MALAYSIA AIRLINES: THE MARKETING CHALLENGE AFTER MH370 ANDMH17

MAS was the national carrier of Malaysia. The company started asMalayan Airways Limited and had its first commercial flight in1947. After the separation of Singapore from Malaysia, the formerpartners formed separate entities in 1972, and were independentlybranded as Singapore Airlines and MAS. The larger part of MAS’sshareholdings (69.4 per cent) was retained by the Malaysiangovernment’s sovereign wealth fund, Khazanah Nasional Berhad.8MAS’s two subsidiary airlines, Firefly and MASwings, operated ondifferent routes; Firefly operated only between tertiary cities inMalaysia and its two home bases, while MASwings operatedinter-Borneo flights.9 Committed to customer service, MAS hasreceived many awards, including a five-star rating from Skytrax andthe title of “world’s leading airline to Asia” at the World TravelAwards.10 MASkargo and MASCharter, the other subsidiaries, operatedcargo and charter flights, respectively. The airline’snon-aeronautical services included maintenance, repair and overhaul(MRO) (see Exhibit 1).

First Phase of Loss

In 1997, the Asian financial crisis brought the expansion of MASto a halt. Reports revealed that much of the company’s growth hadbeen ego-driven and without efficient management.14 During thisturbulent phase, the organization suffered a loss of RM260 million.The airline reduced its losses by 63 per cent in FY1998/99, but thetrend turned downwards again. There were subsequent losses of RM417million in FY2000/01, and RM836 million in FY2001/02.15

Second Phase of Loss

The second phase of loss occurred in 2005. Although the businesssaw an increase in passenger traffic (10.2 per cent) and passengerrevenues (10.3 per cent) as compared to 2004, MAS still incurred aloss of RM1.3 billion. The main reasons for this decline included adecrease in cargo revenues in comparison to the previous year (4.2per cent) and an increase in the various cost overheads, whichprimarily consisted of increased fuel prices (40.4 per cent),handling and landing, MRO, and widespread assets unbundling (WAU)charges and leases.16

Turnaround Phase (2005 to 2007)

Management realized that a business turnaround was needed tosustain MAS. Starting in 2005, the senior management team decidedto draft a new blueprint to drastically improve the situation. Atthe end of 2005, Idris Jala was inducted as managing director toimplement the business turnaround plan. While publicizing therestructuring plan, Jala was quoted as saying,

We are dedicated to the creation of a company that will be asource of pride and admiration for its employees and indeed all itsstakeholders. The Malaysia airline of tomorrow will maintain itsfivestar product, have a competitive cost structure in the region,be renowned as being one of the best places to work in Malaysia,have closed much of the revenue performance gap to our peers, andwill return to profitability in 2007. We can do this, and wewill.17

After the plan was put into practice, MAS announced a profit ofRM851 million by the end of 200718 — far beyond the expected targetof RM300 million. The restructuring exercise emphasized the keyareas of pricing, revenue management, route rationalizing,rescheduling of flights and tweaking the operating model (frompoint-to-point services to hub and spoke).

Third Phase of Loss

MAS recorded a massive loss of RM2.52 billion in 2011, due to anincrease in fuel (25 per cent) and nonfuel expenses (50 percent).19 Although revenues improved marginally from RM13.5 billionin 2010, to RM13.9 billion in 2011, the higher fuel and non-fuelexpenditures — namely, the redelivery of aircrafts (RM602 million),impairment of freighters (RM314 million) and stock obsolescence(RM179 million) — pushed the organization towards another loss.20As part of a major restructuring of the leadership team, Yahya wasappointed managing director and group CEO in September 2011.21

Subsequent Turnaround Phase

Led by its new CEO, MAS implemented various initiatives inresponse to its losses, such as route rationalization. Thererouting exercise enabled the airline to reduce available seatkilometres, one of the key performance indicators (KPIs) in theaviation industry, by 6 per cent. The company posted a net profitof RM51.4 million for the fourth quarter of 2012, a turnaround fromthe year before when the company was running at a net loss of RM1.3billion.22 Yahya stated, “We continue to gain traction in multipleinitiatives that focus on increasing revenue and managing costs.The results are very encouraging for our teams who have worked hardthroughout the year.”23

Although aggressive pricing improved the seat capacity andprotected the market share of MAS, the weakening of the nationalcurrency increased the operating cost of its expanding fleet. Theairline recorded a loss of RM375.4 million in the first half of2013.24 Yahya expressed his concerns: “We are extremelydisappointed with these results, which emphasize the need tomaintain our focus on cost control and drive improved efficiencyand performance across all divisions.”

