Business Plan

The Experience of Malaysia

Airlines
Name: Hamad Abdul-hakim
Alsharksi
022141031
AE555 EPM

Abstract
Malaysia Airlines (MAS) is the Malaysian
national air carrier. It was incorporated
during the early days
of air travel in 1937. From a humble
beginning, MAS has developed into a
renowned international
airline with award-winning products and
services. It managed to achieve cost
efficiency and operates
slightly below industry average. MAS has
gone through several changes in its
management over the
years and still survives. However, being a
national air carrier and government
owned, MAS has several
constraints in its operation where it has to
balance between political and social
obligations, and at the
same time consider its commercial
interest. Thus, some of the decisions on
,air service destinations
pricing structure and other business
factors cannot be made purely based on
commercial ground. This
had affected the profitability of the
airline. Furthermore, the global airline
industry was facing turmoil
since 11 September 2001 as a result of
significant decline in air travel demand as
well as the increase
in fuel cost. Without exception, MAS was
also badly hit and had recorded a
substantial RM 1.3 billion
loss in 2005. The bad market environment
at that time continues to hit MAS hard.
Hence, it was inevitable
for the airline to make drastic changes in
order to respond to the volatile business
.environment
Therefore, a real and radical business
turnaround plan was imperative for MAS.
,Introduced in 2006
the Business Turnaround Plan (BTP)
managed to bring MAS out of its financial
crisis within two years
of its implementation. This case highlights
the winning strategies and action plans
implemented by MAS
in the BTP that had successfully
turnaround this national air carrier from a
deep financial crisis. As a
result, from a substantial loss of RM 1.3
billion in 2005, MAS achieved a record-
breaking profit of RM
.million in 2007 610
Keywords
Business plan, Malaysia Airlines,
government owned, national air carrier,
business strategy
Introduction
The last decade has been very challenging
for the global air transport industry with a
major drop in air
travel demand (Ito & Lee, 2005). Although
the market was picking up and steady
growth was anticipated
in air traffic movements and world
passenger volumes, the industry players,
especially the airlines, were
facing operational challenges, such as
substantial increase in fuel cost and
,various other operating expenditures
eventually affecting their revenue (Cento,
.2009)
Inevitably, the increase in airline
operating costs had resulted in the
.increase in overall airfare structures
Whereas the overall aviation market had
become more competitive due to three
:major factors
the proliferation of low-cost carrier )a(
(LCC) market segment, (b) the Middle
Eastern market growth in
full-service carriers and (c) the resurgence
of the Asian full-service carriers. As a
national air carrier
operating in the international market,
Malaysia Airlines (MAS) had also
succumbed to this volatile market
condition and was suffering severe
operating losses. In the FY 2005, MAS had
registered financial
loss of more than RM 1.3 billion (‘The
MAS Way: Business Turnaround Plan’,
.2006)
In addressing this issue and in view of
these challenges, MAS had taken a radical
approach in its
operation and had formulated a business
plan in the year 2006 called Business
,Turnaround Plan (BTP)
which outlines their imminent recovery
plan to achieve better financial
performance as well as to redefine
their existing business practice that will
enable it to not only realize operational
profitability but also
ensure business sustainability. This plan
serves as a platform for future growth of
.MAS
Hence, the effort was imperative and the
execution of BTP was undoubtedly the key
to its recovery
that required complete focus and full
commitment from the whole organization
with their strongest
determination, in order to see these
initiatives, succeed. After less than two
years of implementing the
BTP, MAS had managed to become
profitable in its FY 2007 with RM 610
.million profits
This case study looks at the initiatives,
strategies and the winning formulas that
were adopted in piloting
MAS through its financial turmoil in 2005.
