This article first appeared in The Edge Malaysia Weekly on October 12, 2020 - October 18, 2020
CAPTAIN Izham Ismail took over as group CEO of Malaysia Airlines Bhd (MAS) in 2017, making him the fourth CEO of the country’s flag carrier since the rebooting of Malaysian Airline System Bhd in 2014. The loss-making airline had been struggling to turn around amid a tough operating environment due to overcapacity and thin margins. The Covid-19 pandemic has made matters worse, and it is now proposing to restructure its debt in a bid for survival. Here is an excerpt from The Edge’s exclusive interview with him:
The Edge: It has been six years since the airline reset its business model and cost structures and now, there is talk that it could be facing another reset if it fails to convince creditors to accept a restructuring plan. Can you share its journey with us?
Captain Izham Ismail: It has been a very difficult journey for MAS since the Malaysia Airlines Recovery Plan (MRP) (which was announced in 2014). A lot of results didn’t meet the MRP targets. The reason being, which a lot of people brushed off, is the overcapacity in the marketplace. Notwithstanding that, we downsized ourselves and we didn’t realign ourselves as planned to a certain extent. We dropped off in our qualitative index and customer experience, our staff became so demotivated, and so forth. In late 2017/early 2018, I asked myself, “How do I address this?” So I told myself the first thing I got to fix is the people. I made people my true north, or Qibla. I then started to leverage customers because at the end of the day, business without customers means nothing. Henceforth, customers became the organisation’s centre of gravity. Everything we did was for our customers. It took a while for us to build it up. So, the first year’s focus when I took over office was actually on people and customers. Thank God, in late 2018, we saw the numbers for Customer Satisfaction Index, on-time performance and mishandled baggage start to turn (to show improvements).
In 2019, I got (staff) morale regained ... People say staff in MAS are laid back but we rallied them. They are committed and the culture has shifted … where we stand in solidarity, the organisation is united and the focus is customers. We started developing products and improve our gaps with regards to our services. In 3Q/4Q 2018, we saw the results.
Then 2019, our focus was on revenue. The last few years, we had been competing in the same market where the low-cost competitors were operating. I said this cannot be. MAS is a premium airline. If we kept on competing in the same market, we would never win. In late 2Q2019, we made a 180° turn. We developed products by focusing on our core market segment that is truly a premium customer proposition. In 2019, we were 18% ahead of our net income after tax target. In 3Q2019 and 4Q2019, we turned in RM800 million in passenger revenue. We went into January 2020 with our cargo and passenger forward booking 4% ahead of 1H2020 budget.
Twenty nineteen was a good year. We experienced hockey stick growth compared with our competitors. No doubt we were still in the red, but with that (growth) momentum, we would have broken even in 2Q2022.
What is MAS’ main challenge?
There is overcapacity in the marketplace. In 2019, even before the Covid-19 pandemic, the number of seats available in Malaysia was about 1.5 times more than demand. For instance, there were four flights to Penang, operated by AirAsia Group Bhd, Malindo Airways Sdn Bhd, MAS and FlyFirefly Sdn Bhd. So what is the best way to win customers? Price. Also, an air ticket for a 45-minute flight from Haneda to Osaka (Japan) costs US$300; Jeju to Gimpo (South Korea), US$290; but KL to Penang would cost US$20. It doesn’t make any sense. So how do you expect MAS to recover in that environment, notwithstanding the balance sheet that we inherited?
Why did MAS come to the decision of undertaking a restructuring of the airline, instead of seeking more funds from its sole shareholder Khazanah or banks?
When Covid-19 happened, I found that it was the right opportunity for me to reset the balance sheet. But whatever plan that we do, it is unfair for us to ask for more money from the government and Khazanah as the company can never turn around because of the fundamentals of the market. I feel strongly that we should get our house straightened out, in the context of having a long-term business plan (LTBP 1.0), which was launched in 2019.
We are rebasing our business plan slightly for us to meet the future. And we are confident that LTBP 2.0 will work. Why? Because of the credibility we had in 2019 by executing LTBP 1.0.
The spirit of going into this restructuring is not to induce pain but to drive survivability across the industry so that the entire value chain succeeds — from aircraft maintenance and lessors and manufacturers, travel agents, catering, to our own staff.
I feel very strongly that this restructuring plan will give some hope for us to make MAS a strong organisation post-Covid-19. The restructuring plan that we put in place is to achieve an amiable agreement between all parties across this value chain. We will depict our final position once we achieve a resolution between our creditors. We feel strongly that if MAS is able to survive this pandemic by restructuring our finance, the creditors will also gain in the future. I have full conviction LTBP 2.0 will work because we did it in 2019, and this business plan is not a table-top exercise. It was derived in 2018/2019.
I don’t know what the future post-Covid-19 will look like, but we have some predictive views of how it is going to be. We know customers want flexibility, their safety and security to be upheld, they want products they are able to choose, but at the same time, they want it to be premium and have low fares. That is the kind of consumers we are looking at in the future. We are convinced LTBP 2.0 will work provided that these three things happen.
