What is the post-MH370 future for Malaysian Airlines?

Hello dear readers. As we see more and more anger directed at the shambolic handling of the missing MH370 flight, from texting the families in China the latest bad news to the fact that the families of the crew are only offered half the amount of hardship money offered to the passengers, it is hard to imagine a worse possible time for any airline. Beyond the immediate aftermath of recovering the missing MH370, this airline faces a PR disaster on an epic scale. I would like to paint three possible scenarios of the future of Malaysian Airlines (MAS).

Scenario 1: Business as usual (after the recovery)

Case study: Air France 

MH370 has been compared a lot to AF477 - the Air France flight that crashed into the Atlantic Ocean on a flight from Rio de Janerio to Paris back in 2009. All 228 on board were killed. Mind you, this came just nine years after the Concorde AF4590 which crashed on take off at Paris CDG airport, killing a total of 113 people. Both were tragic accident within living memory, but today it is pretty much business as usual for Air France. They have managed to recover from those disasters despite many questions having been asked about how this could have happened in the first place. They had a PR disaster, they dealt with it, lessons were learnt and despite the awfulness of both disasters, Air France customers have still stayed loyal to the airline and have not deserted Air France for other airlines. A recent report from the BBC shows Air France - KLM back in profit last year (2013).

Part of the reason why Air France as a business was able to survive these two terrible disasters is because France has a large enough domestic network. It is just about big enough to justify domestic flights (Paris to Nice is about 85 minutes, Paris to Toulouse about 80 minutes, Paris to Ajaccio about 100 minutes). Heck, I've even had to fly from Paris to Lyon before and that took just under an hour. Despite the competition from many European budget airlines and an efficient high speed rail network (TGV), the domestic network is still rather lucrative for Air France. Mind you, the domestic network is not just for the local French market. Say if I want to fly from Singapore to Brest (a town in the NW France), the obvious choice would be to go via Paris with Air France. Singapore Airlines would only get me as far as Paris and then I would still need to find another flight to Brest with another airline, possibly Air France.

Nice, France

It is entirely possible that Malaysian Airlines can survive this episode and get back to where it was - Malaysia is a big country with East and West (peninsular) Malaysia separated by the vast South China Sea. So if I wanted to fly from London to Kuching in Sarawak, flying MAS via KL would be the obvious choice - though I am sure flying via Singapore with SIA might be possible (SIA doesn't fly to Kuching but SilkAir does and they are a wholly owned subsidy of SIA). Then again, SIA doesn't fly to every single small airport in Malaysia, so that is still a good market for them especially since SIA isn't cheap at all - MAS is still considered premium when compared to Air Asia domestically.

The fact is a country as big as Malaysia does need a national airline - Malaysians need to travel abroad, visitors want to come to Malaysia: there is a demand for this service and a willingness to pay for it. There is great infrastructure for air travel in Malaysia - KLIA is a stunningly modern and beautiful airport. The business case is there and has sustained MAS thus far. All they need is a good PR agency to guide them through the next few months and initiate a recovery - after all, a lot of the problems associated with the search for the missing MH370 has far more to do with the Malaysian government and military, rather than MAS per se. There will be hard times ahead for MAS but given time, it may just recover the way Air France did, especially if it can prove that it has learned many valuable lessons from this episode.

Can MAS recover from this episode?

Scenario 2: A much smaller MAS, many routes canceled 

Case study: Alitalia, the national carrier of Italy 

This is an interesting case study because Alitalia have not have a major air crash the way Air France did since 1990 - it got into big trouble through financial mismanagement and failed to turn in a profit year after year. Following a dip in demand post 9-11, Alitalia required many bailouts from the Italian government but by 2008, the Italian government couldn't sustain it any further and allowed Alitalia to go bankrupt. A group of investors bought up the old Alitalia and merge it with another airline Air One to create a new Alitalia - using the same logo and name. Hence people tend to make a distinction by talking about the 'old (pre-2008) Alitalia' and the 'new (post-2008) Alitalia'.

