MAS responds to hblogger's posting

SATURDAY, JUNE 13, 2009

MAS responds to hblogger's posting

Malaysia Airlines does the right thing. On Friday, June 5, I published in full an article by a reader entitled"Six Things MAS must do", here. The management of the national carrier has responded to that article and I am publishing it in full here.

In reference to the article titled “Six things MAS must do” posted on Friday, June 5, 2009, we would like to make the following clarification:

1. MSS

The writer claimed MAS should have spun off its Engineering & Cargo Division, ran a LIFO (Last in, First Out) instead of the MSS, and should use local experts to carry out third party audits/ recommendations.

He also claimed that although MAS’ staff numbers were reduced, staff costs escalated. He also alleged that MAS hired many new personnel with no aviation knowledge, and has become top heavy.

a. Spinning off E&M and MASkargo

For Malaysia Airlines, we have no reasons to spin off our Engineering & Maintenance (E&M) Division and MASkargo.

Over the last 3 years, both E&M and MASkargo have contributed positively to our bottom line. From just RM179 million revenue in 2005, E&M’s third party revenue hasincreased 100% from RM218 million in 2006 to RM438 million in 2008, and we have seen a 50% increase in the number of customers. In 2009, the target revenue set for E&M is RM520 million.

More revenue is expected as the E&M division which is also a subsidiary; MAS Aerospace Engineering has made its first foray overseas. We are working on a 50:50 JV for an Airframe Maintenance, Repair and Overhaul (MRO) company in Hyderabad, India.

The cargo business has been profitable for the past 5 years. In 2007, it recorded a net profit of RM132.1 million and last year, it made RM14.5 million despite the very tough operating environment.

The cargo and passenger services are two core revenue streams of the airline business. The two revenue stream complements each other to make the route profitable. It would be better to keep the two together as belly space is the product of passenger aircraft.

b. LIFO

The MSS is not a retrenchment exercise and as such, the principle of Last in, First out (LIFO) is not applicable.

MSS stands for Mutual Separation Scheme. It starts with MAS inviting eligible employees to apply for MSS. The employee then decides whether to apply. If the employee accepts the invitation, MAS then decides whether the employee should be retained or allowed to leave the company based on specific operational needs and the critical skills required keeping MAS efficient and effective.

A total of 2,621 employees were successful – none were critical staff whose services were still required. No employees with 12 months or less left to retirement were accepted under the MSS. There was only one exception and the compensation paid to this individual was less than had this individual worked until retirement.

The compensation given was agreed based on consultation and inputs from all the unions and associations using the respective collective agreements and memorandums of understanding.

The money used to compensate these employees were from the Government’s compensation to MAS, based on legal obligation as a result of the Government’s early termination of the domestic service agreement through the so-called rationalisation of the domestic network. The compensation would have been payable to MAS even if MAS had not carried out the MSS exercise.

For those who remained with MAS, it meant that they now have to assume the duties of their departing peers. To compensate for this additional work, and as agreed with the unions and associations, these employees were given salary increases based on their performance and the amount of additional work they had to take on.

c. Engaging local experts instead of foreign consultants

We did not use any external consultants for the MSS.

We do engage the services of foreign consultants; selectively and on a limited basis. These consultants bring with them the global aviation know-how and shared the best practices of other airlines with us. They provide the structure and framework for our key projects and work hand-in-hand with our staff to deliver solutions to ensure our competitiveness.

Increase in staff cost in 2007

We made a net profit of RM851 million in FY2007, the highest ever profit in our corporate history.

Accordingly, our staff cost went up in 2007 as we were paying salary increments which was part of the collective agreement with the unions and associations, and bonuses.

Providing incentives to our employees also play a big part in changing the mindset to focus on performance. In December 2005, we found we were only getting about 10% of what we should be entitled to under excess baggage. The industry is collecting about 70%. We wanted to collect 70% to 100% of our entitlement and so, we incentivized the people who are doing the collecting.

In 2007, we collected excess baggage allowance of RM61.5 million and paid employees some RM770,000.

We have also revised upwards the salaries for approximately 1,900 employees with monthly salaries of less than RM1,000. The cost of living has gone up and we want to make sure that the employees are taken care of. And they continue to enjoy the existing allowances and salary increments stipulated in the collective agreements.

Hiring external new personnel

Despite the writer’s allegations, we have only hired 9 senior management personnel (the position of Assistant General Manager and above) since January 2006.

When we bring in new senior personnel, we recruit those who bring with them specialized skills or subject matter experts to make the airline stronger, and to set the foundation for MAS’ future growth.

There are different skill sets required in an airline, not every personnel require airline experience to make the airline successful. At the same time, we have also recruited those who are leaders in their respective fields.

Many of the professionals we hired have worked with MNCs, and have global if not regional experience, making them the ideal candidates to take MAS to the next level. As MNCs pay more and have a highly attractive benefit and compensation package, many of the new hires took a huge pay cut to work alongside existing employees to turnaround the airline.

They should receive accolades, not criticisms.

2. Capital injection

Examining MAS’ cash flow for 2007, one will note that the majority of the increase in cash was attributed the profit before tax of RM880 million and write back from non cash items such as depreciation and provisions of RM800 million.

In September 2007, we raised RM1.5 billion of addition funds via a rights issue and RCPS. This additional capital was earmarked for the fleet renewal exercise and can only be used for the fleet renewal.

