Mueller’s medicine for Malaysia Airlines

Airline corporate doctor, Christoph Mueller, has a reputation for turning around failing aviation businesses. His latest project, resusciating Malaysia Airlines Berhad (MAB), is his toughest test yet. After almost a year on the job, the MAB CEO told Orient Aviation’s chief correspondent, Tom Ballantyne, the transformation is on the way.

March 1st 2016

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Malaysia Airlines had been in intensive care for months when the former CEO of the Aer Lingus Group, Christoph Mueller, arrived in Kuala Lumpur last year to embark on the formidable task of restoring the airline’s reputation. Read More »

In the previous 12 months, the carrier had lost 537 lives from two jet accidents, with one of the aircraft, MH370, and all its passengers and crew, still missing. The accidents did massive damage to the airline’s brand.

MAB CEO Christoph Mueller: His airline’s code share with Emirates Airline almost doubled the routes the carrier offers to its customers

The 54-year-old European’s remit from the airline’s new owner, sovereign wealth fund Khazanah, also required him to make the new airline entity, restructured from a failing MAS, profitable. The former flag carrier had been loss-making for years.

It was generally agreed that if anyone could do it, calm but battle hardened Mueller could. He took over as CEO of struggling Aer Lingus in 2009 and within a year had put the carrier into profit. He also staved off an assault on its share register from low-cost carrier, Ryanair. Before that he had imposed balance sheet discipline on several aviation businesses and had had many successful years in senior management at Lufthansa.

At MAB, Mueller was faced with a technically bankrupt business. He knew the cure would not be pretty. In what he described as a “hard reset program” some 6,000 jobs have disappeared at the carrier, capacity was reduced by 30% and loss-making routes have been eliminated with clinical precision. Unsurprisingly, morale was reported to be at an all- time low.

Today, with several major changes accomplished, it was now a matter of “rolling up our sleeves” and getting stuck into the hard work, Mueller said. “That is no rocket science. There is no element of hope or wishful thinking in it. It’s really a very military plan that needs implementation.”

“The airline is on track to return to profit in 2018. “That is still our projection going forward,” Mueller told Orient Aviation in an exclusive interview last month.

A more difficult task could be fully re-establishing MAB as a recognized and reputable brand. “We had the two tragedies. We do not feel guilty. I think the attitude is to look at it as fate. To re-establish customer perception is most probably the biggest challenge. That will take some time. We just have to tour the world and re-establish our place as a new company,” he said.

In the meantime, it is difficult to judge how well MAB is performing financially, but it certainly remains in the red operationally, at least for the time being. Khazanah has secured the airline’s stability with funding of US$1.4 billion, but it has piled up debts close to $1.5 billion.

The airline was delisted in November 2014. It was the last time it announced a result, a $308.9 million loss for the first nine months of that year, compared with a loss of $196.5 million in the same period a year earlier. It has made a financial loss every year since 2011.

Unfortunately, the plunge in fuel prices has not helped the carrier’s bottom line, thanks to the depreciation of the local currency, the Ringgit. “In fact, the depreciation of the Ringgit is slightly stronger than the benefit we have enjoyed from the low fuel price, so it’s not entirely a wash,” said Mueller.

“We are harder hit by the Ringgit and that is easy to explain. More than 50% of our costs are denominated in US dollars and we still have income of approximately 50% in Ringgit. This is the reason we are being hard hit.

“The Ringgit has recovered compared with the beginning of the year, but we still have a slight deviation to our business plan. So let’s knock on wood that the Ringgit is strengthening and the fuel price stays where it is.”

Until now, the airline has not hedged its fuel. “We were simply too poor to do hedging, but now, with the funding from our shareholder we are contemplating re-entering the hedging scene. That would not be limited to fuel. Currency hedges are one of our considerations,” he said.