Based on secondary data, this case study
highlights the
key areas of concentration in its first BTP
that was able to bring this national air
carrier back to its operational
profitability. The focus and scope of this
case study is during the implementation
,of BTP in 2006
.and the outcome of BTP in 2007
The Historical Background of Malaysia
Airlines
The establishment of MAS can be dated
back to the golden age of air travel when
Malaysia was still
under the British colonization. This
establishment was the result of joint
initiatives between the Imperial
Airways, the Straits Steamship of
Singapore and the Ocean Steamship
Company of Liverpool that
proposed to connect two major cities,
Penang and Singapore, through the
provision of air service. On
October 1937, Malayan Airways 12
Limited (MAL) was incorporated and its
first commercial flight
started on 2 April 1947 holding a national
.carrier status
Within less than a decade, the local carrier
turned into international airlines. In 1963
the national carrier
changed its name to Malaysian Airlines
Limited and incorporated Borneo Airways.
From a single
aircraft operator, Malaysia Airlines grew
into a company with 2,400 employees and
a fleet operator using
the-then latest Comet IV jet aircraft, six
F27s, eight DCs and two pioneers (MAS
official website at
.)www.malaysiaairlines.com
With the separation of Singapore from
Malaysia in 1965, MAL became a bi-
national airline and was
renamed Malaysia-Singapore Airlines
(MSA). A new logo was introduced and
the airline grew exponentially
with new services to Perth, Taipei, Rome
and London. However, in 1973, the
partners went separate
ways. Malaysia introduced Malaysian
Airline Limited, which was subsequently
renamed Malaysian
Airline System or, in short, Malaysia
Airlines (MAS). Today, MAS flies around
37,000 passengers daily
to some 80 destinations worldwide (MAS
official website at
.www.malaysiaairlines.com)
Although it was facing challenging times in
its operation from financial perspective,
MAS still holds
its reputation as one of the best air
service providers. MAS has been a
frequent recipient of best practices
excellence awards. For the past 10 years,
MAS has received more than 100 awards.
The most notable
awards include the recognition by Skytrax
.UK and World Travel Awards (Table 1)
Awarded by Skytrax UK
World’s Best Cabin Crew (2001–2004, 2007, 2009)
Star Airline (2005–2007, 2009)-5
Economy Class Onboard Excellence (2006)
World’s Best Economy Class Award (2010)
Staff Service Excellence for Asia Award (2010)
Source: Adopted from Malaysia Airlines’
official website
(http://www.malaysiaairlines.com/hq/en/
.corporate-info/our-story
Html

Market and Business Overview

Based on the report by Airports Council
International (ACI), global passengers are
expected to surpass
billion by the year 2025. However, due 9
to market maturity in many countries
around the world, the
annual growth rate is expected to become
slower. It is also forecast that in general,
the world’s passenger
volumes will rise by 4 per cent annually.
The expected annual growth rates for
international flights are
higher than annual growth rate for
domestic flights (4.5 per cent for
international flights as against
per cent for domestic flights). 3.7
However, by 2025 the domestic markets
are expected to remain larger
than the international market with 5
billion passengers as opposed to four
billion passengers (Airports
.)Council International, 2007
According to Cento (2009), the challenges
faced by airline industry in the twenty-
first century was
exacerbated by several events which
:include
Terrorist attack in 2001 that generated •
.fear for air travel
The Iraq war in 2003 that created •
hassles to air travellers due to stringent
screening at the
.airport
The SARS epidemic in the early 2000 •
.that reduced the demand to travel by air
The development of low-cost carrier as •
an attractive alternative to price-sensitive
clients, especially
.during economic downturn
Increased competition as new business •
innovation developed that eased sales
through diffusion of
.the Internet and information technology
Although Asia was the third-largest region
in the world in 2006, by 2025 Asia is
expected to become
the largest aviation markets. This is due to
the rapidly growing economies of
countries like China and
India, which will also lead to the rising
number of passengers. Based on the
findings in MAS Business
Turnaround Plan (BTP), despite the
growth forecast, it seems that Asia will
face business problem similar
to that experienced by the West. Indeed,
some of the problems have already
emerged and is affecting
business profitability. Some of the factors
that affect MAS performance are as
:follows
Substantial Increases in Capacity .1
Some of the Asian carriers, as well as the
carriers that were operating in the region,
had procured
substantial number of long-distance