The management has been prudent in ensuring that MAS has a cash pile. In the tough economic situation the industry is in where over 30 airlines have gone bankrupt and where credit is tight, cash is King. If we only have RM2 billion in cash today when we are facing a quadruple squeeze of falling oil prices, fuel hedging, global economic crisis and the fears over the H1N1, we would be bankrupt.

The writer claimed that “as clearly illustrated that in FY2007, profit of RM852 million was not gained from operations but ‘creatively’ generated by selling her fixed assets and borrowings of RM859 million.”

That is factually wrong and the following chart shows that Malaysia Airlines FY2007 profit was driven by operational improvement (not one-off gain).

Complaints about MAS by ex-Tourism Minister

The writer highlighted a quote from the ex-Tourism Minister regarding MAS’ services, about the need to balance the issue of profitability with the effects on the country’s tourism industry.

For MAS, bringing tourists into Malaysia is a critical selling factor for us. All these years, we have been supporting Tourism Malaysia in bringing in tourism dollars into the country. Tourist arrivals into Malaysia has increased from 16.4 million (2005) to 22.05 million (2008) as we turned the loss making airline into a profitable entity, RM1.3 billon losses (2005) to RM244 million (2008).

We have a 4 pillar strategy to bring in tourists:

1. Improve connectivity to Malaysia via our hub-and-spoke network – growing the number of destinations connected from 1,283 (2005) to 2,039 (2008).
2. Provide low fares
3. Aggressively promoting and advertising Malaysia, in collaboration with Tourism Malaysia
4. Having our MH=Malaysian Hospitality customer value proposition to provide customers with seamless and convenient travel. We have close to 740 initiatives to repair service and product breakages across the system.

In addition, our hub-and-spoke strategy has induced more flights from other carriers into KLIA. From 47 foreign airlines which operated out of KLIA in 2006, this has grown to 55 in 2008. Accordingly, the weekly flight frequency has increased 30% from 562 in 2006 to 747 in 2008 even though we reduced our capacity by 7% in 2006 under our business turnaround plan.

Khazanah: Turnaround in operations of MAS and Proton not enough

We absolutely agree with Tan Sri Azman Mokhtar that for MAS to be a regional champion, we must look for other opportunities to grow.

International Air Transport Association (IATA) has revised its airline financial forecast for 2009 to a global loss of US$9 billion, which is nearly double its March estimate of a US$4.7 billion loss, reflecting a rapidly deteriorating revenue environment. IATA also revised its loss estimate for 2008 to US$10.4 billion from the previous estimate of US$8.5 billion.

It is even more critical for Governments in Asia to seriously consider the benefits of opening up airline ownership.

Q&A: Fernandez pours out his frustrations

We would like to highlight that since 2002, Malaysia Airlines have not been bailed out.

When Dato’ Sri Idris Jala first joined the airline and held the first town hall in December 2005 where over 700 employees were gathered, the then PM, Dato' Seri Abdullah Ahmad Badawi addressed the employees and categorically said that the Government will not bail out MAS.

We have remained profitable and made a net profit of RM244 million for FY2008 in spite of the highly challenging times.

3. Continued purchase of A380 and the late decision on B737-800 orders in 2008

The writer alleged that we should have cancelled the orders for A380.

The past MAS administration ordered the planes and we have inherited the planes, and have plans for them in our network.

We believe that the timing for the B737-800 orders is just perfect. Should we have ordered them earlier, we would be taking delivery of the new planes at a time of global crisis and would have problems filling up the new planes. We hope that by the time we take delivery of the planes in the last quarter of 2010, the economy would have recovered.

4. Safety issues

The writer made some serious allegations regarding safety of the E&M operations.

In Malaysia Airlines, we give top priority to safety. In respect to the alleged case the writer mentioned, we performed the C Check on the Air Atlanta aircraft in September 2007 and the incident happened 6 months later. During our checks, the aircraft was inspected in accordance with Boeing’s approved procedures. The investigation by the authorities is ongoing, so it is not appropriate for us to comment further.

5. Fuel Hedging

No one purchases a life insurance that covers him/ her for only for 3 months. Similarly, airlines hedged against fuel as it protects the airline against the volatility of fuel prices. This is important as fuel is the single largest cost item for an airline.

Any business whose major cost item doubles to USD180/ barrel in six months only to fall to USD 40/ barrel in the next six months must take steps to protect itself against such volatility.

And because airlines typically sell seats six months into the future and sometime up to 340 days in advance, the need to hedge against the unpredictability of fuel price is critical. As with other airlines who hedge, Malaysia Airlines only enters into long fuel hedges (where we are buying fuel) and do not speculate by selling short in the fuel market (as may be the case with certain low cost carriers).

6. I rest my case!

Cobbling different news clippings and opinions over a period of years to formulate an argument about how an airline should be run will not present an objective view of how the airline performed.

The airline is a highly complex business, and it’s important to be able to understand how all the different aspects of the business come together to ensure the success of the airline. As they said, the proof of the pudding is in the eating.

We do agree that we need to work together in order to overcome the challenges the industry is facing. This involves sharing of ideas openly as well as challenging the way we do things. This may include changing radically our outlook, strategies and processes. We also agree that we need world class management, and have very selectively recruited people to strengthen the organization.

Despite the challenging circumstances, we are hopeful of beating the odds and aim to emerge as one of the winners.

Tengku Azmil Zahruddin

Executive Director/ Chief Financial Officer

Malaysia Airlines

Source: http://rockybru2.blogspot.com/2009/06/mas-responds-to-hbloggers-posting.html