Wednesday, 29 October 2014

As Malaysia Airlines bleeds out, twin tragedies are still a question mark

Malaysia Airlines has had a profoundly difficult year. Between two harrowing air disasters and the company’s precarious financial woes, the national carrier faces daunting challenges as it attempts to restructure and recover its reputation as a leading regional airline. Despite poor commercial performance in recent years, it maintained a stellar record for decades as one of the Asia-Pacific's safest and most reliable airlines.

Malaysia Airlines has suffered the two worst disasters in modern aviation less than five months apart. Both incidents involved Boeing 777-200ERs, widely considered being one of the safest aircrafts. Over six months have past since flight MH370 disappeared on route from Kuala Lumpur to Beijing. A multinational search team has scoured remote southern stretches of the Indian Ocean, unable to find even a trace of debris from the aircraft.

A preliminary report on the demise of flight MH17 released by Dutch investigators has failed to provide a wider understanding of the incident, leaving critical questions of culpability unanswered. The crippling impact of the two air disasters has forced Malaysia Airlines into accelerating a major restructuring effort to rescue the brand and return it to profitably by 2017, with plans to relist the company by 2019.

Nationalize or privatize?

As the flagship carrier, Malaysia Airlines is viewed as a symbol of national prestige and development. The state has played a vital role in using public funds to restructure the airline over the years. The key challenges confronting the carrier are competition from low-cost national and regional rivals, high operating costs, unprofitable long haul routes, and a bloated payroll.

The main question going forward is whether further nationalization or drastic privatization will more effectively resuscitate the airline. Khazanah Nasional, a state investment fund that owns about 70% of Malaysia Airlines, proposed a strategy to recover the national carrier, involving plans to take full ownership of the airline and the most stringent job cuts in the company's history.

Unlike the four previous attempts to restructure the airline, which reneged on plans to scale back the workforce under pressure from politically influential airline unions, the company intends to cut staffing by 6,000 jobs or 30% of the carrier's 20,000 employees. Malaysia Airlines has about 30 percent more staff than comparable airlines, and while the cuts will be painful, the status quo can clearly not be maintained under the prevailing circumstances.

Khazanah Nasional will channel around RM6bn ($2 billion) into reviving the carrier, buying out remaining stock from shareholders, layoffs and other restructuring costs, debt settlement and capital injections. Putrajaya claims these funds are an investment, rather than a bailout, expressing its intention to regain the funds when the airline returns to profitability. One can be forgiven for being skeptical of the carrier’s strategy, taking into account the shortcomings of previous restructuring attempts.

An accumulative sum of RM17.4bn ($5.3 billion) was injected into the airline between 2001 and 2014, and losses of RM8.4bn ($2.6 billion) were incurred nonetheless during that period. Malaysia Airlines reported a net loss of RM443mn ($140.8 million) for the first quarter of 2014. Second-quarter earnings following the unexplained disappearance of MH370 in March saw losses of RM307mn ($97.6 million). The second-half earnings are expected to be even grimmer in the wake of MH17, following reports from the airline that average weekly bookings had declined by 33 percent. The company has lost more than 40 percent of its market value this year and has not made an annual profit since 2010.

Shareholders will be meeting in early November to consider Khazanah’s selective capital reduction proposal plan before the recovery plan can go into effect. Although shareholders will be losing money by selling off their assets for lower prices than they purchased them for, the independent adviser AmInvestment Bank advised that they accept the offer, because without the proposed capital injection from Khazanah, the airline will go under and the share price will collapse. It’s better to lose a finger than to lose an arm.

As budget carriers like AirAsia, which was formally state-owned before being taken private, lead the Southeast Asian market, there are those who will view any further capital injection into Malaysia Airlines as an imprudent use of public funds. Khazanah itself has noted that the RM17.4bn used to restructure the national carrier could have helped improve education or provide water and power to remote villages. It also doesn’t make sense to refer to Khazanah’s move to take full ownership of the airline as a privatization since it is a government investment fund; it’s more like a de-facto nationalization.

At this stage, whether Malaysia Airlines is nationalized or privatized is a periphery concern: the real question is how can it be restructured to viably compete with discount airlines that make up some 58 percent of the air traffic in Southeast Asia? There are concerns going forward that Khazanah lacks the expertise needed to micromanage the airline and implement the kind of solutions needed to shift the balance back toward profitability. Additionally, there will be no minority shareholders to scrutinize the management and provide helpful input under Khazanah’s full ownership of the carrier.

Structural adjustments are needed to make the airline leaner and more efficient if it has any chance of surviving. Long unprofitable routes that require heavy subsidies should be cut with renewed focus on competitively priced medium-haul services within Asia. The fleet of Boeing 777s and Airbus A380s can be sold off and replaced with more fuel-efficient A330s and the A350s designed for shorter distances.

If employees and unions were better informed about the dire ill health of the airline, perhaps they would agree to voluntary pay cuts for a limited period if it meant retaining job security. Under the current circumstances, bonuses should be suspended and the balance sheet should be carefully scrutinized. In addition to rolling out a public relations blitz to repair the image of the company, Malaysia Airlines should emulate some qualities of their rivals’ business models, but differentiate themselves by offering greater value for money to the extent that a full-service airline can provide.

No answers, no closure

As the enquiry continues into the demise of Malaysia Airlines flight MH17 over the skies of eastern Ukraine in July, the preliminary findings of the international investigation have done little to develop a clearer understanding of the incident. The parties responsible for bringing down the aircraft, and exactly what means were utilized to do so, have yet to be firmly established.