aircrafts. Singapore Airlines, Emirates,
Qantas and other airlines
have ordered large aircrafts, such as the
A380s and 777s. This may lead to highly
competitive
market as rivals are competing to serve
.common core routes across the region
Emerging New Markets .2
Government of many countries in the
region are compelled to embrace a more
open policy towards
local and foreign competition. It is
consistent with the changing business
environment in an aviation
industry with more liberalized air
transport policies, increased prevalence of
open-sky agreements
and the emergence of multi-national
bargaining units. For example, the ASEAN
open-sky
policy continues to create new avenue for
secondary airlines. These small-scale
secondary airlines
are able to penetrate the market of
.primary airlines
Stronger Competition from Foreign .3
Airlines
Foreign airlines like the European,
American and Australasian are MAS’
traditional rivals. Due to
intense competition within the industry at
their home market, these foreign global
players have
been forced to become more efficient,
and they manage to become much leaner
.in their operations
As a result of leaner processes, they are
able to lower their cost structure and
achieve efficiency in
decision making. This means that they
have become stronger and become even
tougher competitors
to MAS. In their quest for new growth
opportunities, they will search for stable
,skies in Asia
as their major targets. Historically, many
European and American airlines were
unable to serve
Malaysian market as they could not justify
the cost of operations and many had
indeed discontinued
their service in the late 1990s and early
2000s. However, due to their ability to
lower their cost
structure, they may return and service
Malaysian market, and this posed threats
.to MAS
The Emergence of Low-cost Carriers .4
at Regional Level
The emergence of low-cost carriers posed
major threats to MAS and other primary
carriers in the
region. Although low-cost carriers were
supposedly intended to serve different
,target markets
they are actually eroding the yield of
primary carriers as passengers’ demand
.has shifted
Furthermore, low-cost carriers have
begun to invest heavily to increase their
capacity in the effort
to serve new potential markets. As what
had happened to the airline industry in
,the US and Europe
these low-cost carriers have penetrated
and taken on primary carriers’ core
business markets
which include long-haul operations.
Therefore, with the aggressive emergence
of Air Asia in
domestic and regional markets, it caused
devastating effects on MAS’ business
yields. In this
respect, it is not impossible that Air Asia
may attempt to enter MAS’ core business
.markets
Increases in Labour Costs .5
In line with the Asian economic recovery,
strong traffic growth had been recorded in
this
region based on the report from the
Association of Asia Pacific Airlines (AAPA).
However, the
improvement in economy has inevitably
increased the cost of living, resulting in
the rise of labour
costs. In this case, MAS has experienced
increase of labour costs of up to 25 per
cent since 2003
and expect the labour costs to experience
a steady gradual increment in the near
.future
Increase in Maintenance and .6
Capital Costs
In the mid-1990s, MAS invested
extensively in the procurement of new
-fleets which include stateof
the-art Boeings and Airbuses.
Consequently, these aircrafts have
entered ageing phase and
require heavy maintenance. The average
age of MAS fleet is between 7 and 8 years
and taking this
into consideration, the annual heavy
maintenance incurred to MAS has
increased to 10 per cent
.since 2001
Given the above scenario, it was
imperative for MAS to look at its business
strategy. These factors not
only affected MAS but this adverse
condition also affected most of the major
airlines in this region, and
some are already hit hard. For example,
the Indonesian Garuda was badly
affected, resulting in the
inability to serve its debt, an indication
that it requires major restructuring in
order to survive. Another
example is Japan Airlines of Japan which
was reported to suffer a loss of about USD
193 million in
December 2005. These incidences can be
attributed to the continual rise of costs as
well as stiffer competitive
business environment. Hence, to stay
relevant in the business, companies need
to respond to
.dynamic changes in the industry
The ‘Business Turnaround Plan’ (BTP)
Business Turnaround Plan—The MAS ‘
Way’ is the framework designed to help
MAS manoeuvre
dynamic changes in its business
environment. It was a holistic approach in
piloting MAS out of its
financial turmoil, propelled by five thrusts
.as follow
Thrust 1: Flying to Win Customers
This was achieved through the
reconfiguration of network and product
portfolio to make sure MAS
had the capacity and resources to be a
top-tier player in every market it serves by
giving emphasis to
