Friday, September 9, 2011

Malaysian Consumers to Lose Much - AirAsia/MAS share swap - REFSA

Ordinary Malaysians must view the MAS-Air Asia Collaboration announced on 9 August with dismay. When previously fierce competitors such as MAS and Air Asia
choose to collaborate instead, consumers tend to be the losers. This arrangement, called the MAS-Air Asia Comprehensive Collaboration Framework might be more appropriately named the MAS-Air Asia Comprehensive Collaboration Framework Against the Rakyat:
REFSA believes at least some of the synergies and savings to be reaped by MAS-Air Asia will be paid for by Malaysians in the form of higher ticket prices, less frequent flights, poorer service levels and reduced job prospects.
The advent of Air Asia and the breaking of MAS’ dominance of Malaysian air travel gave millions of Malaysians the opportunity to fly. The competition introduced by Air Asia resulted in in more connectivity, choice and jobs for Malaysians.

As the airlines competed, Malaysians got the opportunity to fly to more destinations, more frequently and at cheaper prices. In the process, MAS itself introduced yet another new airline – community carrier Firefly, whose turbo-prop planes opened up yet more destinations and more choice at reasonable prices.
It is not just consumers who benefited. Working Malaysians also benefited. Those in the airline industry – whether flight crew, or cabin crew or ground services and other
support personnel – now had a choice of employers. And the millions of new passengers flying around also contributed to economic growth across the country as they consumed other goods and services during their travels.
The MAS – Air Asia collaboration will end much of this. What is good business sense for collaborating airlines is bad for the consumer:
1. For a start, low-cost community carrier Firefly is already pigeon-holed and pushed up the cost curve away from Air Asia. From being able to freely compete in whatever way it deemed fit, it is now slated to be a “full-service regional airline”;
2. Flight frequencies will likely be reduced. For example:
  • Let’s say Air Asia and MAS both have Kuala Lumpur – Kuching flights; one at 11.00am and the other at 12 noon;
  • Each airline on average fills 65% of the plane;
  • When Air Asia and Malaysia Airlines were competing, both would run flights to fight for market share;
  • Now that they are collaborating, it makes good business sense to just run one flight which will be over-booked all the time;
  • All good business sense, but bad for the consumer who now has less choice;
3. Air fares will also likely go up. Where previously both airlines would compete to offer the lowest possible fare, they can now collaborate to raise prices. And they can also help push up prices by reducing frequencies, as mentioned in point 2 above;
4. Airline employees will now have fewer job options, and likely smaller pay hikes. Air Asia, MAS and Firefly competing for talent must have surely been good for employees. Collaboration between them would mean fewer options for employees.
It is ironic that such a potentially rakyat-unfriendly deal is proposed and facilitated by GLCs – government-linked companies. Khazanah Nasional, party to the share swap exercise, is steward of our national resources. CIMB, which is the principal adviser, is nearly half-owned by government agencies (Khazanah 29%; EPF 13%, KWAP 3%, PNB, Valuecap and others 2%).
It might appear that the implications to the rakyat were not completely thought through as the government strived to save MAS, our national carrier.
Surely it cannot be the intention of the government to boost MAS’ profit at the expense of ordinary Malaysians? However, that will almost certainly be the case now that a previously fierce competitor in the form of Tan Sri Tony Fernandez is brought into the fold to ‘collaborate’.
Tan Sri Tony is no doubt a proven entrepreneur in the airline industry. But we suggest that the needs of Malaysians and MAS would be better served if Air Asia and Firefly remained as competitors, and another suitable candidate be hired from the global aviation industry to turn around MAS.
Teh Chi-Chang CFA MBA (Cambridge)
Executive Director, Research for Social Advancement (REFSA)

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