The Airlines Industry

1. The Airlines Industry

Air travel has emerged to be one of the main transportation for people and products since the year 1903. 1903 marks the year that the Wright brothers invented the first successful airplane. During both World Wars, government subsidies and demands for new airplanes vastly improved techniques for their design and construction. Following the World War II, the first commercial airplane routes were set up in Europe. Over time, air travel has become so commonplace that it would be hard to imagine life without it. The airline industry, therefore, certainly has progressed. It has also altered the way in which people live and conduct business by shortening travel time and altering our concept of distance, making it possible for us to visit and conduct business in places once considered remote.

The hundred-plus years following the invention have brought about a revolution in the way people travel. The airline business is not only used for the sake of transportation but also a source of income to thousands of people. Airlines vary in size, from small domestic airlines to full-service international airlines. Airline services can be categorized as being intercontinental, domestic, regional, or international, and may be operated as scheduled services or charters.

Airport capacity, route structures, technology and costs to lease or buy the physical aircraft are significant in the airline industry. Other large issues would be the weather, fuel cost and labor wages. Airlines also earn revenue from transporting cargo, selling frequent flier miles to other companies and up-selling in flight services. But the largest proportion of revenue is derived from regular and business passengers. Business travelers are important to airlines because they are more likely to travel several times throughout the year and they tend to purchase the upgraded services that have higher margins for the airline. On the other hand, leisure travelers are less likely to purchase these premium services and are typically very price sensitive. Growth in Malaysia’s dynamic aviation market is set to accelerate in 2017 owing to aggressive expansion by all four of the main Malaysian carriers – AirAsia, AirAsia X, Malaysia Airlines and Malindo Air.

2. Background and Operations of Malaysia Airlines System (MAS) Corporation

Malaysia Airlines Berhad (MAB) which is previously known as Malaysia Airline System Berhad (MAS) is our Malaysia’s national flag carrier. It operates primarily from Kuala Lumpur international airport and also from Kota Kinabalu and Kuching which are the secondary hub. Khazah Nasional, the government sovereign wealth fund is the owner of MAS had expressed its intention to purchase remaining shares from the minority shareholders for RM 27 sen each and de-list MAS from the Malaysia’s stock exchange to renationalise the airline in August 2014. Firefly and MASwings are the

subsidiaries of MAS. Firefly home bases are Penang International Airport and Subang International Airport while Maswings operates flights on inter-Borneo flights.

The airline was first incorporated in 1947 and was named as Malayan Airways Limited. Its first headquarter was at Singapore. Before the separation of Singapore Airlines and MAS, both are collectively known as Malaysia Singapore Airlines (MSA) in 1966. In 1972, both airlines were separated and formed their respective flag carriers. Among the award they had received are “The World’s 5- Star Airline’ by Skytrax (2009, 2012, and 2013) and “Asia’s Leading Airline” by World Travel Awards 920120, 2011, and 2013).

The dark moment for MAS began in 2014. It lost two aircrafts which are only five month apart from each incidents.  MH 370 went missing on March 8, 2014 and was carrying 239 people from Kuala Lumpur to Beijing. The flight was yet to be found and the 239 people are presumed death. After 5 months, on July 17, 2014 another flight which is the MH 17 was shot down over Ukraine. The flight was carrying 298 people and was flying from Amsterdam to Kuala Lumpur. None survived the incident. Prior to these incidents, MAS had maintained a very well safety records. The only case that occurred prior to these two incidents was on 1977 where Flight 653 was hijacked and 100 people were death. These two incidents had significantly affected the financial position of MAS badly. This resulted in loss of RM576.11 million in the third quarter ended on September 30, 2014 compared to net loss of RM375.44 million a year ago.

Following this, Khazanah had proposed a 12 point recovery plan for MAS on August 29, 2014. This plan includes formation of new company and workforce reduction. This plan expects MAS to achieve sustainable profitability within three years of delisting by the end of 2017. In January 13, 2017 The Star published an article that says “Malaysia Airlines recovery plan on track”. Managing director Tan Sri Azman Mokhtar said that the five-year recovery plan, after its 28 months of implementation, was on track and on schedule (The Star, January 2017).

3. SIGNIFICANT FINANCIAL RATIOS

LIQUIDITY RATIO

Table 1: Liquidity Ratio of Malaysian Airlines Berhad (MAB)

Liquidity ratio is basically used to test a firm’s ability to pay off its debt obligations and margin of safety. In the above table, the current ratio of MAB been decreasing from 1.17x (2009) to 0.39x (2011) but has increased to 0.8x in 2013. However, on average the trend for current ratio has been decreasing over the years. On the other hand, the quick ratio’s pattern was also the same as current ratio. In whole, both current and quick ratios have been decreasing below 1 from 2009 to 2013. It shows that MAB is not in a sound financial position since their current debts exceeding the current assets. MAB is undergoing serious financial health problem.

DEBT MANAGEMENT RATIO

Table 2: Debt Management Ratio of Malaysian Airlines Berhad (MAB)

Debt Management Ratios are used to measure the firm's use of Financial Leverage and as a benchmarking to avoid financial distress in the future years to come. Based on the above table, MAB’s debt to total assets has been fluctuating from 2009-2011 and has started decreasing from 2011 (91%) to 2013(81%). Overall, MAB’S ratios over the years fall below 1, which indicates that MAB assets funding is coming mainly from equity. Somehow, it is noticeable that MAB’s ratios are closer to 1 which can indicate that they do finance considerable amount of assets on debt. However, it is mainly due to the inclusion of operational liabilities such as sales in advance of carriage and trade payables which they use as going concerns to fund their day-to-day operations of their airline business and aren’t really debts in the leverage sense of this ratio.