MAS has just reported a loss of Rm 349 million in the 2nd quarter 2012 which is smaller than the loss of Rm 526 million in the same corresponding period last year. This is still twice as much as the first quarter loss of Rm 171 million. The total loss for the first half of 2012 is now Rm 520 million. The company has suffered losses in every quarter of the last 6 quarters.

As usual, there are the incorrigibly optimistic cheerleaders for the airline who are unable to see the writing on the wall. These ‘experts’ are still touting that the company is in recovery mode and will soon be returning to profitability.

The market however sees the prospects for the airline differently. During the past few days the airline share has been scrapping the one ringgit level. This is the lowest share price that the airline share has recorded during the past five years. Without the support of government-linked funds and left to market forces alone, it is possible that the share price of MAS will drop even more.
Many investors still holding on to the share must surely be hoping that MAS will not try to ‘break the record’ loss of Rm 1,262 million set in 2005 or that achieved in 2011 when the loss was Rm 2,521 million.

For non-investors, the recurring losses of MAS are a great mystery especially when they are compared with the performance of SIA. I972 Malaysia-Singapore Airlines (MSA) became MAS and SIA. In the last 10 years from 2002- 2011 SIA reported a total pre-tax profit of Singapore $13,992 million, averaging S$ 1.4 billion per year.

Should the government continue to bail out MAS?

The most recent losses bring the total losses of MAS to at least over $3 billion. In any normal business, any company incurring large and sustained losses would have closed down or gone into bankruptcy. This has not happened to MAS yet but I think the time is right – many observers will say, long overdue – for the government to withdraw the open cheque book extended to MAS.

When planning the future of MAS, it is important that the government avoids not only the past mistakes 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. The fact is the airline industry requires huge capital and produces poor returns on capital employed. Hence, year after year, many airlines produce poor profit margins or 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 move in 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. This factor however is less found now as many governments have learnt not to come to the rescue of their airlines.

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. This may make sense politically but it is poor economics.

Let MAS fly or crash without further interference or delay is the only way forward in the national interest.

This article is posted by Koon Yew Yin, the philanthropist tycoon.

    6 replies to "Why is MAS still flying?"

    • […] 2 years ago, I wrote and published the article “Why MAS Is Still Flying”. It is important and worthwhile to reiterate some of the points I mentioned in my article. Quote: […]

    • seoguy

      I don’t agree that the government should close down MAS. A complete revamp (and sacking) of the top management? Yes, but close shop? No. Lets follow what Obama did when he bailed out the US motor industry to profitability.

      • Netmask8

        I agree that MAS should continue revamp or change the top management until get the company become profitability.. No need to close SHOP, as MAS is country’s icon brand and image, just like any country have its own brand to advertise/promote/marketing/tourism..

        MAS’s losses for past few qrtr/years were due to budget airlines’s strategies.. But the loss is quite common sense + justify with many emergence of budget airlines in the regions. That’s why Fire Fly was also established.

        However, for our country budget airline with many new planes orders/purchases and the BIG HUGE DEBT credit line given by banks, any wrong move by budget mgmt or bad economy/recession hit again, will drastically brings a big major financial difficulty.

        Perhaps, Mr. Koon Yew Yin should analyst the 1) DEBT to Equity Ratio, 2) Liquidity Ratio, 3) Current Ratio, 4) Acid-Test Ratio of similiar airline industrys in same country/region.. Huge Debt(AA) will makes you very uncomfortable compared to small operating losses incurred by MAS.. AA are very proud to mention have many airplanes and destinations, but their debts are big and eating their operating profits in very long long period.

        Just a little thought.

    • vincebeh

      May I know where do you get Koon Yew Yin’s articles from? I’d like to read more about his articles. Thanks.

      • KCLau

        Hi Vince,

        Koon Yew Yin is a regular contributor here.

    • Netmask8

      Greetings + G’Day,

      With many budget airlines(Tiger Airways, JetStar, Air Asia ..etc.etc) it is very hard to complete in term of price/cost .. That’s why MAS’s FireFly established to complete in Budget League..

      While in premium/international League, competition is even harder with SIA, Emirates, Qantas, Cathay Pacific ..etc..etc Differents Leagues, Differents Services, Different Classes, Different Passions ..etc..etc

      Why continue the business? National Pride? Personally, i think, it is very IMPORTANT to feed the majority (72% ppls in M’sia) and hope to become winner in coming GE while the minor hoping for changes/new environment.

      Just a thoughts. Feed the right class ppls and Gain from the major.

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