He sees fuel hedging as a risk mitigation tool. “Basically, it dampens a little bit the spikes and gives our commercial department a little bit more lead time to react to fuel prices. I believe a proper revolving hedging policy going forward 18 months is applied by most carriers in the world and that’s how we will do it. The risk mitigation is just stronger than forgotten opportunities,” he said.

However, the fuel bill has been shrinking because MAB has removed several jets from its fleet. They include 17 B777-200ERs, which are all of grounded, sold or returned to lessors. Its fleet stands at 77: six A380s, 15 A330-300s and 56 B737-800s. The latter is due to be reduced to 35 by year end as older planes are retired.

On order, for delivery from 2018, are four A350-900s with options on another two. It also has options with lessor, Air Lease Corporation, for two A330-900neos. Although it was widely reported that MAB tried to sell its fleet of A380s, Mueller said there had been “a huge misunderstanding” in the media.

“We always wanted to retain them until 2018 because they are the only aircraft we can fly with to London. London has never been questioned as a destination in our network. London is basically so important to Malaysia, for a variety of reasons, that we would never have contemplated touching that route and we need all of the A380s. That will be the case until our new A350s arrive and that will be 2018. We are also, on an increasing basis, using the A380s for religious traffic to the Middle East,” he said.

The right-sizing of the fleet and the reduction in staff from 20,000 to 14,000 were no back of the envelop exercises. It was a carefully devised plan based on where MAB needed to fly, where it didn’t and what its focus should be. MAB has dropped services to Paris, Frankfurt, Amsterdam and Istanbul and cut capacity to Australia by 40%. It also reduced frequency to several Asian destinations.

Mueller said the restructuring of an airline should be done with markets in mind. The carrier’s long-haul network was designed when most airlines focused on traffic between Europe and Australasia.

Even today, he said, big airlines were using re-fueling stops in hubs such as Singapore and Hong Kong to link the markets. “What I’m saying is that the world has changed and there are two main impacts. Number one, that entire traffic from Europe to Australasia has gone to the Middle East carriers. They are much more competitive because of their geographic location and of course they are start-ups and are in a superior cost position,” he said.

“Secondly, the trade between Europe and Australasia became inferior with the ascent of China. In 2001, China was number nine or 10 in ranking in the world economy. Now it is a very close number two to the U.S. Relevant traffic streams have changed. So our new network design was based on new origin and destination flows and new trade relationships between Malaysia and these emerging economies.”

None of this means Europe is being downgraded in importance. One of the major steps Mueller took was to follow the example of Australia’s Qantas Airways and sign an extensive codeshare deal with Emirates Airline. The deal was done in Dubai late last year.

“We are in a similar situation to Qantas. Flying into Europe ourselves had very thin traffic streams that left you with insufficient load factor. What does it mean for us? Clearly, we want to extend our network to those places where we will never be able to fly with a full aircraft ourselves,” he said.

“That is Europe in the first place, but we will have more network extensions [through Emirates] to Africa, Latin America, North America and then places where it is difficult to generate enough traffic from Malaysia to fly to such cities as Tashkent, Teheran and many other destinations in the Middle East.

“By the end of the year, the choice of destinations you can reach with Malaysia Airlines will have increased by more than 60. “That is significant because we operate ourselves to a little bit more than 70. It’s almost doubling the end points in our network. What our customers like most is that they can earn miles in our Enrich frequent flyer program for these flights. Very soon they will be able to redeem them on Emirates flights.”

Initially, the MAB code is appearing on Emirates flights to 38 European destinations, 15 cities in the U.S. and 38 in the Gulf, Africa and Indian Ocean, with more to come.

As for the financial benefits expected from the partnership, Mueller wasn’t saying. “Yes, we know that, precisely down to the last cent, but I would be reluctant to share that with you. It is significant and it is not only in terms of delivering additional revenue to us,” he said.

“What you have to take into account is that we axe the losses on certain of our European routes and that is a bottom line improvement in its own right. We are getting rid of the losses, but still retaining the traffic.”