EVENTS IN 2014 The MH370 Disaster

MAS flight 370 was an international passenger flight departingfrom Kuala Lumpur and bound for Beijing. The airplane vanished onMarch 8, 2014, after losing contact with air traffic control withinan hour of taking off. The plane carried 227 passengers of 15different nationalities and 12 crew members.25 The searchoperation, supported by numerous nations, started in the Gulf ofThailand and expanded to the South China Sea, the Strait of Malaccaand the Andaman Sea.26 A week-long investigation concluded that theairplane had diverged from its original route plan.27 Thus, thesearch area was expanded to the Southern Indian Ocean (WestAustralia).28 The internationally supported investigation teamsused various tools, such as satellite communication, hydroacousticdata and ping detections, and considered possible in-flighthappenings, such as a power failure, an unresponsive crew andpassenger/crew involvement, to rule out various explanations. Afteran extensive search of all likely locations, no debris wasretrieved. None of the locations could be declared the crash site.Although the lack of information gave rise to many wildspeculations about the disappearance of the aircraft, flight MH370was eventually declared as having fallen into the Southern IndianOcean.29 The hunt for MH370 was the most expensive search everundertaken, with costs reaching as high as US$100 million.30Unsurprisingly, the tragic disappearance had an enormous impact onMAS’s post-performance figures. The company’s stock pricesdeclined, booking rates plummeted, cancellations increased31 andthere were even boycotts by travel agents in China.32

The MH17 Tragedy

Just 131 days after the MH370 disaster, MAS suffered yet anotherblow. On July 17, 2014, flight MH17, en route to Kuala Lumpur fromAmsterdam, was hit by a surface-to-air missile while flying overEastern Ukraine near the Russian border.33 The conjecture was thatthe aircraft was brought down by pro-Russian separatists withweapons provided by Russia.34 The killing of 298 passengers, 66 percent of whom were citizens of the Netherlands, was announced as thedeadliest air incident35 and the worst civilian airline shootdownin aviation history.36 In light of this catastrophe, variousairlines, including Aeroflot, Transaero, Air France, TurkishAirlines, Virgin Atlantic, Lufthansa and S7 Airlines decided todetour around Ukrainian airspace.37

The two unforgettable tragedies, along with other competitiveand operational difficulties, left MAS in a vortex of challenges.What immediate strategy could the leadership team use to countersuch obstacles?

THE IMPACT OF TWO DISASTERS

The 2014 catastrophes had deeply impacted each member of thebusiness value chain. MAS employees were in a state of emotionalshock. The president of the flight attendants union reported, “Someof our members cannot fly because they have been affectedmentally.”

MAS stock prices dropped drastically (13 per cent)39 after theMH17 tragedy, and the impact of the crisis was felt throughout theworld. The markets in the United States and Europe witnessed adecline. Chris Weston, an IG market analyst, noted, “Today is goingto be a pretty ugly day.”

Apart from MAS, the stock process of other global airlines alsorecorded a downturn. Some of these losses included the stocks ofDelta Air Lines (by 3.4 per cent), United Continental (3.9 percent), China Eastern (2.2 per cent) and American Airlines (3.3 percent).41 Overall, MAS lost US$148 million in the first quarter of2014. The loss included the cancellations or delays of more than30,000 bookings after the first disaster.

Further impacts of the MH370 and MH17 tragedies includedincreases in insurance premiums, particularly for flying overconflict zones such as Syria, Iraq and Afghanistan. Bypassingconflict areas and taking longer routes to reach destinations wouldsubstantially increase the fuel and other costs. As per the clausesof the international treaty, MAS was legally responsible fordisbursing US$175,000 per person impacted by the tragedies, for atotal of more than US$40 million.44 Beyond these costs, employeesalaries, union pacts and catering agreements would have to berenegotiated to help overcome this challenge. How could MAS regainits position as one of the finest airlines in the world in order toretain and attract customers?

MALAYSIA: THE HUB Tourist Destination

Malaysia was known for its plethora of tourist attractions. Itsrich history, culture and natural attractiveness made it an idealvacation destination. In 2012, the United Nations World TourismOrganization listed Malaysia as the 10th-most visited country,46and it had been witnessing a consistent increase in the number oftourist arrivals since 1998.

