http://time.com/3011201/malaysia-airlines-ukraine-crash-survival-business-mh370-mh17/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+timeblogs%2Fcurious_capitalist+%28TIME%3A+Business%29
July 21, 2014
Malaysia’s national carrier was already in a weak financial position. Now its future is highly uncertain
Only four months after Malaysia Airlines Flight 370 vanished somewhere in the Indian Ocean with 239 passengers on board, Flight 17 was shot down over Ukraine, causing the loss of another 298 souls — an unprecedented blow to a major international airline. Even a robust operator would have trouble overcoming twin disasters like that. But the fact is that Malaysia’s flag carrier is in no financial shape to absorb these catastrophes. In fact, analysts wonder if it will ever be able to recover.
“The outlook is very dire,” says Mohshin Aziz, an aviation analyst at Kuala Lumpur–based Maybank. The airline, he fears, “won’t be able to survive beyond the year in its current form.”
The next months could prove humbling for an airline that had grand ambitions. The Malaysian government had high hopes that its national carrier would compete with the region’s best, and invested much money and emotion into building it. But Malaysia Airlines got badly squeezed in the fiercely contested Asian airline industry. Its cost base is too high to compete with lean and mean budget carrier AirAsia, also based in Kuala Lumpur. At the same time, it lacks the prestigious brand image to raise its ticket prices and take on East Asia’s more premier airlines, such as Singapore Airlines and Hong Kong’s Cathay Pacific. As a result, the company has been bleeding for years. The airline’s Kuala Lumpur–listed parent, Malaysian Airline System, has racked up losses of more than $1.4 billion since 2011. Management has tried cutting costs and improving service to turn around the airline’s fortunes, but such efforts were making only minimal progress.
Now whatever hope remained may get dashed by the two crushing tragedies. Analysts are concerned that the fallout will scare passengers away from flying on the airline, or force management to discount tickets to convince them to book — reducing revenue either way. That could push the airline’s fragile finances to the breaking point, causing “the ticking time bomb to explode,” says Daniel Tsang, founder of consultancy Aspire Aviation in Hong Kong. That reality will likely force Malaysia Airlines to take more drastic measures to stay afloat. Even before the latest crash over Ukraine, CEO Ahmad Jauhari Yahya told shareholders in June that the MH370 incident “sadly now added an entirely unexpected dimension, damaging our brand and our business reputation, and accelerating the urgency for radical change.”
There are options, but all are equally unsavory. Mohshin believes that Malaysia Airlines will have to greatly shrink its business, perhaps eradicating most of the international routes it flies, to focus on the more profitable parts of the operations. “It will never get back to the large size it was before,” he says. “The sooner they accept that fact, the better off they will be.” Tsang says that bankruptcy proceeding would be a “pretty good option” for Malaysia Airlines. That process would make it easier to strip out more of the legacy costs and make the airline more competitive.
What happens next ultimately depends on the Malaysian government. A state-controlled investment fund owns a majority of the shares in the carrier’s parent company, and that makes the future of Malaysia Airlines a political issue. The airline’s powerful union has been able to fight off previous efforts at radically overhauling the carrier and analysts say that rescuing Malaysia Airlines this time will require a high degree of political commitment. Still, if Malaysia Airlines manages to streamline its operations, it may live to fly another day.
“The restructuring will be painful for a lot of people,” Tsang says. “But a phoenix can rise from ashes.”
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