One is to restructure our financial position or balance sheet. The LTBP 2.0 entails a five-year journey through 2025. We are hopeful of achieving break-even in 2023. This is assuming a recovery model where we predict that the domestic and Asean markets would return to 2019 levels in 2Q2022 or 3Q2022. For international and inter-continental markets, we expect a recovery in 3Q2024.
But I need to go across to 2022 first, and, second, I need some money, not a lot, from my shareholder to kick-start MAS for the next 18 months. If you ask me, the next 18 months, I don’t need money (that is not true). I need money. The whole airline industry and travel agents all need money.
Still, even if I achieve these two things, we as a country must look at how to manage the market capacity. If not, then it’s better to just close the airline. I am one of those who have advocated this since 2018. If the nation doesn’t have the collective view to make MAS work, then we shut it down. When I say collective view, I don’t mean (making) Malaysians fly with us. I am looking at the policy side as a country.
If MAS is shut down, we have to handle just the 12,500 staff. However, across the value chain, there will be others such as the travel agents and caterers affected — easily 200,000 people who contribute to the GDP of the country. With that 200,000 figure, you multiply by four as a standard household number, it is close to one million people being affected. So, today, MAS is doing (this restructuring) with the spirit for us to survive for the future. I know that across the value chain, the margins of our partners are higher than the airline’s itself. Airline margins are +/–1% to 2%.
This restructuring plan involves not only the lessors but across the supply chain — aircraft manufacturers, spare parts providers, maintenance, repair and operations providers, banks that give us term loans for hedging, forex, revolving credit and partners in our booking engines, etc — [they] will have to sacrifice for the better of the future.
What are MAS’ total liabilities?
AirAsia X Bhd is RM63.5 billion, AirAsia Group Bhd is about RM100 billion, ours is RM16 billion. It is a small amount (compared with the other airlines) and involves about 50 creditors. Some of our vendors will not be affected in this restructuring because they are still required to operate, such as the bus operators. We are looking at critical partners that move the needle in the whole value chain. If I can restructure the balance sheet, it will be positive.
How much haircut are you asking the lessors/creditors to take?
My answer is for them to be competitive in the market. Definitely, I am not (proposing a) 99.7% (haircut).
How confident are you of getting the support of creditors for the restructuring scheme?
There are creditors who have agreed already. There are others still resisting, and another group still 50:50. I need to get the 50:50 ones (on board) with those who have agreed. I understand quite a sizeable amount of creditors have agreed.
Why is MAS seeking to negotiate with creditors through a UK court process?
All our contracts are written (according to) English law. We can elect to do it in Malaysia too but assuming the Malaysian courts give a judgment that favours us, we still have to go to the UK and file to get recognition. And we don’t have the (luxury) of time. Hence, we file it in the UK court. Is filing at the court my preferred path? Of course not. I want to have an amiable bilateral negotiation with all my creditors but if it is so tough, then that is the path we have to go. At the least, the court will now decide who is right and which way we should go.
If Plan A fails, I am prepared to shut down MAS. We have done this before. This organisation has gone through tremendous pain (inflicted by the twin tragedies of flights) MH370 and MH17 in 2014. We had to reset MAS and 6,000 staff had to leave. If you ask me, I don’t want to go down that path (again).
What is the stage of the restructuring and discussion with the lessors?
It’s at a very late stage already. I need the lessors/creditors to make a decision by Sunday (Oct 11). I should be able to make some conclusions by early next week and we will decide the next course of action. The next course of action is filing (the scheme of arrangement to convene a scheme creditors’ meeting) in the UK or execute Plan B.
What does Plan B entail?
Under Plan B, there are a few scenarios which I cannot share with you yet because to a certain extent, it is a trade secret to my competitors. But the existence of Plan B is there. It is real and we have actually started the process of [making] operational Plan B because I cannot afford to lose time. When you liquidate a company, it takes time, but I am asking my team for the impossible. Shut down today and Firefly starts tomorrow. Ideally, it takes six months, just like the old MAS took about a year to wind down ... [That’s because] Plan B must continue to ensure that we have a national carrier and must ensure that Malaysia and Malaysians remain connected domestically and internationally. Henceforth, it has to be immediate.
If you ask me, is Plan B credible? Of course, it is. We have all the skills sets in place. We have the air operator’s certificate (AOCs) of Firefly and MASwings. Or I can novate the AOC from MAS to this new airline and give it a different name. Firefly is not a Malaysian brand, but a community one. If you go worldwide, people will not understand. I can operate Firefly. Six months later, I will change the name to Malaysia. I can say goodbye to the MH code but I’ve got one code which is in file with IATA (International Air Transport Association) now ready for me, that is, MY.
If my partners/creditors don’t want to help themselves to survive ... I have no choice but to shut it down.
What will happen to the 12,500 staff?
We will cross the bridge when it comes because I have a few scenarios in Plan B. Management will do everything humanly possible to save staff. But the staff have been told to brace for more drastic actions in the coming weeks.
