There’s a better way to rescue Malaysia Airlines

09/02/2014 7:00 PM

09/02/2014 4:25 PM

On Friday, Khazanah Nasional, the parent company of Malaysian Airline System, announced the airline’s fourth and most radical restructuring since its founding in 1972. This one, too, is likely to fail. The real challenge, though, isn’t overcoming the twin tragedies of MH370 and MH17 and the loss of passenger confidence (and ticket revenue) that followed. Rather, the problem is the spectacular growth of Southeast Asian discount airlines, which have wreaked havoc on state-subsidized flag carriers such as Malaysia Airlines that used to have the region all to themselves.

In May, The Economist estimated that almost 58 percent of the air traffic in Southeast Asia is now flown on discount airlines that offer cheap fares and require passengers to pay for extras ranging from luggage to bottles of water. The model holds obvious appeal for a burgeoning Southeast Asian middle-class that’s anxious to travel regionally, but still needs to do so on a budget. Take Kuala Lumpur-based AirAsia. The formerly state-owned airline was taken private in 2001 and transformed into a discount carrier that competes on the lower end of routes flown by more expensive carriers. Malaysia Airlines, with its legacy costs (including a bloated, unionized workforce), didn’t stand a chance. By July 2013, according to one tabulation, the airline’s share of domestic traffic in Malaysia had shrunk to 37.4 percent, while AirAsia’s share stood at 47.7 percent.

The gap is clearly visible at Kuala Lumpur International Airport where on Tuesday, I flew out of the newly opened Terminal 2, home to discount airlines like Air Asia (which I flew to Singapore for a quick overnight trip). The building is thriving and crowded, reminiscent of a buzzing train station, and it stands in stark contrast to sleepy Terminal 1, home to Malaysia Airlines and other legacy carriers. When I flew out of the latter on Wednesday (via China Southern, to Guangzhou) shops, restaurants, and corridors were empty. Of course, the considerable business hangover that Malaysia Airlines suffered after the July 24 downing of MH17 contributes to the sleepiness. But in the three years I’ve been flying in and out of the airport, it’s always felt oversized.

Can restructuring Malaysia Airlines wake up Terminal 1? Khazanah Nasional has proposed buying out other investors, cutting 30 percent of the workforce and trimming some revenue-losing long-haul routes. These would have all been fine ideas in 2001, before the AirAsia era. According to the Financial Times, a person familiar with the restructuring plan predicted that the airline could only return to “sustained commercial viability” in four to five years — and that assumes the politically sensitive plan is fully implemented. It also assumes, of course, that Malaysia Airlines can recapture some of the customers lost to Air Asia and other discount carriers in the next five years while remaining a unionized airline even more closely tied to the Malaysian government.

Instead of trying to beat AirAsia, why not join them? In 2011, the two companies engaged in an equity swap that lasted a full eight months before Malaysia Airlines’ politically powerful unions — fearful of job cuts — succeeded in having it unwound. Since then, AirAsia’s fortunes have soared, often at the expense of Malaysia Airlines. The benefits to the legacy carrier are obvious: It’d acquire a discount partner that could — ironically – help to highlight the full-service luxury available on its planes. For AirAsia, the tie-up would ease regulatory burdens in Malaysia and other markets while giving it opportunities to carry passengers from Malaysia’s international routes (and OneWorld alliance partners). Meanwhile, both airlines would benefit from the efficiencies achieved in areas such as maintenance.

Of course, the downside is that reduced competition would likely end up costing Malaysia’s fliers in higher ticket prices. But so long as the Malaysian government is determined to preserve its state-owned airline in some form (and it is), Malaysians will be on the hook for the losses. This way, at least, Malaysians will be getting something more than a state-subsidized anachronism for their money.

Adam Minter is an American writer based in Asia, where he covers politics, culture and business.

© 2014, Bloomberg News

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