Is Najib’s RM43bil Boeing buy in line with MAS’ plans?

A QUESTION OF BUSINESS | Among Prime Minister Najib Razak’s puzzling announcements in his much-heralded meeting with US President Donald Trump was that Malaysia would spend US$10 billion, or a massive RM43 billion, purchasing passenger aircraft from US’ Boeing.

Flanked by top advisers in the Cabinet Room, Najib told Trump that Malaysia Airlines would buy 25 Boeing 737 jets and eight 787 Dreamliners, and would probably add another 25 737s in the near future – a deal he said would be worth more than US$10 billion within five years.

These came as a bolt from the blue as the purchase of the eight 787s is something which Malaysia Airlines Bhd, the government’s wholly-owned airline through Khazanah Nasional Bhd, has not announced before while the airline is actually in the process of cutting down on its narrow-bodied 737 fleet.

It is still making losses while it maintains it will turn around to profit in 2018. Reports put the loss at over RM450 million in 2016, at a time when airlines worldwide were making money.

According to the International Air Transport Association, airline industry profits reached a cyclical peak in 2016 of US$35.6 billion (US$153 billion), and is still strong at an estimated US$31.4 billion (RM135 billion) for 2017, expected to be the eighth year in a row of aggregate airline profitability.

That Malaysia Airlines is making large losses at a time when many airlines are making good or even record profits does not bode too well for the company. Contrast with low-cost leader AirAsia which made a net profit of over RM2 billion for 2016, up from RM541 million in 2015. 

Over the past few years, Malaysia Airlines has been scaling back operations under a RM6 billion rationalisation programme which saw it cut back many routes and mothball some of its existing aircraft while laying off thousands of staff.

Its chief executive Peter Bellew even told Reuters in April that its six Airbus 380s, the largest passenger aircraft in the world, are being put into a new airline that will use it to fly passengers undertaking the Muslim pilgrimages of haj and umrah.

The news agency reported that Malaysia Airlines has been trying to find a use for its A380s since it failed to sell them. The airline previously said the A380s do not make economic sense at a time when it is cutting costs.

The airline has flip-flopped from its earlier policy of becoming a regional carrier and announced a change in its wide-body aircraft policy. According to CAPA Centre for Aviation, Malaysia Airlines is planning to launch a new long-haul route in 2018, using its new A350 fleet.

“Destinations in continental Europe are under evaluation. London has been Malaysia Airlines’ only destination in Europe since early 2016, when the flag carrier suspended services to Amsterdam and Paris as part of the last phase of its network restructuring project.

“Malaysia Airlines plans to use four A350s to replace A380s on its twice daily London service under a recently accelerated schedule which includes transitioning the first London flight in 1Q2018. The other two A350s were initially intended for medium haul routes within Asia Pacific, including Auckland, but are now earmarked for a new not yet decided long-haul route.”

As a result, Malaysia Airlines will be reducing capacity on the Kuala Lumpur-London route by over 40% before the start of the 2018 peak summer season. First class capacity will shrink by 50%, and business class capacity by nearly 50%, while economy seat capacity will be cut by approximately 40%, CAPA quoted Bellew as having said.

Confusing policy

Malaysia Airlines is also planning to nearly double the size of its passenger widebody fleet over the next few years – from 21 aircraft to 36 aircraft, CAPA said. The lease of approximately 15 additional A330s will enable Malaysia Airlines to upgauge several routes from the 737-800 as it shrinks its narrow-body fleet.

It is clear from this that Malaysia Airlines plans did not include the purchase of Boeing 787 Dreamliners. That raises the question of whether Najib is taking into account the interests of Malaysia Airlines, whose confusing policy, flip-flops and extreme lack of transparency already are major problems for an airline already under rationalisation.

Also confusing is the addition of up to 50 Boeing 737s to the purchase at a time when Malaysia Airlines has been widely reported to be cutting its reliance on narrow body aircraft, those typically used for short trips with limited carrying capacity.

While Malaysia Airlines plans to expand its widebody fleet by approximately 15 aircraft over the next three years, it plans to reduce its narrow-body fleet by a similar number. Bellew told CAPA in June that Malaysia Airlines had completed negotiations covering the return of six 737-800s in the second half of 2017, resulting in a reduction in the narrow-body fleet from 54 to 48 aircraft. He added that he expects the 737-800 fleet will be reduced by a further eight aircraft over the next few years, to approximately 40 aircraft.

Commitments to purchase 25 narrow-bodied Boeing 737s with further commitments to purchase another 25 are clearly contradictory to what Malaysia Airlines had planned to do just three months ago.

Najib’s announcements were made to garner Trump’s support in the US and to brighten up an increasingly gloomy image he has in Malaysia. They are not in the interests of Malaysia Airlines and the country in general, continuing upon other bad, desperate decisions he has made recently which are downright dangerous to the country.

He should have left the decision on buying aircraft entirely to the management and board of Malaysia Airlines. The problem is not necessarily government ownership but bad appointments by government compounded by ill-informed government interference.

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P GUNASEGARAM is an independent consultant and writer. E-mail: t.p.guna@gmail.com. -Mkini