Malaysia Airlines - Orient Aviation

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COVER STORY The recovery of Malaysia Airlines from near bankruptcy to profitability in less than 18 months is an object lesson in hope for struggling carriers. Idris Jala, the former oil industry executive who has become the Kuala Lumpur flag carrier’s white knight, explained to TOM BALLANTYNE how he has achieved the near impossible. Jala works his magic It may not be pretty, but Malaysia Airlines (MAS) managing director Idris Jala’s style is damned effective. MAS was on the ropes after losing a record RM1.3 billion (US$377.9 million) in 2005 when he was headhunted to perform miracles and turn the airline around. The former Shell oil executive took off the kid gloves and started to work hard and fast ... and a little dirty. In a bid to reduce costs dramatically and improve yields, he slashed jobs and cut routes. He exposed malpractices by introducing a ‘whistle blowers’ programme. Problem solving? “We stick people in a room and they stay there burning the midnight oil until it is solved,” said the 48-year-old boss. And the result of this tough love? Some would say a miracle. In just 18 months MAS has been transformed from a basket case with record losses to an airline forecasting anything up to a RM 700 million profit this year. There are no simple answers about how to revive a struggling state-owned international airline. But Jala needed to find them. And he realised one thing very quickly: any hope of success hinged on two critical issues, reducing costs and increasing yields. To achieve the first Jala did the expected. He set out on a relentless drive to re-engineer the business, trim expenses across the board, increase productivity and rationalize the network. To tackle the second he did the unexpected. In an industry heavily reliant on sophisticated information technology systems to cope with every aspect of the business, he turned off MAS managing director, Idris Jala: has turned the airline around in 18 months 24 ORIENT AVIATION JULY/AUGUST 2007
the computer that runs the carrier’s pricing structure and seat inventory and did it his way. Why? Because Jala had a theory the sophisticated network revenue management systems used by airlines to cope with the industry’s incredibly complex fare structure were perpetuating low yields. “There is probably no other industry anywhere in the world that has a pricing mechanism as complex as the airlines,” said Jala. “I come from the oil business and no way is it anywhere near as complex as the airlines’ [price structure]. If you have 118 routes, as we do, there are something like 2.5 million fare permutations and these are changing on a daily basis.” That is why, he explained, every airline today runs its pricing structure and seat inventory through sophisticated IT systems. Jala backed his judgement, forming a team whose job was to take the system off line and produce massive spreadsheets covering every route the carrier operated. They had to look at 2.5 million fares on a daily basis, compare them with competitors and manually adjust them to ensure they were competitive. “This was a massive and very detailed piece of work. I think the reason we are seeing increases in yield is not because we found a simple way to do it, but just by hard work,” said Jala. The proof was in the bottom line. When Jala took the helm, passenger yields were 22.6 sen (US cents 6.5) per revenue passenger kilometre (RPK). At the end of September last year they had risen to 25.3 sen per RPK. And by the end of the first quarter this year (March 31) they had reached 26.1 sen. “Yields have been our greatest improvement in the past 18 months. Every quarter they have risen with a total increase of 27% in yield. I think very few airlines can generate that kind of increase in such a short period of time. We think there is still scope for raising it further,” said Jala. But improving yields was only part of the solution. In 2005, MAS lost RM1.3 billion in just nine months (it had shortened its financial year because it was switching to a calendar fiscal year in 2006). “This company had a very, very tough time in 2005. We had a cash Blowing the whistle One innovation Jala introduced from his previous company would send shivers down many a spine, but the MAS boss makes no apologies – a whistle blower programme. As Jala explains, the idea is for the programme to provide a “confidential internal channel for employees to raise their concerns about malpractices, irregularities and negligence affecting MAS”. “[In the beginning] we had about 100 whistle blower cases. We have certainly unearthed a lot of cases of malpractice and we have issued warning letters to staff that were involved. We also had contracts that were renegotiated as a result of this,” said Jala. “The good news is that people now know there is an opportunity [to report complaints] other than through normal channels, that you can do it anonymously via the whistle blower policy. It is a very important deterrent to malpractices. “When I first joined there were a lot of poison pen letters. We had them almost every day for the first three months. We don’t have them today. And there is less rumour circulating, although you can never remove that entirely.” crisis. We felt if we didn’t change the way we ran the business we would run out of cash and go bankrupt. It was not a funny matter,” he said. By February last year, just three months after taking control, Jala had drawn up a business plan aimed at reversing the carrier’s financial performance to the tune of RM1.1 billion by the end of the year. “That comprised RM710 million from revenue and yield improvement and another RM370 MASKargo: record profits last year million from cost reduction, to reduce the loss to [an estimated] RM620 million,” said the chief executive. “At the time people didn’t believe we could swing this in a year because the share price fell and languished at two ringgit 60 sen (76 US cents) for six months. But we relentlessly monitored our profit and loss (P & L) performance. In fact, we monitored the P & L and the cash flow on a daily basis and there are not many companies that do that.” In the end, despite rising fuel prices and higher aircraft leasing costs, Jala’s plan exceeded all expectations. The estimated loss of RM620 million loss was slashed further to RM136 million. Today, the share price is around six ringgit. MAS beat all its quarterly and full year targets. This, said Jala, was down to yield improvement, a RM973 million increase in revenue and a RM665 million reduction in costs. In the year prior to his arrival, MAS’s costs had ballooned 50%. By the end of the third quarter last year MAS had moved into the black recording a net profit of RM240 million to September 30. And the profits have continued to flow onto the balance sheet. There was income of RM121 million in the fourth quarter, which reduced the loss for the full year to RM133.8 million. The good times continued this year with a first quarter profit of RM133 million. JULY/AUGUST 2007 ORIENT AVIATION 25
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