Last updated: August 28, 2014 12:59 pm

Malaysia Airlines cleared for radical restructuring

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A woman looks on as an aircraft operated by Malaysian Airline System Bhd. (MAS) stands on the tarmac at Kuala Lumpur International Airport (KLIA) in Sepang, Malaysia, on Tuesday, Aug. 26, 2014. Malaysia Airlines are scheduled to release second quarter earnings Aug. 27 as the airline considers job cuts, a review of aircraft orders and replacing its chief executive officer after the national carrier suffered two disasters this year, people familiar with the plan said. Photographer: Charles Pertwee/Bloomberg©Bloomberg

Malaysia has approved the most radical restructuring of Malaysia Airlines since the national carrier was established in the 1970s, proposing to cut about a quarter of staff, abandon some long-haul routes and launch a new business plan to restore its fortunes after the tragic loss of two jetliners.

The country’s cabinet, chaired by Prime Minister Najib Razak, on Wednesday approved the plan, which envisages concentrating on the airline’s core Asian business while preserving some long-haul routes to help feed traffic to those routes, a person familiar with the plan said on Thursday.

The aim is to achieve “sustained commercial viability” in four to five years, the person said.

Malaysia Airlines has struggled to cope with waning confidence among would-be travellers after the loss of flight MH370 en route to Beijing in March, and then MH17 over Ukraine last month. The two incidents cost the lives of 537 passengers and 29 Malaysia Airlines staff.

On Thursday the airline revealed the extent of the financial damage inflicted, reporting a significant widening in quarterly losses to Rm307m ($97m) from a net loss of Rm176m in the same period a year ago.

Average weekly bookings fell by a third immediately after the MH17 disaster, with numerous flights cancelled.

Ahmad Jauhari Yahya, chief executive, predicted that the full financial impact of the twin tragedies would hit the airline in the second half. “We operate in a harsh business environment of stiff competition from regional and global carriers and high operational costs. Coupled with the impact of the two tragedies which have damaged our brand, the need to restructure the company was accelerated.”

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“Our company has had to undergo a thorough re-examination and re-evaluation in order to reposition ourselves as a stronger and more sustainable Malaysia Airlines for the future”, said Mr Ahmad Jauhari.

About a quarter of the airline’s roughly 19,500 staff would lose their jobs in the restructuring, although there would be “outplacement support” for those made redundant, the person said, adding that the number was subject to the business plan being finalised.

The plan was a “high-level framework”, according to the person familiar with the matter, and detailed plans for the restructuring would be worked out later, probably mostly by Malaysia Airlines itself. There were no specific plans yet for disposal of some of the airline’s other units such as its profitable engineering business.

The thrust of the plan was to pare back Malaysia Airlines’ long-haul network and maintain only those routes that would provide what the industry calls “load factor” for regional routes in Asia. Malaysia Airlines flies to the European cities of London, Paris, Amsterdam and Frankfurt. Analysts have said that at least Frankfurt is vulnerable to being cut.

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The airline would then be able to make more efficient use of traffic fed to it through partner airlines in the Oneworld alliance, such as British Airways.

The plan, expected to be unveiled on Friday, was hammered out by executives at Khazanah, Malaysia’s sovereign wealth fund, together with external consultants. Khazanah already owns a 69 per cent stake and this month announced a plan to buy out minority investors, taking the carrier private.

Neither Khazanah nor Malaysia Airlines immediately responded to requests for comment on Thursday.

Any jobs cuts are likely to be fiercely opposed by the airlines’ unions, setting the stage for delicate negotiations that are likely to be a test of Mr Najib’s resolve to see through a painful overhaul. Mr Najib, who is also chairman of Khazanah, has said that “piecemeal” changes to the airline will not do, and that a “complete overhaul” is necessary.

Malaysia Airlines’ 19,500 staff operate a fleet of 108 aircraft, while Singapore Airlines, its neighbouring rival, operates 103 aircraft with 5,000 fewer employees. The result is that over the past nine years the Malaysian carrier has lost a net Rm3.56bn ($1.1bn), while Singapore Airlines has made S$8.86bn ($7.1bn) without a single year of losses.

The last time job cuts approaching the level of a quarter of total staff were achieved was in 2008, when the airline was in the midst of what was a third attempted restructuring since it was created in its current form in 1972. That involved almost 3,000 job losses.

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