CATEGORY
PROFILE
T
hey say that the eyes are the
window to the soul and even to health. If
the airline equivalent is its Internet site,
then Malaysia Airlines is alive and well, its
website brimming with bright, colorful fare promo-
tions and special online deals. It’s quite a departure
from a few years ago when the carrier’s future seemed
much more uncertain and its website was not stacked
with rotating Domestic SuperSavers.
43 atw | MAY 2007
In fact, MAS managed consecutive
profitable quarters for the September and
December 2006 periods, with earnings
totaling MYR361 million ($104.3 mil-
lion). The stock market rewarded the
momentum by sending its shares from
MYR2.5 to above MYR6, causing the
airline to outperform the Kuala Lumpur
Exchange average by 44% last year.
Much of the credit for the improve-
ment must go to CEO Idris Jala, a former
Shell Oil executive who came to MAS on
Dec. 1, 2005, after a number of govern-
ment and private-market rescue efforts
had failed to put the carrier on solid
ground.
“When I was first appointed, the com-
pany was bleeding cash and accumulating
massive losses,” he recalls. In the short-
ened nine-month 2005 fiscal year it lost
MYR1.3 billion. “If we continued on the
 Transforming
Malaysia
Airlines
By Geoffrey Thomas
same course and speed, Malaysia Airlines was projected to lose
MYR1.7 billion by the end of 2006. If we didn’t do anything,
the company would have plunged into bankruptcy by mid-April
2006,” he says.
Jala hit the ground running. The company’s Business
Turnaround Plan was presented to the airline’s board, the
Malaysian Prime Minister and the Ministry of Transport
on his first day on the job. “The next day, we had a town
hall meeting where we gathered some 700 employees across
the organization. The Prime Minister, who addressed the
employees, made it very clear that the government will not
bail out Malaysia Airlines. The airline will have to solve its
own problems and return to profitability,” he explains.
“We had a burning platform. I told the staff that we had
no choice other than to take drastic measures over the course
of the next 12 months,” he continues. “At that point, all
23,000 employees were in disbelief ! Staff morale was at the
lowest in the history of the airline. It was a difficult period
for all. When the BTP was announced to the public later,
the share price immediately dropped to below MYR3, show-
ing that the public didn’t believe we could do it.”
The solution involved tackling four critical problems: Low
yield, inefficient network, low productivity and lack of cost
control. Management reviewed and readjusted fares and fuel
surcharges across the board so they matched the rest of the
industry. Seat inventory management was improved and
MAS sharpened its tactical campaigns.
“We tackled the network [problem by] running laboratories
to review all the routes, which were clustered into eight business
regions. If the teams in the labs concluded that they could not fix
certain routes that were losing money on a cash contribution level,
then we immediately cut the routes,” Jala says. In 2006, MAS
dropped nearly 25 routes, representing 7% of the network.
In addition, it “focused on expanding our hub-and-
spoke strategy by partnering with other airlines.” The net-
work had evolved away from hub-and-spoke and he put
in place a three-phase program to restructure it. The first
phase involved refocusing the airline around Kuala Lumpur
International Airport as the hub. Five major indirect routings
that included London-Langkawi-KL, London-Penang-KL
and Frankfurt-KL-Kuching were scrapped immediately. Now
all flights transit KL and the network is better described as
atw | MAY 2007 44

mainly point-to-hub.
The second phase over a six-month
period involved dropping a host of sec-
ondary international and regional desti-
nations including Vienna, Manchester,
Ahmedabad, Xian, Padang, Fukuoka,
Cairo, Chengdu and Kolkata. The
long-haul strategy now is built around
Frankfurt, Zurich, Rome, Paris, Los
Angeles, New York, Stockholm and
London. MAS has increased frequencies
on key routes such as Paris, which is
now daily, and extra services were added
to Yangon, Dhaka, Hanoi and Cebu.
As Jala explains, the driver was simple:
“Only routes that were profitable or
could turn a profit were retained and
the rest were scrapped.” To fill the gaps,
the carrier has bulked up its codesharing
and currently boasts 28 codesharing and
interline agreements.