The old Alitalia had routes that spanned the globe - the new Alitalia pulled the plug on many long haul destinations like Australia, all South-East Asian destinations (including Singapore), most of their African destinations as well as many of their North and South American destinations. It underwent a period of consolidation: fewer routes, focusing on local markets, trying to bring the business back into profit rather than rapidly expanding and breaking into new markets. Did this new strategy work? Not really, in late 2013, it was facing bankruptcy and needed more government bailouts to stay afloat. Will they slim down even more in 2014 to try to break back into profit territory? Or might they go bust (again)?

Will consolidation work for the new Alitalia?

Could MAS go the same way? Possibly. MAS has already made losses in the last three years and with MH370 on their hands, 2014 is likely to be their worst possible year on record. Their share price has already plummeted and things are looking grim at MAS. Nonetheless, the Malaysian economy is booming (even if MAS is not) and the Malaysian government could sustain MAS by simply giving them a big handout each time they make a loss (which is exactly what has happened in the last few years). The Malaysian government is unlikely to allow MAS to go bust like that - it would reflect very badly on the ruling party and have implications on their popularity. They don't want to be known as the party that allowed MAS to go bust. It is between the devil and the deep blue sea: do you allow MAS to go bust (and face the fallout from it) or bail it out despite the fact that it is terribly mismanaged and hemorrhaging money? A smaller business is cheaper to bailout, hence MAS may be forced to consolidate and slim down as part of any bailout package.

Scenario 3: MAS will go bust, it will become history. 

Case study: Malev, the former national carrier of Hungary 

Hungary's former national carrier Malev went bust in 2012 - the government and the EU were not willing to bail it out and it became history as of February 2012. It was in so much debt from financial mismanagement that there was really no alternative by 2012. Today, Budapest, the capital of Hungary, is served by many international airlines and Hungarians simply have one less airline to choose from today. It was a tough choice for the Hungarian government - do you pull the plug on an airline that had been in operation for 66 years and effectively say, "we're going to be a country without a national airline", or do you continue to pour money into it and see the airline continue to make massive losses year after year? Well, the Hungarian government did eventually pull the plug on Malev - they had no choice.

It all boils down to economics at the end of the day.

Could MAS face the same fate as Malev? Well that all depends on just how much money the Malaysian government has got to pour into MAS to sustain it and that really depends again on consumer confidence. If passengers desert MAS en masse for other regional and budget airlines (of which, there are plenty in SE Asia), then MAS could face a big problem if they are flying planes which are half-empty. MAS also rely a lot on international business not visiting Malaysia: some of the passengers on MH370 were traveling from Australia to Beijing via KL and MAS is a relative cheap way to get from Australia to China. If Chinese travelers effectively boycott MAS, then that would represent a big loss for MAS. The anti-Malaysian anger in China today is at fever pitch at the moment, how long will it last?

With the angry protest at the Malaysian embassy in Beijing today, things could get a lot worse for MAS in China and we don't yet know just how bad things will get for them. Will this be something that will blow over in 6 months or will this have a far longer impact of the business of MAS in China? Will other passengers completely lose confidence in MAS? What is the impact on tourism in Malaysia in the coming years? Will the Malaysian electorate be happy to support a government that will bail out MAS despite everything that has happened? MAS could go bust if the economics (and not the politics) dictate that there is just no other alternative. You cannot keep the Titanic afloat after it has hit the iceberg.

Will MAS keep flying after this episode?

So there you go, that's my three scenarios for MAS. Personally, I think scenario 2 is most probable but you never know how this may all pan out. The final outcome really depends on what will happen over the next 6 months. What do you think is the most likely outcome? Would you gladly fly with MAS in the future? How will the Malaysian government respond? Please do let me know what you think, kindly leave a comment below. Thank you, terima kasih.