One of the key factors in achieving success at MAB was reducing the staff to fit a smaller airline. Termination letters were sent to all 20,000 staff, with 14,000 being retained on new contracts.

The airline has another 2,000 workers on temporary contracts, but these jobs will be gone within this year. “Why is that? Because you simply cannot adopt new working procedures overnight,” said Mueller.

“In some cases you need the help of supporting IT systems. In others you have to rewrite standard operating procedures. Now we are in a phase of the restructuring where we have to roll up our sleeves because the hard work is coming.

“We have structured more than 200 projects on the revenue and cost side. Some of them can be implemented rather swiftly and some others are dependent on a better IT structure and that can take up to two years in some cases. That’s where we stand.”

Mueller and MAB’s senior management also have to deal with staff morale, which was at an all-time low after years of losses and the two accidents in 2014. Mueller described the morale situation today as “a little bit of a mixed bag”. It was explainable, he said, because “those who were offered permanent contracts are very excited, looking forward and wanting to create something new”, he said.

“For those who are with us on a temporary contract and know the leaving date is coming closer, I cannot blame them when they are not singing and dancing. But we will overcome that situation in a couple of months’ time. I would answer by saying staff morale has increased.”

Another critical change to be introduced at MAB is a measure to ensure staff and management can communicate effectively, often a problem for airlines. MAB has no unions, but Mueller believed it was very important to have employee representation.

“Shortcomings, leadership and whistle-blowing and all these type of things need to be channeled in a certain shape and form. So what we did, which is most probably unprecedented, was call in the employee representatives and asked them if they could kindly consider electing work councils so we had a counterpart to speak to,” he said.

“That process is currently on-going. We have invited each employee group to elect two representatives: two from the flight attendants, two from the pilots, two from the mechanics, two from ground handling and so forth. It will allow us to communicate better with our employees and enable the employees to tell us what needs to be improved.”

Absorbed as he is in the complexity of the airline’s restructuring, Mueller is not ignoring the need for MAB to offer world-class service. He said the carrier has rightly been recognized for its good service delivery – the Malaysian mentality is to be very hospitable – but conceded the product needs a complete refresh.

“Little had been done because the airline was suffering from losses in the last couple of years. What is needed is a heavy investment in our products,” he said.

Several improvements will be rolled out this year. A completely new catering concept is being introduced. “We will be absolutely leading in our food offering. Food is a very important factor in Malaysia. The cultural diversity we enjoy will enable us to offer the best Indian food if you fly to the subcontinent, the best Chinese food if we fly to China and also to Australia, a good steak cannot be rejected,” he said.

“Catering will be rolled out in three waves. We started on our First Class just a week or two ago. That will be followed by long-haul business class and then the shorter routes.”

New Business Class seats are being introduced. “The seats are above business class average. They are totally lie flat, but they are very wide and very long. There is a lot of storage space. I think they are just a notch below certain First Class seats I have flown recently on competitor carriers. That’s very important because we fly long stretches,” he said.

The airline’s lounges worldwide are being refurbished and modernized and crew will have new uniforms. A completely new inflight entertainment system will be installed on the fleet.

When Orient Aviation spoke to Mueller he had just returned from a meeting on the introduction of Wi-Fi on most of the fleet, beginning early next year. “We are redoing our entire service chain,” he said.

But achieving sustainable profitability still won’t be easy. MAB continues to operate in a fiercely competitive market awash not only with full-service rivals, but aggressive and still expanding low-cost carriers.

Mueller said competing is difficult, but not impossible. “If you had a choice between two or three carriers price still is the predominant factor. But what we can utilize, particularly against LCCs, is the quality of our schedule. Another important factor is connectivity here at KLIA (Kuala Lumpur International Airport),” he said.

“We are the only carrier in the land able to seamlessly connect passengers and luggage. Low-cost carriers don’t have the IT capabilities to do that according to IATA standards. It is the benefit of a well-planned network. We are known in the market and we offer full service. That’s where we compete, on service and on schedule.”