Malaysia Airlines’ recovery shadowed by politics

Buffeted by two of global aviation’s worst disasters in recent history, Malaysia Airlines’ (MAS) plans for a turnaround were never going to be easy. Alleged political meddling in the state-held airline is complicating matters, with the recent resignation of two foreign chief executives raising even wider questions.

In August 2014, Khazanah Nasional, Berhad a Malaysian state investment fund that previously owned 69% of the carrier, became its sole stakeholder in a US$430 million bailout.

Earlier that year, MAS lost two aircraft, the still unresolved disappearance of Flight MH370 and the shooting down of Flight MH17 over Ukraine, sending its finances into a downward spiral.

The national carrier was delisted from the country’s stock market, effectively renationalizing the carrier, and aggressively restructured. Khazanah unveiled a five-year recovery plan, dubbed as “rebuilding a national icon”, to reverse massive losses and return to profitability in three years. The plan set a target date of March 2019 for a new initial public offering.

Two foreign chief executives were hired in short succession to professionalize management and in hope that international expertise could restore its fortunes. MAS has cut 6,000 jobs since Khazanah’s takeover while various unprofitable long-haul routes to North and South America have been discontinued.

Christoph Mueller, a German business director known as an aviation turnaround specialist, initially oversaw the recovery plan before abruptly quitting less than a year after being hired on a three-year contract. Citing personal reasons for his resignation, he described the airline as a “ship that has many leaks.”

Peter Bellew, a former director of operations at Ireland’s Ryanair, took over as chief executive in July 2016, but tendered his surprise resignation last month after barely a year in the post. He announced his decision to rejoin Ryanair, in a move that surprised many industry watchers.

Bellew was widely credited with winning back Chinese customers despite the still unresolved disappearance of flight MH370, which carried mostly Chinese tourists and stirred a diplomatic controversy over the Malaysian government’s perceived mismanagement of the crisis.

Bellew had maintained the carrier was on target to return to profitability by the second half of 2018 and meet its 2019 relisting target. MAS has not publicly revealed its financial results as it is no longer a publicly listed company, raising questions about its performance among industry analysts.

“Information from MAS has been a tiny trickle, we don’t really know what’s what. We keep hearing of a turnaround, we really are going around in circles,” said Mohsin Aziz, an aviation analyst at Maybank Investment Bank, who was uncertain whether the carrier was on track with its recovery plan.

The Wall Street Journal reported favorably on MAS’ turnaround efforts earlier this year, noting that business-class bookings had surged while 81% of its seats were full on flights in the last quarter of 2016.

Lower jet fuel prices have helped to cut costs, but the carrier still faces the same stiff competition from low-cost carriers it did before the twin tragedies, and those safety reputation issues won’t easily be reversed.

Malaysian media widely speculated that interference in the airline’s management was behind Bellew’s resignation. The former executive has said there was no meddling from state-run Khazanah, currently MAS’ sole shareholder, during his tenure.

Yet pro-government broadsheet the New Straits Times cited unnamed sources that alleged Khazanah had micromanaged the carrier and bypassed the MAS board on occasion, prompting both Bellew and Mueller’s departures. Khazanah issued a statement calling the report “speculative” and “erroneous.”

Former MAS staffers who spoke anonymously to the Malaysian Insight news also said there was outside interference in the company’s management. “There’s too much political meddling in Malaysia. That’s why it’s difficult for anyone who takes over to do their job,” one unnamed staff member said in the report.

Former prime minister and current opposition coalition chairman Mahathir Mohamad has taken aim at incumbent Prime Minister Najib Razak for alleged meddling. In a blog post, he raised questions about the commercial logic behind the deal MAS recently signed in the US to purchase Boeing 737 jets and 787 Dreamliners worth more than US$10 billion.

The ex-leader questioned whether the deal, announced in September while Najib visited the White House, was really intended to “get a photo opportunity with [US President Donald] Trump.” Bellew, for his part, denied the politicized allegation, saying Mahathir was “100% wrong.”

Recent White House visits by the leaders of Malaysia, Thailand and Singapore, all of which were attended by large orders placed for US aircraft or big ticket military equipment, have aimed at maintaining bilateral goodwill and smooth anxieties over Trump’s antipathy towards countries that maintain large trade surpluses vis-a-vis the US.

During his visit, Najib also committed Khazanah and Malaysia’s national pension fund to billions of dollars worth of investments in American equities and infrastructure projects.

Malaysia’s National Union of Flight Attendants, or Nufam, expressed its concern that no executive would be held accountable for the controversial deal with Bellew’s departure.

“There are also no signs of MAS making profits to show they could sustain all this high cost and maintenance of new planes. Its financial problems will rise up again in no time when the new planes arrive,” Nufam said a statement released by the organization.

MAS also committed to purchase six A350-900 Airbus aircrafts, Boeing’s main competitor, to replace its aging A380 fleet by year end. MAS declared itself “technically bankrupt” in 2015 and fired 6,000 staff, prompting Nufam to question the commercial logic behind MAS’ massive fleet expansion.

In a January interview with Nikkei Asian Review, Bellew acknowledged a growing overcapacity problem in the region’s aviation industry. “Between Indonesia and Malaysia, there are twice as many aircraft on order than the total of all aircraft on order in China. There definitely is over-ordering of aircraft in the region,” he said at the time.

MAS has announced its current chief operating officer, former pilot Captain Izham Ismail, will become the airline’s next chief executive. Izham has worked for MAS since 1979 and is viewed favorably for his breadth of in-house experience.

Some Malaysians, including Nufam members, have articulated opposition to a foreigner leading the national flag-carrier.

Izham, who will be MAS’ fourth chief in less than three years, is expected to follow Kazanah’s the recovery plan timeline targeting a return to profitability by next year and then a subsequent relisting on the local bourse in 2019.

Shukor Yusof, a former Standard & Poor’s analyst and founder of Endau Analytics, however, has cast doubt on Khazanah’s recovery strategy and aircraft acquisitions under Bellew’s tenure.

“Airlines typically order aircraft when the going is good and take delivery of them when the economic cycle becomes bearish,” he wrote in a personal blog entry. “Overcapacity will be worsened, resulting in many planes being stored. It’s hard to see how all these acquisitions make sense.”

He added: “Is the sovereign wealth fund prescribing the wrong medication? Is the sovereign wealth fund the problem?”