Monday, 14 April 2014

Malaysia Airlines has no funds absorbing increasing costs.


An article which I reckoned local media would not want to touch much after what happened recently.

A good overview and as someone who wants to know not just what happened to the still missing jetliner MH370, I want to know how far more Malaysia Airlines will go with the red;... and when with changing CEOs will not help much, this GLC will find the light at the end of the tunnel bleak....

Continuing to receive bailouts also will not help forever....




The mystery of missing Malaysia Airlines Flight 370 has cast an additional cloud over the country's already struggling national airline. The carrier may have to turn to the government for relief once more, but indulging the company with public money will not likely solve the problems it has been facing for more than 10 years.

Flight 370, which went missing over the South China Sea on March 8, is believed to have crashed in the Indian Ocean. Even more damaging to the carrier's reputation than potential safety issues is its slow and often mishandled investigation into the matter, including unsympathetic treatment of grieving family members. The incident may deal a near-fatal blow to a management that has been heavily reliant on public money.

Unexpected costs.
Hostility toward the company and the Malaysian government is especially strong in China. Out of 239 passengers and crew on the missing flight, 153 were Chinese. On March 26, China Youth Travel Service, a leading travel agent in China, announced that it would suspend bookings with the airline and refund the full fares of those who have already made reservations.

If the problem persists, it may hurt not only the carrier's ticket sales for international flights but Malaysia's tourism industry as a whole. In 2013, nearly 10% of tourists to the country were Chinese.


The airline also carries the long-term risk of having to pay damages to the families of the missing passengers. Local papers estimate that compensation could total $110 million. However, the amount is subject to change, because the cause of the incident has yet to be determined. Damages may increase if any major negligence on the part of the airline is found.

The biggest problem is that the company has no funds to absorb the increased costs.

In the fiscal year through December 2013, it posted a net loss of 1.17 billion ringgit ($356 million), although passenger numbers increased by almost 30% and sales grew by around 10% from the previous year. According to a source close to the airline, the loss is largely attributable to discount marketing that did not take costs into account.

 With its operating cash flow in the red for three straight years, the company has little chance of earning a profit from its mainline airline operation.

Despite efforts to improve its financial standing through injection or reduction of equity, its capital ratio at the end of 2013 stood at 28%, far below the safe threshold of 40%.
The airline has recorded losses since the Asian currency crisis in 1997, and the company has been trying to restructure its operations for the last 15 years through a continuous pumping in of government money in the form of capital injection and low-interest loans.

 CEO Ahmad Jauhari Yahya previously said that the company aimed to generate a profit by fiscal 2014, but the market is largely of the opinion that the disappearance of Flight 370 has erased this hope.


Fundamental hurdles
There are two underlying factors squeezing the company: increasingly tough competition with budget carriers and the difficulty of streamlining a state-owned company.

Malaysia-based AirAsia was founded in 2001 and has almost doubled its sales in the last five years. Its success is down to its ability to offer ultracheap fares, about half what Malaysia Airlines charges. AirAsia has also lured domestic passengers from its state-run rival by increasing the number of flights between local cities.

 As for cost-consciousness, the national airline has not streamlined its payroll in recent years, retaining around 20,000 employees. Its largest shareholder is Khazanah Nasional, a government investment fund. Employees of state-owned enterprises are valuable voters for the ruling party, which is increasingly losing support. The government must also listen to the voice of labor unions.

Malaysia Airlines received a capital injection from AirAsia in the summer of 2011 and tried to apply its rival's low-cost know-how to its own operations. However, it had to scrap the capital alliance due to protests from labor unions in May 2012.

In 2013, Mahathir bin Mohamad, former Malaysian prime minister, suggested that the company reduce costs through privatization, but labor unions opposed the suggestion, forcing current Prime Minister Najib Razak to reject the proposal. There are now calls for the company to streamline its low-profit domestic routes.

A Malaysian government official said the country will ultimately have to rescue the airline, because the company has few assets that it can sell off and there is no prospect of a bailout through merging with another airline. In 2022, it is scheduled to redeem corporate bonds of $460 million, but is unlikely to be able to do so. Another capital injection from the government seems to be the only viable option for the airline operator.

Source...
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