serve the customers better. Inability to
respond to customer needs and
preference will force MAS out of
market. MAS strongly upholds this thrust,
and as it exerts itself onto this thrust, it
has developed a viable
policy that was able of continuously
capture the market. MAS had to run away
from the traditional fact
that customers chose them as they had no
other option. But it had to strive in
ensuring that people choose
its product and services based on the
quality of product offerings, such as
competitive prices and efficient
flight timings. However, MAS has to
acknowledge that its domestic customer
base is small (as a result of
small home market), and it may not be
able to match the scale of its competitors
in the neighbouring
countries. Flying to win customers is a
business strategy based on customer-
.orientation strategy
Thrust 2: Mastering Operational
Excellence
This was achieved by building a distinctive
operating capability inimitable by its
rivals. Through
this strategy, MAS improved its internal
business processes that enabled it to carry
out similar activities
in a more efficient way which is better
than its rivals. This thrust focused on
,increasing the quality
productivity as well as increasing
employee and customer satisfaction. By
,mastering operating excellence
it reflects MAS’ conviction that it
possesses outstanding operational
capabilities that outshine
.its competitors
Thrust 3: Superior Financial Management
Based on Profit and Loss
This was achieved by persistently raising
profits with the cooperation of an
outstanding finance function
with the commitments to achieve
transparency, financial accountability and
performance orientation in
its business. Under the BTP, the company
must be efficient in its financial
management so that it would
be able to deal with market volatility and
at the same time able to delve into new
prospects. In order to
realize this, it had to divert all its
manpower resources towards achieving
the objective of profit-making
with the aid of a top-notch financial
.management
Thrust 4: Unleashing Talents and
Capabilities
This thrust is consistent with the saying
that ‘employees are company’s greatest
assets’. MAS believes
that its intellectual capital are committed
and has the capability to achieve
whatever tasks are assigned
to them. Under this BTP, the management
acknowledged the importance of working
together, hand-inhand
with employees to ensure healthy
working environment is nurtured so that
employees strive to the
fullest to achieve organizational
.objectives
Thrust 5: Winning Coalitions
In this respect, MAS realizes that success
is impossible if it does not recognize the
.role played by others
Hence, MAS needs to gain and preserve
support from various shareholders and
stakeholders, namely, the
employees, contractors and suppliers,
government and investors. MAS strongly
believes that ensuring its
long-term success requires recognition
from various parties who are directly or
indirectly affected by its
business operations. These five thrusts are
.further elaborated in Table 2
The BTP Outcome
MAS’ BTP has been cautiously designed to
achieve financial performance and lead to
growth in future
in the wake of its major financial crisis.
Accordingly, internally it is expected to
create a working environment
and a culture where the employees are
entrusted to promote an environment
that enables all
talents to contribute to the success of the
.whole organization
MAS has been experiencing low
profitability prior to 2006. MAS’ pressing
profitability challenge
was the result of low yield. It had to raise
RM 4 billion in 2006 to survive in the
business. Although
MAS’ products and services are award-
winning and in terms of competitiveness,
MAS was only slightly
Table 2. The Five Thrusts of Business
Turnaround Plan
Thrust 1 Broaden the Scope of Product Offering
MAS has been focusing on businesspeop
in the significant amount of investments
low seating density. That is why, MAS is w
class travelers. MAS found out that the n
not justify its investment, as the demand
consideration the market conditions, MA
targeting at non-business travelers and le
serving its existing business travelers and
.product offering
A Focus on Connecting Carriers to Gain M
One of MAS’ main challenges is to fill up
with the traditional rivals in the region, S
,passengers to fly with MAS, it has ventu
.it concentrated on winnable markets, w
This required MAS to adjust its flight sche
major destinations and ultimately able to
only materialize once MAS was able to en
which required bilateral negotiations. Wi
foreign destinations. This strategy also en
.same time intensify traffic volume
From Low-density Large Aircraft to Smal
Following its strategy to win more leisure
low-density aircrafts to increase smaller h
business and first-class cabin to dedicate
were also directed toward smaller aircraft
.MAS to offer frequent services to more d
