Tuesday, February 28, 2006

Initial Report Card For Idris Jala (MAS)
Not Good, Man... Not Good

As reported in The Edge Daily (28/2/06): "Malaysian Airline System Bhd (MAS), went deeper into the red with a net loss of RM1.3 billion for the nine months to Dec 31, 2005, is deep in all sorts of crises and needs to turn things around fast to avoid a complete collapse. Facing a “current cash crisis”, its cash of RM1.17 billion as at Dec 31 may be depleted by April and losses will total RM1.7 billion by end-2006, if it continues on its present course.It will need RM4 billion in cash that will be raised through internal and external sources to tide it through the crisis. Its banes include high operating costs and unprofitable routes. It posted a net loss of RM616.43 million in the third quarter ended Dec 31, weighed down by higher operating costs including fuel costs and additional provision relating to receivable and engineering spares, compared with a net profit of RM57.62 million a year earlier. Revenue was RM3.17 billion, up 4.5% from RM3.03 billion a year ago. For the nine-month period, net loss was RM1.26 billion compared to a net profit of RM216.91 million a year earlier. Revenue was RM9.08 billion, up 10% from RM8.25 billion. Idris said out of the RM4 billion needed, RM1.1 billion would come from cost-cutting measures, RM1 billion from short-term borrowings and RM2 billion from “long-term” government aid. "The fact that we have secured RM1 billion has put less pressure. All options are available. We are talking to Khazanah (Nasional Bhd) and the MoF (Ministry of Finance),” he said. "

My observations:

1) RM4 billion is needed to turn around MAS - Is there a better way to use the RM4 billion, because I can get RM200 million in interest a year without risking the RM4 billion at all. What kind of risk/reward scenario are we looking at? Have we looked at the opportunity cost of using RM4 billion to TRY and turnaround MAS? Why didn't MAS go to the capital markets for the funds, if foreign lenders are going to reject the fund raising, why aren't we? Are we comfortable with the situation MAS is in? Are we throwing good money after bad money?

2) Jala said he will NOT consider job cuts but will drop unprofitable international routes, and will raise prices for domestic routes - How can Jala rule out job cuts, the company is bleeding operationally, job cuts are inevitable. As for raising prices for domestic routes, that is so against the tide because many of the domestic routes MAS operates in are also handled by Air Asia (AA) and AA charges even lower and still makes a profit, and here you go to raise prices on these routes to attract customers - fuzzy logic, not going to work. An additional 10% of zero is nothing. Cutting unprofitable international routes - jumping the gun here. MAS is not the only international airline with unprofitable routes, by cutting them in a knee jerk reaction, it will be difficult to win back customers and routes - all airlines have this problem, they solve it by joining mini-cartels in alliances to do code sharing, obviously MAS has not been strong in this area at all - go and appoint a top notch person/team that is strong on networking/alliances/routing capability.

3) Root of problem - High operating cost and unprofitable routes - have addressed the latter, as for operating cost, MAS needs to learn from AA or SIA. Does MAS have specific performance targets for each department or cost ratio analysis, boy, do they need key performance indices to be efficient. There is probably no mechanism currently to provide the efficiency feedback. Again, please consider buying a small stake in AA and let AA run the domestic routes.

Jala did not mention about how most of the losses is due to mismanagement of fuel oil exposure. This is not the first year MAS is operating as an airline, fuel price volatility is part of the business. If you can incur such huge losses on fuel oil, that means the company has taken huge bets on the direction of the price of fuel oil, one way or another. MAS must realise they are not in the position to trade fuel oil. The fact that Jala has been quiet on this issue makes me think his hands are tied and he does not wish to shame the previous management.

What about the previous management, why is there no censure, board of review, investigation into what caused the downfall of MAS? Surely, somebody must be interested to see if there was CBT or gross negligence on the part of management - no sound, backbenchers on holidays - that is why GLCs will always under-perform, Khazanah can lead the way to turn the tide by punishing "bad management" (if that was found to be true). When professional managers can just up and leave and leave behind a mess, with no inquisition - where is the incentive to perform? It will be the same cycle over and over again.

I have written about Jala before, and his performance for announcing measures to counter the blood letting misses the mark almost on all points. Even if you get the RM4 billion, it will be wasted. If nothing changes, soon MAS will come asking for more money again, then what? After a few years, when nobody will lend MAS any more money, the government will have to step in and privatise the company - at the expense of Malaysians. We are not blaming Jala for the actual losses, nothing was his fault, but he was brought in to correct those problems - man, Jala you are offering the wrong medicine for the disease. Jala, you did not address the right problems and when you did address the right problems, you give the wrong cure (and I am being nice, Simon Cowell would have slaughtered you). Initial report card: D-.

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