Huge losses by Malaysia Airlines can’t be tolerated forever

Huge losses by MAS can’t be tolerated forever

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MAS has just reported a fourth consecutive quarter of losses with a net loss of RM343 million for this last quarter.
For the full FY 2013, the net loss amounted to a whopping RM1.17 billion, compared with a net loss of RM433 million in FY 2012. 
The question is whether this eye-popping loss will be the straw that broke the camel’s back. In the past, there have been incorrigible cheerleaders for the airline who have been regularly touting that the company is in recovery mode and will soon be returning to profitability.
This time round, even the most optimistic experts have given up. One leading financial house analyst has estimated that there was a seven percent financial year underperformance due to weaker than forecast domestic yields.
As competition heats up in the international space, we can expect MAS to continue another year of losses in 2014.
Savvy market observers have seen the writing on the wall much earlier and bailed out on the share.
During the past few months the airline share has been trying to stay above 29 sen, the lowest share price that it has recorded during the past few years.
Without the support of government-linked funds and left to market forces alone, it is certain that the share price of MAS will drop even more.
These government-linked funds must surely be hoping that for the next financial year, MAS will not try to ‘break the record’ loss of RM1,262 million set in 2005 or that achieved in 2011 when the loss was RM2,521 million.
Should gov’t continue to bail out MAS?
The most recent losses bring the total losses of MAS to at least over RM3 or RM4 billion. In any normal business, any company incurring large and sustained losses would have closed down or gone into bankruptcy.
This has not happened to MAS yet but I think the time is long overdue for the government to withdraw the open cheque book extended to the airline company.
It is an open cheque book which comes with money from taxpayers and ordinary citizens who are being hit with price increases left, right and centre, while the government merrily pours money into MAS and other inefficient and loss incurring government enterprises.
When planning the future of MAS, it is important that the government avoids not only the past mistakes but also take a rational approach based on economic fundamentals.
One line of simplistic thinking is that there is a bright and profitable future for MAS since the number of air travelers continues to increase by about five to seven percent per year. This familiar argument is also given prominence in the company’s report filed a few days ago with Bursa Malaysia.
But if you look at the history of airline industry profitability, this is not the case for airlines worldwide. The fact is the airline industry requires huge capital and produces poor returns on capital employed. Hence, year after year, many airlines produce poor profit margins or outright losses.
Why you might ask, is that an industry with year-on-year rises in sales cannot generate good returns to shareholders?
Part of the reason comes down to the economic structure of the industry. One of the forces that limit profitability is the intensity of the rivalry between the leading airlines. There is over-supply leading to pressure on prices.
This is exacerbated by a high degree of freedom for new competitors to enter the industries. If, say, an airline route between two destinations is found to be reasonably profitable, it is not long before new entrants move in or current airlines simply move their planes to this profitable route.
Mismanagement and corruption
Although the airline industry is generally governed by the principle of “survival of the fittest”, it is important to note that airlines can not only be profitable – they can be highly profitable. The classic case is Singapore Airlines. Another classic case closer to home is AirAsia.
Why have these two airlines, SIA and AirAsia, succeeded whilst MAS has flopped? It does not require rocket science or a Harvard PhD to explain this contrast in airline profitability.
It all boils down to the quality of management, productivity, operational efficiency and the ability to control costs. Control of costs is not simply tied to obvious items such as the cost of fuel prices or the salaries paid to pilots and crew. It also crucially has to do with the procurement policies and practices of the airlines.
Unfortunately the factor of mismanagement and leakages and corruption in MAS appears to be an off-limits subject in the mainstream media.
Just because the mainstream media does not mention it does not mean that these factors are insignificant or are of little or no consequence.
A search of the listings in the internet when one googles the subject “corruption in Malaysia Airlines” will turn up many allegations and charges of leakages and corrupt practices.
These allegations have not been responded to by the authorities.
If the problem of mismanagement, leakages and corruption cannot be resolved in MAS, I say let MAS crash without further delay. This is the only way forward in the national interest and to save taxpayers’ money.
This article was prompted by having listened to Anwar Ibrahim’s recent speech on MAS and SIA.

KOON YEW YIN, a retired chartered engineer, is a philanthropist.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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