Europe/Middle East routes accounts
for 33% of international revenue,
followed by North Asia and North
America (26%). Inter-Asia is 21%,
Australia/New Zealand is 16%, while
South America and Africa generate 3%
of international revenue.
Staff Reductions On low productiv-
ity, he says MAS was “overstaffed”
and staff size was reduced by 3,000, or
15%, via a mutual separation scheme
and through natural attrition. Costs
came under intense scrutiny, he notes:
“I announced several moratoriums
including one on corporate advertis-
ing and sponsorship. All CAPEX had
to go through me. We also tightened
our fuel hedging and improved our
maintenance expenditure. In 2006 we
Managing Director/CEO Idris Jala
45 atw | MAY 2007
FACT FILE
managed to reduce our costs
by MYR310 million.” Selected Traffic & Financial Data
Quarterly reporting was 2006 2005 % chg.
scrapped and replaced with
monthly. “Turnarounds are FINANCIAL
(MYR mil)
all about action. If it takes Revenue
too long it will not work, and Passenger 8,218 8,037 2.0
staff want to see results,” Jala Cargo 1,946 1,928 1.00
says. Vital to the turnaround Fuel & Security 1,909 1,248 16.0
was the government’s deci- Other 1,417 1,648 99.0
sion to free MAS from its Total 13,490 12,861 4.9
obligation to fly unprofitable Expenditure 13,793 13,481 2.0
Profit/Loss after Taxes (413) (1,193) -65.0
domestic routes and hand
them over to AirAsia with TRAFFIC (mil)
Domestic
its much lower cost structure
Passengers 7.04 8.85 -20.40
(ATW, 4/07, p. 24). MAS RPKs 4,021 4,892 -17.80
had operated up to 118 ASKs 5,771 6,808 -15.20
domestic routes and during Load Factor (%) 69.7 71.9 -2.2 pts.
2006 that figure was cut to
International
just 19 major ones. In the Passengers 9.35 8.42 -10.0
last quarter the subsidies were RPKs 37,078 42,411 -12.6
scrapped on those as well. For ASKs 53,152 59,105 -10.1
MAS, that meant cutting its Load Factor (%) 69.8 71.8 -2.0 pts.
domestic fleet by more than Cargo
half, from 41 aircraft to 23, Load tonne km. 2,597 2,576 0.8
and closing four of its major Capacity tonne km. 4,103 4,206 -2.4
domestic stations.
Source: Malaysia Airlines
It also launched its own
low-cost carrier called Firefly,
which took to the air on April FACT FILE
3 from Penang. Initially the up 10% to MYR9.3
network is just six routes Fleet * billion and impor-
using F50s connecting tantly, yield increased
737-400 39
Penang to Langkawi, Kota 21% to MYR0.24
747-400 17
Baru, Kuala Terengganu and as RASK grew 17%
747-200F 4
Kuantan on the domestic to MYR0.17. The
747-400F 2
front and Koh Samui and fourth quarter also
777-200ER 17
Phuket in Thailand. Fares incorporated the first
A330-200 5
start from MYR9, “slightly full quarter of the
A330-300 11
more than the price of a plate domestic business’s
of nasi kandar [Penang’s best- * As of Sept. 2006. P&L since the ratio-
Source: Malaysia Airlines
known dish],” says Jala. He nalization on Aug. 1,
adds that Firefly links destina- 2006. That segment
tions that currently have no made an operating
air service. profit before finance costs and excep-
While the network restructure was tional items of MYR36 million.
a key plank of the new MAS, it was Jala says MAS has “managed to
only part of the makeover, the results of achieve these results because the BTP
which have been dramatic, he says. “To is totally focused on delivering imme-
date we have beaten the BTP targets for diate results by anchoring everything
Q1, Q2, Q3 and Q4 and for the 2006 on the P&L. In fact, with the help of
financial year. We recorded a profit of my Blackberry I know the projected
MYR240 million for the third quarter monthly P&L every day . . . I can act fast
of 2006 and a fourth-quarter profit of if my monthly P&L indicator is show-
MYR121 million. For our 2006 full- ing that we are heading in the wrong
year results we exceeded our MYR1.1 direction.”
billion BTP improvement target.” In Cargo also has been a solid perform-
fact, if fuel and aircraft lease payments er. Revenue climbed 8% to MYR2.47
had remained level, the airline would billion on a 2% decline in capacity
have posted a net profit of MRY676 to 4.13 billion TKMs in 2006, while
million last year. Passenger revenue was RTKM jumped 10% to MYR0.602
and yield grew 7% to MYR0.95.