Tourism had been cited as a recession-proof industry, as bothdomestic and international travelers commuted throughout the year.Offers of affordable airfares by low-cost carriers emerged as animportant enabler in promoting Malaysia as a popular touristdestination. The rising demand for medical tourism, ecologicaltourism, luxury tourism and business tourism had propelledMalaysia’s acceptance as a preferred tourist destination across theglobe. Tourism had been designated a national key economic area bythe Malaysian government. The government started the “Entry PointProject,” which included the removal of import duties, to help ineventually positioning Malaysia as a popular and duty-free shoppingcountry. Its geographical proximity to China and India also helpedin increasing the flow of tourists.

The conducive legislative environment was one of the criticalcontributing factors in promoting tourism in Malaysia. Theincreased focus on medical tourism had also furthered economicgrowth. A government controlled agency called the MalaysiaHealthcare Travel Council was introduced to supervise and promotehealthcare-related travel. Malaysia attracted 236,836 foreignpatients in 2012, generating RM751 million in value sales. Tofurther improve business tourism, the Malaysia Convention andExhibition Bureau (MyCEB) had been reinforced. To provide potentialtravelers with holistic entertainment, the Malaysia MegaBiodiversity Hub created many initiatives to develop and promoteecological tourism in Malaysia.48

Travel and Tourism: Future Potential

In 2013, travel and tourism directly contributed RM70.4billionto Malaysia’s gross domestic product (GDP) (7.2 per cent of totalGDP) and this figure was anticipated to increase by 7 per cent in2014. From 2014 to 2024, travel and tourism was expected toincrease by 4.4 per cent per annum to eventually reach RM115.4billion (7.6 per cent of total GDP) in 2024. Similarly, the totalcontribution of travel and tourism to the country’s GDP was RM158.2billion (16.1 per cent of GDP) in 2013, and was predicted toincrease by 6.8 per cent in 2014; the evaluation would reachRM262.5 billion (17.3 per cent of GDP) in 2024.

Moving in a phased manner, MAS planned to choose countries thatmay be prioritized as part of its restructuring plan. Data showsforecasted arrivals by country of origin from 2014 to 2017, withSingaporean and Indonesian nationals expected to make up thehighest number. Singapore would provide the highest-spendingtourists .Table shows that air travel would be the preferred modeof travel in the country. MAS, being the national carrier, couldtarget a maximum share of this expected increase in air travel byincoming tourists.

The situation was equally promising in terms of departures. Thenumber of passengers seeking overseas departures was expected towitness consistent growth. Of the potential tourists, the majoritywould leave for vacation purposes, and most were expected to travelby air.

FINANCIAL KPIS AND THE FUTURE

After the first tragedy in March 2014, MAS witnessed a decreasein the number of travelers and in revenue passenger kilometres, acriterion which was often used in evaluating aviation performance.In line with the broader trend, the Samoan women’s rugby teamswitched from MAS to Thai Airways on July 27, 2014, for a World Cupevent in France.49 One travel agent who saw a cancellation rate ofmore than 30 per cent of MAS bookings in her office noted theanxiety of the passengers, saying they were “very, very afraidabout anything else happening again.”50 MAS recorded an after-taxloss of RM576 million at the end of November 2014.51

Of all the possible options, could a restructured pricingstrategy play a critical role in retaining and attracting customersto MAS? What specific new pricing structures would make customerschoose MAS over other airlines? How should the tradeoff ofdecreasing price and increasing value be managed? After so manytragedies and such a massive backlash, what actions must be takenin order to recover loyalty to the airline and recoup MAS’s losses?Yahya knew that the answers to these questions would decide whetherMAS would take off once again or remain grounded.

1. Faced with prospective restructuring options - namelyrebranding, a merger, bankruptcy, and privatization - How shouldeach be weighted to save MAS from monetary and non-monetarylosses?

2. Of the three likely pricing strategies (i.e. increasingvalue, decreasing ticket prices or undertaking both), which wouldyou choose if you were the CEO of MAS in order to retain andattract customers?

3. What is value communication? How can value communicationstrategies be classified? How could such a strategy be leveraged torestore MAS's market share?

4. Could change management bring about the desiredtransformation of MAS, particularly in terms of customerperception? In what contexts could change occur?

5. Bearing in mind potential of the travel and tourism industryin Malaysia, can diversification into this arena help MAS retainits market share?