The Dutch Safety Board (DSB), which is leading the investigation into the MH17 crash, released a preliminary report in September, which sought to analyze air traffic control and radio communication data, assess the inflight break-up sequences, and conduct a forensic examination of the wreckage. Assigning culpability to any party was not in the report’s mandate; the authors of the text use highly guarded and ambiguous language to explain their findings.

Due to the continued obstruction and contamination of the crash site as a result of military hostilities, it is highly questionable whether further forensic examinations can be carried out under such protracted circumstances. Another barrier is a lack of political will to consider certain findings, due to the politically charged nature of the Ukrainian conflict, which has resuscitated Cold War-era hostilities, bringing US-Russia relations to new lows.

Though Ukraine, the United States, and other countries have accused Russia of supplying the rebels with surface-to-air missiles and orchestrating the shoot-down of MH17, those governments have yet to declassify their intelligence on MH17, refusing even to discuss the sources and methodology behind their findings. Comments by Russian officials at the UN and elsewhere indicate that Moscow feels its side of the story has been neglected and overlooked.

The satellite images and military data made public by Moscow, which suggest a completely different series of events, have been entirely absent from the media’s narrative. The Dutch findings conclude that the aircraft abruptly ended its flight after a large number of “high energy objects” penetrated the aircraft from the outside, but does not identify the nature of those objects.

Dutch investigators have wholly omitted findings from radar data submitted by Moscow that purportedly showed a Ukrainian Su-25 fighter jet flying in close proximity to MH17 prior to it disappearing from radar.  BBC’s Russian language service broadcasted a report shortly after the disaster where several local eyewitnesses claimed to see a military aircraft in the sky flying in the vicinity of MH17 as it exploded and broke apart. The investigation has a responsibility to address the question of the Ukrainian fighter jet and its possible role in the incident.

The case of MH370 has proven to be the most baffling incident in commercial aviation history and one of the world's greatest aviation mysteries. Despite the largest multinational search and rescue effort ever conducted, not a trace of debris from the aircraft has been found, nor has the cause of the aircraft’s erratic change of trajectory and disappearance been established.

After a fruitless search in the southern Indian Ocean where the plane is believed to have crashed after running out of fuel, the Australian Transport Safety Bureau leading the investigation has admitted that investigators are not entirely sure if the current underwater search is being conducted in the right spot, although Malaysian officials have been more optimistic.

Tim Clark, the CEO and president of Emirates, questioned the methodology used by investigation team to pinpoint the crash site, claiming it was downright “suspicious” that a Boeing 777 could disappear without a trace with its communications being disabled. Clark also raised concerns that the public was not being told the whole truth about the cargo manifest.

The families of the passengers and crewmembers onboard the missing aircraft recently renewed calls for Putrajaya to release the full cargo manifest, which they say was only partially released some two months after the incident, claiming that there were missing gaps in the document. The manifesto claimed that the cargo contained 2.4 tons of lithium ion batteries and radio accessories and chargers consigned for Motorola, and 4.5 tons of mangosteen.

IGP Tan Sri Khalid Abu Bakar promised the media that authorities would investigate the mangosteen supplier after the Federal Agricultural Marketing Authority claimed that the fruit was not in season, nor were there any orchards in Johor where the mangosteen supplier, Poh Seng Kian, is based. The way in which certain information has allegedly been withheld from the public domain has worked to stoke skepticism that investigators must address. 

Inmarsat, the British satellite telecommunications company responsible for analyzing MH370 satellite data, has also come under scrutiny from independent satellite experts and engineers that found glaring inconsistencies in their analysis. The Atlantic magazine published a report in May based on the analysis of Michael Exner, founder of the American Mobile Satellite Corporation, Duncan Steel, a physicist and visiting scientist at NASA’s Ames Research Center, and satellite technology consultant Tim Farrar.

The team of analysts used flight and navigation software to deconstruct Inmarsat’s analysis, and determined that Inmarsat’s data contained irregular frequency shifts, and even when the values were corrected, Inmarsat’s example flight paths failed to match and proved to be erroneous. In other words, these analysts believe there may be grounds to believe that the search is being conducted on the basis of a false mathematical conclusion.

The authors of the report attempted to reach Inmarsat and other relevant bodies, but they claim that the company did not reply to requests for comments on basic technical questions about their analysis, leading them to determine that “Inmarsat officials and search authorities seem to want it both ways: They release charts, graphics, and statements that give the appearance of being backed by math and science, while refusing to fully explain their methodologies.”

While the investigation teams are doing their level best to establish accounts of the two Malaysia Airlines disasters, there is undoubtedly a dimension of political pressure involved that can create various barriers to understanding. The astonishing nature of these two incidents demand that uncomfortable scenarios and questions be addressed and examined. The media still has an important role to play.

This article was appeared in the October 28 and 29, 2014 print edition of The Malaysian Reserve newspaper.

Nile Bowie is an independent journalist and political analyst based in Kuala Lumpur, Malaysia. His articles have appeared in numerous international publications, including regular columns with Russia Today (RT) and newspapers such as the Global Times, the Malaysian Reserve and the New Straits Times. He is a research assistant with the International Movement for a Just World (JUST), a Malaysian NGO promoting social justice and anti-hegemony politics. He can be reached at