Across the world, you see airlines like Singapore Airlines, American Airlines and British Airways cutting staff because their staff cost is high. Our staff cost is about 7% to 8% of total costs, while fuel cost makes up 30%, aircraft leasing is about 25%, maintenance and engineering 9% to 12%, and cost of sales constitutes 2.5%.
How did MAS survive the last 10 months?
Yes, I had some remaining money from the MRP last year. (On Oct 2, Reuters reported that the aviation group is experiencing an average monthly operating cash burn of US$84 million but only had US$88 million in liquidity as at Aug 31 and an additional US$139 million available from Khazanah.) That is the money that is making MAS survive. And staff have taken a huge salary cut. From the board, C-Suite, GM, senior managers and senior executives — nearly 1,000 staff have taken a pay cut from 10% to 50% to support those at the lower levels. Because of that action, the lower staff felt that we care for them and now, the whole organisation is united. The pilots went a bit further by taking no-pay leave because they are not flying planes. Pilots are the biggest [item] on our payroll.
Grounding the aircraft alone resulted in RM3.5 billion in cost savings; moratorium or payments that we have been able to defer was RM1.7 billion (which is going to bite us next year), and the cash that we saved through salary reductions, operations totalled RM900 million. In total this year, we have avoided costs amounting to close to RM6 billion.
What is Khazanah’s position as a shareholder? What mandate did it give the negotiating team?
Khazanah is fully supportive and has given 100% mandate to me. They said, ‘Do what is right. Izham, if you cannot restructure this, we will not pump in any more money.’
What is the commitment of Khazanah?
The word is interconditional. Everybody must agree, then the shareholder will pump in money. Mind you, even the government is taking a haircut through Turus Pesawat Sdn Bhd, which is a Ministry of Finance Inc-owned special-purpose vehicle and owns MAS’ six A380s. Everybody is taking a haircut this time. If we don’t reach an amiable position, my recommendation to the shareholder is to shut this airline down. We go to Plan B.
We are including the A380s in this restructuring exercise. During MRP, when the creditors wanted to roll over to the new company, all the lessors had to take a haircut except the A380s, which were under Turus Pesawat. I want to make it right (for all lessors) this time.
Who first came up with this restructuring idea — MAS or Khazanah?
It is actually from Malaysia Aviation Group Bhd (MAGB). I consulted my board and shareholder and Shahril (Khazanah managing director Datuk Shahril Ridza Ridzuan) said, “This time around, this is your show”. MAGB is leading. I met our various stakeholders, including Finance Minister Datuk Seri Tengku Zafrul Aziz.
Will M&A work this time around?
Over RM100 billion liabilities (AirAsia) and RM63.5 billion liabilities (AAX), you think I am crazy to merge? So, M&A at this present time is out of the question. This could be a future conversation. It is not happening (at the higher level).
I come from a poor family, my father earned RM130 a month. I drank tap water in school just to keep my tummy full. I walked five miles to school every day. As a professional serving this airline for the past 41 years, this organisation has given me life. So there is no personal agenda in what I am doing here. This is to repay the kindness this organisation has given me by taking my family and myself out of poverty. My quest now is to make things right for future generations so that our anak cucu (grandchildren) can enjoy and be proud.
So what I am doing here on the restructuring, [there] is no other agenda up my sleeve. I am 60 years old and I am retiring soon. I just want to make sure that things are set right and people outside there really understand what is happening in MAS. I didn’t create this mess. I am just here to make things right so that my successor will be able to take MAS to the next level.
What will MAS be like, post-restructuring?
An organisation with a more well-structured cost base that will make us more competitive in the marketplace. Then, we will have room for capital investment to enhance our products and make it better for the consumers. I believe post-restructuring, MAS will be a more agile and competitive organisation, and in the long run, hopefully, less dependent on our shareholder and the government.
We have to be realistic. The industry’s L-shaped recovery is bordering on W-shaped. As such, the number of aircraft that I need for the next 18 to 24 months is half of what I have today. When domestic and Asean markets start to recover in 2022, that’s when we will start to build our capacity again. We should normalise ourselves in 2024 when international/intercontinental recovers. (MAS currently operates six Airbus A350s, 21 Airbus A330-200s/300s, 48 B737-800s and six A380s.)
The way I look at the future is, if I am able to reset this balance sheet, have a little bit of money for me to reboot the business post-Covid-19 and the over-capacity issue being managed by our country effectively, then I don’t see any reason airlines and the entire value chain could not succeed. It will.
I don’t expect the overcapacity issue to be resolved within one year. It is policy (that the government has to decide). I hope the nation is looking into it. Malaysia has a population of 32 million, but last year, we had 37.5 million seats in the marketplace.
If we can address the over-capacity in the market, do you know who the winner will be? Not (only) MAS but my competitors (as well). The aviation and hospitality industry will also flourish, and the rest of the value chain too. Covid-19 is a time to reset. Let us prep ourselves as a country — Malaysia Inc per se.
All of us can survive this stormy weather safely and come out stronger and profitable. That indirectly feeds the economy of the country.
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