Tun
Dr Mahathir Mohamad, speaking at a media conference after his lecture
on ‘The Challenges Faced by Muslims Now’ organised by the Terengganu
state government on May 3 was reported to have said:
“Air Asia fares are so cheap, sometimes free, but it has been able to
provide service for the last 10 years. Logically the company should have
gone bankrupt, while MAS which has received government aid up to RM3
billion, is still losing money every year.”
It is good of Dr Mahathir to point out this key paradox of a poor
performing government-linked company (GLC) as compared with a private
sector driven one.
It would have been better and more educative for the country had he
explained why, as the Prime Minister of the country for more than 20
years, he gave orders to pump government aid and taxpayers’ money into
MAS.
Also what role did he play in orchestrating the numerous bailouts which
helped enrich Tajudin Ramli and other cronies who milked MAS dry and
brought the airline to the doors of death?
Economics of the airline industry
In
a statement issued on May 2, MAS parent Khazanah Nasional Bhd said it
had on Monday terminated the share swap with AirAsia major shareholder
Tune Air Sdn Bhd. It was reported by the press that both Tony Fernandes
and Kamarudin Meranun (left) resigned from the MAS board the same day.
“Under the earlier agreement, MAS was to be only a full-service premium
carrier, while AirAsia and AirAsia X will be low-cost regional and
medium-to-long-haul low-cost carriers respectively. The new
collaboration terms allow the airlines to enter each other's domain if
they wish to,” said The Star in its report ‘It’s official, MAS-AirAsia share swap is off’.
When planning the future of MAS, it is important that the government
avoids not only the mistakes of the past but also takes a rational
approach based on economic fundamentals. One line of simplistic
thinking is that there is a bright and profitable future for MAS since
the number of air travellers continues to increase by about 5-7 percent
per year.
But if you look at the history of airline industry profitability, this
is not the case for airlines worldwide. In fact, if you add up all the
profits of all the airlines over the last 100 years the total would come
to less than zero. The years of losses outweigh the years of gains.
Financial History of MAS and SIA
In 1972 Malaysia-Singapore Airlines (MSA) became MAS and SIA. In the
last 10 years from 2002- 2012 SIA reported a total pretax profit of
Singapore $10,565 million, averaging more than S$ one billion per year.
MAS reported losses in 1997 RM 260 million, in 2005 Rm 1,300 million and
in 2011 reported a stunning loss of Rm 2,520 million (Wikipedia).
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The fact is the airline industry requires huge capital and produces
atrocious returns on capital employed. Hence, year after year, many of
the main players produce poor profit margins or they produce outright
losses.
Why you might ask is it that an industry with year-on-year rises in sales cannot generate good returns to shareholders?
It all comes down to the economic structure of the industry. One of the
forces that limit profitability is the intensity of the rivalry between
the leading airlines. There is over-supply leading to pressure on
prices. This is exacerbated by a high degree of freedom for new
competitors to enter the industries.
If, say, an airline route between two destinations is found to be
reasonably profitable it is not long before new entrants try to grab
customers or current airlines simply move their planes to this
profitable route.
It is truly an industry governed by the principle of “survival of the fittest”.
The ego and elections factor
It
would seem that every developing nation wanting to show off to the
world its progress MUST have its own airline, regardless of the impact
on an industry already grossly over-supplied, and regardless of whether
they have the ability to manage efficiently. So there is a regular
stream of announcements of new airline ventures.
Now that Malaysia has also done it and failed dismally, the next logical
question to ask is why doesn’t the Malaysian government allow MAS to
fold up or go under?
There are two main reasons: Firstly, the perennial optimism of managers
and shareholders. “Just one more chunk of money will see us break
through into profitability as we rout the opposition!” seems to be the
credo of these parties based on their self and not national interest.
Secondly, there is government interference. Around the world we see
many governments come to the rescue of their airlines despite perennial
losses. Malaysia has not learnt these lessons – initially for reasons of
national pride tied to the ego of leaders but now increasingly
apparently to save jobs and to prevent the retrenched employees from
voting for the opposition.
It is an expensive mistake to continue MAS. Mahathir who has on more
than a few occasions bailed out MAS from liquidation using enormous sums
of taxpayer money should answer this question instead of beating around
the bush on the divorce event.
Honouring Dr. Mahathir
Finally, MAS should be a case study in all MBA programmes on how not to
set up an airline industry or how to bankrupt the nation quickly.
Perhaps it can be a course offered in the Institute of Tun Dr. Mahathir
Mohamad’s Thoughts (IPDM) established on 19th August 2003 by the
Malaysian government at Universiti Utara Malaysia. And Dr. Mahathir
should certainly be invited to provide guest lectures on this
financially disastrous chapter in the country’s history when he was at
the helm.
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