Best thing for Malaysia Airlines may be to go bust

What a difference four months can make. In March, Malaysian leader Najib Razak was widely criticised for mishandling the search for a Malaysia Airlines jet that disappeared with 239 people on board.

His government’s unsteady initial response to the Flight MH370 tragedy deeply tarnished the Malaysia brand.

Critics are seeing a very different Najib after Malaysia Airlines lost a second Boeing 777 on July 17: Steady, circumspect and statesman-like.

As world leaders bickered with President Vladimir Putin over Russia’s alleged role in the shooting down of Flight MH17, Mr Najib quietly brokered deals with rebel leaders in Ukraine to gain access to the bodies of 298 people and the plane’s black boxes.

The diplomatic coup has gone a long way towards erasing memories of the MH370 fiasco.

It will be much harder for Malaysia Airlines to recover its own reputation, however. Most observers acknowledge that the airline bears no blame for the loss of MH17. But as a business, it was teetering well before the crash, bleeding about US$1.6 million (S$1.99 million) a day.

A month earlier, state-run parent Khazanah Nasional reckoned the unprofitable carrier only had enough funds to last another year. Now, many passengers are sure to declare Malaysia Airlines a personal no-fly zone, whatever the facts.

Maybank analyst Mohshin Aziz was quoted widely last week opining on a Malaysia Airlines “curse”.

OPTIONS FOR THE AIRLINE

Privatisation is the main option being considered. The process may indeed enable chief executive officer Ahmad Jauhari Yahya and his team to strengthen the airline’s balance sheet and improve competitiveness. But I worry it will not address the underlying issues — it will prolong them.

The airline’s problems are the same as those that ail Malaysia Inc. Revenues lag costs because of insular thinking, inefficiency, fat supplier contracts and militant labour unions.

Long shielded from global competition, staffed with political cronies and hobbled by inefficient supply chains, its employees generated a paltry US$220,000 of revenue on average in the past three years compared with US$524,800 at Singapore Airlines and US$245,000 at Thai Airways.

Those headwinds may intensify now because privatising a government-linked company essentially means bailing it out. There will be less urgency to challenge the status quo, not more.

Bankruptcy is the better option. It would free management to make the bold moves needed to turn things around: Scale back the airline’s global ambitions; scrap many routes; face down powerful union officials who have managed to scuttle previous overhaul efforts; and perhaps rebrand the airline.

The process worked for Japan Airlines. After JAL filed the largest bankruptcy by a non-financial Japanese company in 2010, the company slashed enough jobs, flights and debt to relist and prepare for seeking a credit rating to sell corporate bonds again.

Malaysia Airlines’ troubles are more daunting in some ways. It faces cut-throat competition from Tony Fernandes’ low-cost AirAsia and has an unparalleled image crisis on its hands. But JAL demonstrates that the bankruptcy of a flag carrier is not the end of the world.

The stumbling block, of course, is pride. Malaysia is a still-developing nation eager to tout homegrown symbols such as Proton cars and the Petronas Towers, which dominate the Kuala Lumpur skyline.

If sound business thinking were at play in Putrajaya — Malaysia’s administrative capital — the national carmaker would have been shuttered 10 years ago. Letting Malaysia Airlines go bust would not be any easier for Mr Najib’s party.

Complacency, though, carries its own risks. It is true that Malaysia is currently growing at a healthy 6.2 per cent pace.

The country has done well building physical infrastructure and raising living standards. But Putrajaya should not let itself be lulled by these metrics. By not implementing reforms for the future — foremost among them, scrapping the race-based preferences that benefit ethnic Malays only — Malaysia risks standing still while countries such as Indonesia and the Philippines race forward.

This dynamic, as I have written before, helps explain why Malaysia’s entire economy is not flying higher. Jettisoning Malaysia Airlines now, forcing the kind of painful restructuring the company has avoided for so long, would send a powerful signal throughout the economy.

If the airline can root out its deepest problems, it might not only rehabilitate its own image, but Malaysia’s, too. BLOOMBERG

ABOUT THE AUTHOR:

William Pesek is a Bloomberg View columnist based in Tokyo who writes on economics, markets and politics throughout the Asia-Pacific region.