On the overall scorecard, Jala gives
MAS high marks in most areas although
ontime performance at 84.06%, system-
wide aircraft utilization at 11.74 hr. and
baggage delivery, which has improved
28% over the previous year, are either on
or below target compared to other param-
eters such as cash surplus and profitabil-
ity, which are deemed “outstanding.”
Going forward, he is confident that
2007 will be the turning point. “In the
BTP, I announced that MAS’s target is to
reduce our projected loss of RM1.7 bil-
lion to RM620 million for 2006, achieve
a small profit of RM50 million in 2007
and go for a record profit of RM500 mil-
lion in 2008,” he says. But while he is
bullish, there is a strong note of caution:
“There is more to do. For 2007 we will
continue the momentum and intensify
our BTP initiative to generate profit.”
To achieve this goal, the airline is
focused this year on a variety of busi-
ness areas.
n Malaysian Hospitality Campaign:
Progressively rolling out more than
125 initiatives to improve the cus-
tomer experience at every touch
point from purchase, pre-embarka-
tion, embarkation and inflight to
disembarkation.
n Project Omega & Alpha: Designed
to increase yield to close the gap
with the best in the business.
Initiatives include introduction of
new competitive fares, opening of
46 atw | MAY 2007
“store fronts” by publishing net
market fares and implementation of
tighter inventory controls.
n Passenger Service System: Investment
of some RM200 million from 2007
to 2009 to equip the airline with
“state-of-the-art” IT systems, provid-
ing cost savings through e-ticketing
and ticketless transactions as well as
the ability to change fares dynami-
cally in response to competition.
n Engineering Breakthrough Project:
Designed to enhance productivity,
which in turn will ensure more rev-
enue contribution from third-party
MRO.
n Structural Cost Reduction Exercise:
Scrutinize every aspect of the busi-
ness to ensure maintenance of a cost
advantage over competitors.
n MASkargo: Continue efforts to
maximize net profits through further
revenue enhancements and cost-
reduction initiatives with a goal of
making the freighter business profit-
able without the contribution from
belly freight.
n Network Growth: Finalize a five-year
network plan. From 2008 onward
MAS will develop new routes and
increase frequencies on existing routes
with growth potential.
Jala wants to expand “our core net-
work in Asia/Pacific” while strengthen-
ing the airline’s hub-and-spoke con-
nectivity in Europe, Australia, New
Zealand and Africa via new partnership
agreements with KLM, Gulf Air, Virgin
Blue and South African Airways. He says
Middle East routes will be restructured
and flight frequencies to nontrunk markets
such as North America, South America
and South Africa will be reviewed.
A380 Orders There has been wide-
spread speculation that MAS will scrap
its order for six A380s. Jala says, “We
are still in discussions with Airbus and
we will also consider and assess all
available alternatives and options.” He
acknowledges the carrier is looking to
acquire new aircraft but declines further
comment.
On the horizon, he sees three major
challenges. His greatest concern is that
staff will fall back into complacency;
“We are not out of the woods just yet,”
he cautions. Coming a close second is
“the continuous volatility in fuel cost”
and third is “the high cost structure that
Rob Finlayson
still exists within MAS.”
He is candid: “Unlike other profit-
able airlines in the region, MAS was in
financial trouble last year and we are only
starting to crawl back into the black.
Liberalization is akin to the Olympics,
where to compete successfully one must
train for years. As such, you can’t just tell
us that we have three months to prepare
. . . We need time to get our house in
order.” However, at the rate he has man-
agement and staff focused and in training,
perhaps he underestimates the carrier’s
preparedness for the marathon.