In Part 2 of  the AirAsia-MAS share swap article the writer contends that the government must have a clear cut policy. There is thus an urgent need for the government to come out with a comprehensive and transparent air transport policy.

 

 

Unlike the RJR Nabisco takeover with its fierce battle for control of the company, for control of Malaysia's skies, AirAsia was allowed to enter the MAS gates without hindrance.

The gates protecting MAS's control of Malaysian skies were opened wider and wider for AirAsia over the past 10 years due to inconsistent government policies.

Regulation determines airlines' fortunes

International air transport operates within the framework of the 1944 Chicago Convention for International Air Transport.

Governments enter into bilateral agreements setting out the landing rights, restrictions on capacity and pricing. Sectors within a single country are normally denied to foreign airlines.

klia kl international airport This restriction is called cabotage. It is recognised that cabotage is the prerogative of the domestic carrier.

The system of bilateral agreements between two governments has led to the aviation industry to be highly regulated.There has since been a change towards deregulation and liberalisation.

Nevertheless, the industry remains one where regulation plays an important role.

Regulation is thus a critical determinant of an airline's performance. It can determine how competitive the market is as well as constrain an airline in its choice of fares, capacity and frequency.

Most governments impose entry controls which are usually applied to particular routes.

Most governments usually permit one airline to operate a route. The government therefore plays a critical role in determining the fortunes of an airline by deciding on the routes to be given to the airlines.

Golden service takes a beating

MAS's finance and operation problems to a significant extent are due to the inconsistent and contradictory government's air transport policy. Such decisions gave the MAS Golden Service a beating while AirAsia became the Golden Child.

The main asset of any airline is its route networks. The government first allowed AirAsia to compete with MAS and then had given MAS's domestic routes to AirAsia and had its route networks reduced while AirAsia boosted theirs.

MAS's social and political obligations

In the fight with AirAsia, MAS had a handicap. As the national carrier it had to compete against a private owned pure commercially motivated AirAsia.

klia airport 141105 mas aircraft at the terminal When Malaysian Singapore Airline (MSA) split in 1972, the Malaysian government formed Malaysian Airline System (MAS). MAS as the country's national carrier provided domestic flights at government controlled prices.

In performing its social and political obligations, it flew commercially unprofitable domestic routes. One of them is the rural air services. The airline suffered losses as a consequence.

In return it made money in the lucrative international flights. Thus the international routes were a form of cross subsidy for the domestic sector.

It was thus assumed that MAS as national carrier performing national service will enjoy exclusive rights to both domestic and international routes.

However, the government allowed DRB-Hicom to establish AirAsia to operate international flights. The original AirAsia management lost money.

The present management of AirAsia then obtained approval from the government to take over and operate domestic and international services as a low cost carrier.

This caught MAS by surprise because it never imagined that the government would allow such competition.

Gov't meddling cost MAS

In the absence of clear policy MAS assumed it would operate domestic services subject to fares being controlled by the government.

MAS share price Idris Jala said in the MAS Business Turnaround Plan (BTP) that studies showed incumbent airlines suffered a 30 percent revenue decline when low cost carriers were allowed to enter the market.

What MAS did not expect was that the government would not allow it to mount an effective challenge to the low cost competitor. The government did not allow MAS to lower its fares.

As a result, AirAsia gained market share with its low cost strategy. This continued until 2007 when the national airline was allowed to determine its domestic fares. By then the red ink had sunk in.

Idris Jala warned in the BTP that political and social obligations presented the most overwhelming and significant constraints to MAS's ability to transform.

As a government controlled airline, MAS does not always have the freedom to act according to pure market principles.

MAS is constrained from freely changing destinations, routes and pricing within the domestic sector.

Even though there are no explicit constraints on international routes, MAS does not have the flexibility to make changes to destinations, schedules and pricing.

Idris Jala said that while MAS was fully committed to serve the nation's interest, this did not necessarily fulfill the national airline's commercial interest.

At the time of the BTP, 66 of the 114 international routes were unprofitable and 114 of the 118 domestic routes were making losses.

Under the BTP, MAS proposed to the government that it be allowed to run the domestic routes and be given a free hand to operate them like AirAsia.

The government, however, on March 28, 2006, chose instead to allow AirAsia to share 19 trunk routes with MAS while the former was given 96 domestic routes to operate exclusively. This was called the domestic route rationalisation plan.

Survival of fittest

Chan Kong Choy, the transport minister at that time, said the government wanted two national champions.

air asia airasia aircraft The minister forgot that the aviation business is a tough business. There are no different divisions like a football league.

There is only one where the fittest survive. In the battle for survival only one is finally left standing.

MAS would have a tough time to implement the BTP but the domestic route rationalisation plan did not help. AirAsia was given 96 routes which included the rural air services.

When they proved difficult to operate, AirAsia gave up and MAS was asked to resume the operations after one year.

airasia stewardess 091107 03 MAS had handed over to AirAsia the planes used for operating the rural air services. When MAS resumed operations, 4 out of 7 Fokkers and 1 out of 5 of the Twin Otters were not airworthy.

They were cannibalised and cost RM40 million to be repaired. MAS will always be called upon to undertake routes that commercial firms will not touch.

MAS had to perform social and political obligations and will be required to do so in the future.

AirAsia being a private owned entity with the objective of making maximum profits for its shareholders does not operate under such constrains.

The government in changing policies and priorities without taking into consideration the difference between the two entities is forcing MAS to compete under a handicap.

This is part of MAS' perennial financial and operation problems that have required three government bail outs.

Air transport policy needed

It cannot be denied that MAS has many problems and not all of them are due to government policy. It has a high cost structure, poor productivity yield and bad corporate culture.

The latest results show the transformation talked about in the BTP has not occurred or had taken root.

disabled airasia 040807 fernandez talking AirAsia's management has done very well in running a low cost operation, employing a highly motivated workforce and operating an efficient organisation.

The government in making its policies must take into consideration that MAS being government owned is financed by the tax payers' money.

Public funds should not be put at risk in requiring a national carrier having to serve social and political commitments to compete with private carriers serving purely commercial considerations.

The government must have a clear cut policy. There is thus an urgent need for the government to come out with a comprehensive and transparent air transport policy.

The policy should provide clear directions for the efficient development of the airline industry without imposing undue burden on the tax payers and consumers.

The government having allowed a rival airline to compete with MAS, cannot abdicate its responsibility to ensure that they are able to compete on a level playing field.

It cannot run away from this responsibility by forcing the two competitors enter into an unstable alliance. The AirAsia-MAS alliance is in truth an artificial solution to an artificial problem.

The government needs to work with both MAS and AirAsia to resolve the issues which the government created. The government must remember it is not operating on OPM. It's the People's Money.

PART1: Airlines share swap: Barbarians past the gates

 

WILLIAM LEONG JEE KEEN is Member of Parliament, Selayang.