Pigs will fly : The Case against flag flying airlines

Sabina : A ghost of National Airlines passed

Sabina : A ghost of National Airlines passed

Malaysia Airlines is cutting 30% of it’s staff in an attempt to be viable business. It is getting a $2B bailout from the Malaysian Government and will de-list itself from the stock exchange. It will focus on becoming a regional routes which sounds like a smart business move: There is no need to fly everywhere and travelers accept changing at hubs.

The two disasaters were a factor in that it led to reduced number of passengers booking on them.

Khazanah [the investment arm of the Malaysian government]said there would be “significant changes to leadership” at Malaysia Airlines and that it would consider “global aviation industry executives” in its search for new talent. The current chief executive, Ahmad Jauhari Yahya, will remain as chief until July.

The government said it would carry out the restructuring by creating a new company with a “right-sized work force and work practices and contracts.” Malaysia Airlines has been burdened in recent years by contracts with politically connected suppliers.

The burden — and the risk — of the restructuring plan appears to fall heavily on the airline’s creditors. They will be offered a swap of the airline’s debt for shares of the new company, according to the plan. Among the airline’s largest bondholders is the government employee pension fund, known as Kumpulan Wang Persaraan, which, according to Friday’s announcement, agreed to swap 750 million ringgit, or about $240 million, for ordinary shares. The move is likely to be controversial because investors have long assumed that the debts of the state-controlled airline were guaranteed by the government.

Malaysian Airlines has not made a profit since 2010.

Quantas is another flag airline that is in financial trouble where a headline $2.8B loss was reported. That figure was mainly a statituary accounting write down but the problem is an underlying $646m loss which reflects their operating profits. Part of the problem is a price war with Virgin Australia but there are a number of inbuilt inefficiencies of Quantas structure as a National airline. Australian laws have limited the % of foreign ownership allowed – this limits its ability to raise capital – and obligates Quantas to maintain the majority of its operational and maintenance facilities in Australia.

With the deregulation of airline industry, why are Governments bothering to maintain National airlines? The Economist assessed this in an August 2014 article ” Flags of inconvenience : Why governments are so keen to keep their loss-making airlines aloft?”

Malaysia’s is not the only government that persists in keeping rickety airlines in flight. Italy raided the state’s coffers again last year to keep Alitalia going. Then, on the day of the Malaysia bail-out, Etihad, the flag carrier of the United Arab Emirates, agreed to inject a further €560m ($750m) into Alitalia in return for a 49% stake. A restructuring plan agreed at the end of July will keep Poland’s LOT in business—in return for $200m of taxpayers’ cash.

The drain on public funds has a long tradition. Airlines used to be regarded as a vital part of transport infrastructure, like roads or bridges. So, until the mid-1980s, governments owned most of the airlines, set fares and routes, and protected flag-carriers by restricting new entrants. But privatisation made air travel more competitive and liberalisation brought competition from low-cost carriers. Most airlines in state control have failed to adapt.

The exceptions are few. The thriving airlines of Singapore and Ethiopia, and the Gulf carriers, Etihad, Emirates and Qatar Airways, all benefited from government money but have been allowed to operate as commercial enterprises with minimal interference. Such entrepreneurial thrust is rare. Elsewhere, inexperienced cronies often dominate management. State employees frequently travel free. Many carriers are obliged to maintain loss-making domestic routes to please politicians. Olympic Airlines was forced to deliver newspapers for a pittance to keep the country’s press barons happy. The Greek national carrier went to the wall in 2009.

The Economist asks why they still prop them up: The basic answer is Politics and Unions.

It is surprising that Alitalia are still in business even thought it last made a profit in 1999. Air-France wrote off their investment in them. Eithiad has now a 49% stake in them. Good luck with that. Alitalia’s unions are very powerful.

Does the world end when a Flag carrier disappear? Look at Sabena and Swiss Air. Belgium and Switzerland are still in existence and in Belgium’s case, it is now serviced by Brussels Airlines.

Trajan