapest.

However, other measures announced look set to make more of a positive impact.

A reorganisation of the network has taken aircraft off some less popular routes to India and China, allowing aircraft to be deployed more profitably elsewhere. There are also plans to cut the fuel bill by around 10%.

Domestic re-organisation of air traffic could also help the airline re-orientate itself. With plans afoot to divide internal routes with Malaysia's low-cost airline, Air Asia, Malaysia Airlines could get out of some of its service obligations which don't always turn a profit.

As international oil prices drive costs up around the globe, airlines all over the world have felt the pinch. Malaysia Airlines' error seems to have been a failure to make provision for this in time. Yet the hope is that new management and a focus on internal operations will give the airline the edge it needs to deploy its shiny new A380s to maximum effect.

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