Case Study: Malaysia Airlines

Introduction
Malaysia Airlines (MAL) is the government owned national airline of Malaysia that became
internationally infamous for all the wrong reasons when two catastrophic events impacted its
business within the space of five months. Whilst the world is familiar with the disappearance
of Flight MH370 in March 2014 with 239 people aboard, and the downing of MH17 carrying
298 people over Ukraine in July 2014, fewer people are aware of the significant financial
trouble that MAL was facing leading up to these tragedies.

Background
MAL is an international passenger airline operating from its home base, Kuala Lumpur
International Airport and with a secondary hub at Kuching. Other than the airline, the group
also includes aircraft maintenance, repair and overhaul and aircraft handling operations
(Wikipedia).
In 2012 Malaysia Airlines are in a position of crisis. The company has incurred a net loss of
RM 1.2 billion in the first three quarters of 2011 alone. Almost 40% of the total routes in
which the airline operates are incurring losses. The aviation market was becoming
increasing competitive with the growing entrance of low cost carriers such as Firefly and
AirAsia, Middle Eastern full service carriers such as Etihad, and the resurgence in strength
of Asian full services such as Garuda, Japan Airlines and Thai Airways.
In the previous six years MAL had not focused on the premium segment of the market with
the major marketing efforts of MAL focused on tactical sales promotion instead of brand
building. Rather than build customer loyalty this strategy was perceived by consumers as a
reduction in quality of their service. This, together with an increasing cost structure, led to the
low level of income generated.
Despite MALs position, demand for air travel services in Asia was strong. Throughout Asia
the disposable income of people was increasing; access to credit becoming easier, and
travel was becoming increasingly popular.
In 2012 MAL embarked on a fundamental remodelling of its core business in order to
achieve its new vision of becoming a preferred premium carrier.
 Consolidate routes to profitable networks: In early 2012 the airline slashed seven of
its least profitable routes to focus on those frequented by premium travellers. This
strategy was aimed at regaining financial stability which, when achieved, allowed
them to expand their network to cover world’s major economic regions and hubs.
 Win back customers: The company changed its focus from discounting to offering a
premium travel experience. It took delivery of 23 aircraft each with state of art
passenger amenities. A new sales and marketing plan aimed to win back previously
loyal customers - especially Malaysia nationals, as well as attract new premium
passengers.
  Focus on cost: The new aircraft not only had improved passenger features but also
had significantly improved efficiencies allowing MAL to immediately lower fuel bills
and maintenance expense.
 Restructure: The business structure of the company had become very complex with
a group of entities operating together - core full service airline, MASholiday, MAS
aerospace Engineering, training, catering, and ground handling. The company
streamlined its operations and focused on its prime business activity - flying.
 Launch of new regional premium airline: In 2012 the company launched a new short
haul brand which flew entirely on the new Boeing 737-800. The smaller Boeing size
enabled the airline to fly to more destinations more efficiently. A separate
management structure was brought in to focus on the unique needs of the premium
travel customers.
 Alliances and partnership: MAL join the extensive global network and aimed to
increase passenger traffic with the help of combined networks and infrastructure.
 Branded customer experience: The customer became the top priority of the airline
with an improved experience provided at all touch points pre-flight, in-flight, and post-
flight.

The Impact of the Disasters

In 2014 Malaysia Airlines experienced two catastrophic events that were largely out of their
control. Occurring so close together, and being of such impact, the disappearance of Flight
MH370 and the downing of MH17 has significantly affected the profitability of MAL. Bookings
evaporated overnight as customers opted for other airlines, despite many acknowledging
that the two events were largely beyond MAL's control. With spiralling debt and no sign of
consumer confidence returning in the short term business analysts around the world
questioning whether Malaysia Airlines can ever recover.

Is Recovery Possible?
Malaysia's state investment firm Khazanah Nasional is the primary investor of MAL with
almost 70 per cent ownership.
Khazanah Nasional is the investment holding arm of the Government of Malaysia entrusted
to hold and manage the commercial assets of the government and to undertake strategic
investments. Khazanah was incorporated under the Companies Act 1965 on 3 September
1993 as a public limited company. The share capital of Khazanah is administered by the
Minister of Finance, a body corporate incorporated pursuant to the Minister of Finance
(Incorporation) Act, 1957.
Khazanah has a nine member board comprising representatives from the public and private
sectors and the current Prime Minister of Malaysia is the Chairman. Khazanah has stakes in
more than 50 companies with net asset value estimated in 2012 at US $29 billion.
Khazanah has been charged with spearheading the recovery of Malaysia Airlines and have
announced that the key strategy for rebuilding is complete privatisation of the company.
"Nothing less will be required in order to revive our national airline to be profitable as a
commercial entity, and to service its function as a critical national development entity"
Khazanah said in a statement.
The complete buy out is estimated to cost US$436 million and in early August 2014 the
stock of Malaysia Airline System was delisted, the first step to going private.
The Risk Management Challenge
You are the Board of Khazanah Nasional. MAL is now completely privatised and under your
direct control. Your responsibility is to now create a Risk Management Strategy to protect the
organisation as it commences its rebuild.