A Focus on Leaner Operations
MAS found out that the economy-class m
business. Hence, MAS aligned its strategy
economy-class consists of those who are
 price. Hence, MAS must strategize its pri
to attract this market segment. In order t
is able to become leaner in its operations
become efficient. This is because there is
now prefer to purchase flight tickets onli
enable businesses to serve the customer
.trends by developing infrastructures to s
Thrust 2 A Focus on Precision and Error-free Busin
Over time, MAS delivered better and reli
precision in its operations against other a
and feelings to its customers. In order to
competitive pricing, it must maintain the
was able to achieve efficiency in the oper
incidence of missing baggage and faster c
enables the company to become more effi
.lead to the elimination of unnecessary c
A Focus on Cost Efficiencies
Prior to BTP, every year MAS had experie
determined to keep cost at bay and to en
larger productivity increment. MAS emph
ability to control costs and increase in lab
.cost efficiencies
A Focus on Labour Productivity
MAS acknowledged that the productivity
.also found that the company was actual
Hence, in order to become competitive, M
same time work towards increasing their
predicaments that staff rightsizing can in
.has been able to operate with fewer em
A Focus on Efficient Suppliers
In order to become competitive, MAS ha
it deals with suppliers. This was achieved
work towards achieving common interes
risks associated with doing business. Und
 give business only to those who are qual
.common business objectives
Thrust 3 An Emphasis on Profit Making than Ima
Overall, the company’s profitability must
process. Political favor, the company’s im
,influence the decision. More emphasis w
hence re-focus on routes, businesses and
the BTP, it struggled to transform the wa
.discontinue non-profitable activities
An Emphasis on the Outcome based on K
Traditionally, monitoring and reviewing w
reviewing operational performance is ne
management has come out with precise
are expected to achieve certain fiscal tar
top management will continuously challe
towards continuous improvement. Conse
.instantaneously and immediate remedia
 An Emphasis on Profit and Loss through
MAS’ overall operations, activities and pe
work towards maximizing profit and mus
.from merely a focus on accounting to a s
A Focus on Business Sustainability
Even under the volatile economic climate
survive and be relevant in the industry. T
Plan, MAS was returned to profitability w
.will ensure its sustainability
Thrust 4 A Focus on Manager as Leader rather th
.Through this transformation process, on
Managers are expected to be leaders wh
with administrative activities. MAS devel
career advancement to its staff for their
.system which eliminates career advance
An Emphasis on Teamwork
MAS discovered that it had been working
 culture and created working environmen
to be made based on the inputs gathered
empowerment which means teams have
.expected to be responsible and liable fo
Transparency and Integrity
Under the BTP, the management had bec
better informed of the company’s activiti
.transparency principle which promotes h
Thrust 5 Winning Coalitions
Thrust five emphasizes the importance o
the business. In this respect, MAS realize
materialized without the assent of others
.shareholders and stakeholders are very
Source: Adapted from ‘The MAS Way—
Business Turnaround Plan’
.(http://www.malaysiaairlines.com/)

below industry average, but it kept losing

money as it was unable to compete with
rivals which managed
.to reap higher returns
The management of MAS was devoted to
making the MAS brand become a national
pride and a
basis of admiration by its employees and
stakeholders alike. MAS envisaged to
preserve its five-star
product and services, operate in the most
competitive cost structure in the region,
become one of the
best employers in the region and increase
revenue to be comparable to or earn
more than that of its
competitors. Hence, through the
implementation of BTP, it managed to
.return to profitability in 2007
MAS believes that the success of BTP was
the result of determination and concerted
efforts of its
people who were able to make the
business profitable, and in fact, the
.outcome goes beyond their expectations
BTP implementation was not an easy task
as it required drastic, unconventional
changes
that required the management to make
difficult, tough decision. The management
believes that this
unconventional way of doing things
coupled with sheer hard work of its
people have contributed to the
success of BTP. The BTP managed to turn
the company into profit-making, and most
importantly, it has
transformed MAS into a tough and
resilient company. Experience has been
the best lesson for MAS to
be able to withstand external pressures
and assertively able to tap into new global
.opportunities
Government-linked companies (GLCs)
