Malaysian Airlines

MALAYSIAN AIRLINES 7

MalaysianAirlines

MalaysianAirlines

ExecutiveSummary

MalaysianAirlines faces a daunting managerial task after the MH370 and MH17aviation accidents. When aircrafts belonging to the MAS were involvedin accidents, the effect was a nose-diving stock value and decliningconfidence among customers. In the aviation industry, safety is thesurest measure of confidence. Any issues that affect safety erode theconfidence of potential customers in the services of the Airline. Before the accidents, MAS was already experiencing market problems asa result of competition from low-cost carriers. The accidents onlyexacerbated a problem that MAS was already facing. This reportentails an analysis of data related to the Airline’s profitability,value, and market share as the basis of suggesting strategicinitiatives the Airline can take in the wake of collapse due tolosses and a shrinking market share. The data analysis provides thekey areas the Airline’s management needs to focus on. Thestrategies involve financial decisions that will take the Airlineback to work and rebranding strategies that will re-invent it intothe market. A new market image is the catalyst for future sales.Finally, the recommendations constituteall the necessary steps thatwill save the Airline from collapse including those intended toresolve the key issues that are evident after the data analysis.

Background

MASneeda change of strategy if it has to survive in the market. Althoughthe MH370 and MH17 worsened the situation at the airline, there werealready many indications that the company needed a change of strategyon how it manages its costs and the diversity of its revenue streams(Tiwari&ampKainth,2014). The airline has gone through many multiple phases oflossmaking, and oil costs have an uncompetitive cost structureremains the constant factor in all the cases. MAS’s revenue streamsheavily rely on cargo and passenger services. MAS have anotherchallenge over streamlining its revenue flows and cost structure: itscorporate image has plummeted after the accidents (Ramage,2014). Furthermore, the company incurred substantial expenses incompensating the families of victims and also the long search forMH370 that disappeared. All strategies should enable MAS to recoverfrom its previous state and fill-up the asset deficit caused by thetwo aviation disasters.

Consideringthat oil costs continue to fluctuate in the market, the company hasfind innovative ways of diversifying income and cut costs. Some ofthe recommendation will not only focus on bringing back the company’sconfidence into the market, but also financial sound decisions thatincrease the company’s value and the ability to attract investorsafter the aviation accidents (Xu,2015).The multiple turnaround strategies initiated in the past tosave MAS from collapse were not sufficiently sustainable because theydid not constitute increasing the revenue flows ion manner that wouldmuch the increased cost of fuel and other fixed costs.

Strategiesthat increase revenue streams should always have targets that outpacethe rate of cost increases, especially fixed costs. For instance, thesecond phase of loss in 2005 had the following feature, which pointout the fact that MAS ought to implement a diversified revenuestream: 1) an increase in passenger traffic by 10.2%. 2) An increasein revenue streams from passengers by 10.3%. 3) A loss of RM1.3billion. 4) A decrease in cargo revenues by 4.2%. 5) Increased fuelprices by 40.4%. 6) Increase in overhead costs. A diversified revenueregime by MAS would have mitigated the effect of a fall in the cargorevenues. Furthermore, it shows that MAS over-reliance on passengerand cargo revenues without engaging in the innovative issues such ascompetitive pricing, increased number of services offered by thecompany, and cost cutting, predispose it to stiff competition thattakes away its market share.

SupportingData analysis

Thebest way to have an effective strategy that can enable MAS reclaimits market position and attract its customers once more is to look atthe company’s data in the last phase of loss just before theaccidents and the loss of revenue that followed. In 2012, MASincurred a net loss of RM1.3 billion. Regardless of the company’saggressive pricing strategies, it still recorded losses worth RM375.4million in the first half of 2013.Hence, fixing the company’sfinancial challenges should begin from changing the bad direction thecompany had taken before the MH370 and MH17 tragedies in 2014(TranViet, 2014).

TheMH370 and MH17 tragedies caused the following revenue losses to MAS:

  1. A drop in stock prices by 13 per cent

  2. Increased insurance premiums

  3. $175,000 to compensate the families of the accident victims per person reaching a total of $40 million.

  4. $148 million losses due to cancelled flights and bookings

Keysissues of the Airline

Thefirst vital issue for MAS is to regain confidence from customersafter the disasters. The second issue is to have strategies thatwould enable it reclaim its market position over an increasing numberof low-price competitors. The third issue is to recover the revenuelosses that followed the disasters. The fourth issue is to resolvethe recurrent problem of loss making by adopting competitive and adynamic and competitive cost structure and diversify its revenuestreams.

Strategicalternatives

Rebranding:The intense media coverage of aviation disasters makes a victimairline such as MAS way too familiar to the public (O’Connell &ampWilliams, 2005). The only alternative from MAS is to begin arebranding process. Rebranding will entail a new launch, with a newcompany log, and off course colors that are different from theprevious ones. Rebranding treats the company as a new outfit that isset to face the market with a new strategy.

Governmentbailout or nationalization: MAS is an international symbol ofMalaysia’s aviation industry. The government is the only singleinvestor that has the capacity to pump money into the company tomitigate the increased costs and lost revenues after the disaster.

Mergewith a competitive company: If the government declines to pump enoughmoney into the airline, the other strategic alternative is to mergewith another competitive company so that anew management will takeover some of the company’s decision- making organs.

Costcutting: Cutting costs includes limiting the cost structure to thefixed costs as much as possible. The proportional of variable costsfor the company must be minimal.

Recommendations

TheAirline has to formulate a team that would help the company gothrough three of the above strategic alternatives. If it cannotsecure a government bailout through full nationalization, theresultant merger option should be in such a way that the mergingaccompany is competitive and able to take over the financial problemsof the company.Some of the decisions that the new team will beresponsible to make are in the light of the strategic alternatives.The main actions that will turnaround the company are:

  1. Diversification through focusing on the regional network that is sustainable on a low cost strategy through smaller aircrafts

  2. A new brand and logo with a promise of a new image

  3. Increase revenues through enhancing employee productivity and introducing new courier services on the international market

  4. Inevitable job cuts that aim to reduce the company’s wage bill.

  5. Outsource some services to cut operational costs

References

Nel,P. (2014). TheTwo Malaysia Airlines Disasters in 2014: Lessons for AirlineManagement in a Global Context.

O’Connell,J. F., &amp Williams, G. (2005). Passengers’ perceptions of lowcost airlines and full service carriers: A case study involvingRyanair, Aer Lingus, Air Asia and Malaysia Airlines. Journalof Air Transport Management,11(4), 259-272.

Tiwari,S. R., &ampKainth, J. (2014). MalaysiaAirlines: in search of a sustainable business model.Emerald Emerging Markets Case Studies, 4(7), 1-22.

TranViet, T. (2014). PublicRelations in enhancing brand values: case study Virgin Atlantic andVietnam Airlines.

Ramage,S. (2014). The 2014 Tragedy of the Missing FlightMH370 with Hundreds on Board Presumed Dead. CriminalLaw News,(68).

Xu,S. (2015). Therelationship between financial performance and safety in the aviationindustry: A worldwide perspective(Doctoral dissertation, Concordia University).