Transformation Manual Guide was
referred to as the basis of the
.development of MAS’ BTP
Discussion: Lessons Learned
This case study is a highlight of MAS’
experience of how it bounced back from a
deep financial crisis in
to a record-breaking profit in 2007. 2005
The secrets of this major success are
outlined in the BTP which
was introduced in 2006. The
implementation of this turnaround plan
involved drastic strategies with a
holistic approach that requires full
orchestration and participation of all the
internal and external parties
involved in MAS operations, comprising
the management, employees, business
partners, contractors
.and suppliers
Being a government-owned national air
carrier operating in a highly regulated
,business environment
it is very challenging for MAS to fulfil its
social and political obligations, and at the
same time it has to
consider its commercial well-being. This is
further worsened by the external market
situation with the
emergence of low-cost carriers, reduced
demand for air travel as a result of
,terrorist attack in 2001
greater competition and escalating
operating expenditures. With a
substantial loss in 2005, MAS was
heading for bigger losses and had come to
a juncture where it had to make a drastic
turnaround or otherwise
.have to bear a major failure
From profit and loss perspective, MAS had
four internal major problems which are
,low-income generation
incompetent network, low productivity
and issues related to cost control. Hence,
BTP has provided
strategic approach and action plans to
navigate MAS out of these problems. With
some drastic
actions and tough decisions throughout its
implementation, the BTP had managed to
bring MAS out of
.its financial crisis within merely two years
The future of global airline industry is
characterized by highly competitive and
.challenging industry
Based on the reports by Airports Council
International (ACI), the number of global
passengers is
expected to rise by 4 per cent annually for
the next 20 years. Annual growth rates for
both international
and domestic markets are very promising
which indicate a good prospect for future
.business growth
MAS will continue to face challenges from
global business. Globally, with more
liberalized market and
open-sky policies, the global airline
industry will become more competitive. In
view of this, it is forecast
that secondary airlines and low-cost
carriers will compete head-on with
primary national airlines for
passengers. In this relation, MAS will have
to strengthen its competitiveness and
become more dynamic
in order to face global rivals. Locally, MAS
is facing stiff competition from its
domestic competitor, Air
Asia, the low-cost carrier that is well
known for its low cost and operational
.effectiveness strategies
Conclusion
Since its inception during the golden age
of air travel, MAS has gone through its
glorious era and also
survived several turmoil's in its years of
operation. MAS’ great achievement and
excellent level of service
has been given due recognition by several
international bodies, as it has won several
service and best
.practices excellence awards
Being a government-owned national air
carrier operating in a heavily regulated
industry, MAS has to
balance between its political and social
obligations, as well as commercial
requirements. As a primary
national carrier, MAS does not possess
total liberty to operate based on free
market principle, which
concerns on-profit maximization. MAS
carries the obligation to serve the political
and social obligations
that sometimes restrain its profitability
objectives. In other words, although MAS
is commercially
driven, it is also obliged to carry out
specific social responsibility, and it is
expected to juggle between
serving national interest and commercial
interest. As a government-linked
company, having to serve the
nation by taking up non-viable routes is
one of the major challenges faced by
.MAS
In conclusion, like other national air
carriers, MAS had undergone a severe
financial turmoil due to
the market situation. In 2005 MAS had
recorded a substantial loss of more than
,RM 1.3 billion. Hence
the BTP was formulated and introduced in
2006 as an immediate remedy to rescue
MAS from its financial
crisis. Within merely two years after
implementing the BTP, MAS had managed
,to become profitable
with a record-breaking profit of RM 610
.million
This case is an analysis of the initiatives
and action plans taken by the
management of MAS in driving
this airline out of its financial turmoil. It
also highlights the winning formula with
full orchestration and
business strategies formulated by the
management through the implementation
.of the BTP
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.Heidelberg: Physica-Verlag
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/http://www.malaysiaairlines.com/my/en
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