Khazanah fallacies on MAS/Airasia share swap

7 REASONS WHY KHAZANAH MUST NOT UNDERTAKE THE SHARE SWAP BETWEEN MAS AND AIRASIA - PART 2 - The article by troubleshooter2011@gamil.com

1. MAS IS A NATIONAL ASSET JUST LIKE PETRONAS AND TNB

MAS’ primary purpose aside from performing its aviation role is to, as mentioned in my earlier piece, promote Malaysia as a tourism destination, to facilitate trade between countries under a G to G environment and also to facilitate outreach to new destination for strategic and commercial purposes. Because of this it should NEVER be in the hands of an entrepreneur with a vested interest in a similar industry let alone any other entrepreneur. The problem started even with the appointment of an entrepreneur many years ago because the government failed to differentiate the nature of the asset. What transpired was that entrepreneur had to think of ways and means to offset his individual debts in taking ownership of the airline and therefore may have compromised the asset because of this. A similar pattern is developing now with Air Asia where the entrepreneur will undertake actions to best serve his purpose. If looking at SIA, where it’s successful is because it recognises this fact. Therefore the running of the company is left to professionals who have no vested interest and can be hired or fired based on the KPI’s given to them. This also allows for the airline to be run by the ‘best man for the job’. What you need is a CEO with an entrepreneurial mind, professional conduct and culture. With proper assessment, there are many who could step up to the plate. MAS is a national asset and should be treated as one just like Petronas and TNB and other strategic assets that need to remain under government control and directions as it also performs its corporate social responsibility to the country and its citizens.

2. THE COLLABORATION FOR COMMON BENEFIT CAN STILL CONTINUE WHEN THE SHARE SWAP IS REVERSED

Recent collaboration announcements made is welcomed and should continue after the share swap is reversed. This will test the sincerity of Air Asia VENDORS WHO ARE MALAYSIAN. Under a normal business collaboration framework, whatever cost that can be cut, brings better economies of scale for competing entities, creates healthy competition at the supplier level to drive cost down and eventually pass on to the consumers of both MAS and Air Asia should be encouraged. For example, the utilisation of training assets could be shared and Long Term Service Agreements (LTSA) with Aircraft Engine Manufacturer and other critical components for common benefit should be explored. Hangar sharing and MRO activities at cost competitive pricing should also be looked at diligently. These can happen with or without a share swap but if Air Asia insist that these happen only with a share swap then MAS can still go it alone as they have already invested in the assets and have little capital expenditure more to be invested in these particular areas.

3. KHAZANAH CAN ENSURE THAT THE MAS BOARD COMPOSITION CONSIST OF INDIVIDUALS WHO ARE PREPARED TO CONTRIBUTE TO THE WELL BEING OF THE COMPANY AND SHOULD NOT BE ‘CORPORATE PERSONALITIES’ PER SE

The members of the Board should put the Company first in terms of discharging their fiduciary duties and need to be compensated for their efforts. A Board Member who is not dedicated in the best interest of the company must not be considered. If the notion of the Board being a compliant Board is taken, then there is no active energy or debate at the Board level to provide a check and balance to the management of the company. The Board should be innovative in thinking to challenge the management to come up with new initiatives that keep the company at the highest competitive level and not just rubber stamp approvals based on papers presented to the Board.

4. THE ULTIMATE STAKEHOLDERS IN MAS AND AIR ASIA IS THE PUBLIC AND THEREFORE SHOULD NOT BE SUBJECT TO ANTI COMPETITION BETWEEN TWO COLLABORATING ENTITIES AND FORCED TO SUPPORT A ‘PREMIER AIRLINE’ WHEN THERE IS NO NEED FOR ONE

The public were already happy with the competition and choices that were present between MAS and Air Asia that drove both companies to vary their product and services in order to capture their market share and serve different segments of the markets. It was already working and therefore there is no need to change the competitive nature of the industry for the paying public. What needed to be intensified was, the level of ‘good service provided’ and not the requirement for MAS to provide ‘premium services’ as generally the market in Malaysia or for MAS is not sufficiently large to capture this premier segment. Malaysia is not a financial or business hub where there exist a large number of premier passengers unlike Hong Kong and Singapore. Converting MAS to be a premier airline will entail capital spending and in turn will result in higher fares where PASSENGERS ARE NOT WILLING TO PAY. A quick check on company policies around the world whether MNC, Private, GLC or any other corporation is that there is a move to limit the number of persons flying Business and First Class on company expense. Most companies are adopting a policy of lower entitlement for the general staff while keeping premier services to select few. Therefore, entering a premier segment when the MARKET SIZE IS SHRINKING DOES NOT MAKE ANY SENSE AND IS IN FACT SUICIDAL FOR MAS.

5. KHAZANAH AND THE GOVERNMENT SHOULD NOT UNDERESTIMATE THE MALAYSIAN PUBLIC WHO KNOWS WHEN THERE IS A GOOD DEAL OR A BAD ONE

The Malaysian public is now a very informed society and not blinkered as before. Because of ready available public information, the public can weigh in their opinions on what is good and what is bad. By trying to shove a deal like this down the public’s throat it actually exposes the incompetence of the executives and parties making this decision. This does not bode well for the country as it exposes shortcomings in our decision making process and will affect investor’s perception of doing business in the country. You will know when the public is okay with Government corporate deals when there is no real outcry on the subject. For example, when Khazanah took over Parkway, the only gripe was whether Khazanah paid the right price but in terms of Khazanah’s rationale in creating a regional healthcare champion, there was not too much outcry as the public can appreciate the rationale in having a major investment in the healthcare industry although the private healthcare market may not be assessable to all segment of the public.

6. KHAZANAH SHOULD HAVE DONE A GAP ANAYLSIS ON THE STATE OF MAS INSTEAD OF THE SHARE SWAP AND ASK THE RIGHT QUESTIONS

Khazanah should have done a GAP ANALYSIS when MAS reported losses in the recent quarters. The key towards turning around Operations, is to understand whether management was narrowing the gap on all their cost elements. For example, in my earlier piece, I mentioned that the previous MANAGEMENT WAS ALREADY ON THE RIGHT TRACK. They were addressing the issues of cost associated to fuel, manpower and maintenance and the question to them should have been, “How much improvement have they achieved q-o-q and y-o-y? If there is a positive trend on all these elements, then even though the results are negative, it would be a matter of time for the right results to be achieved. It is especially important to have the right people asking the right questions in order for any turnaround to be effective. This is where Board composition is important and having wisdom in knowing whether people are on the right track or not.

7. KHAZANAH SHOULD UNDERSTAND THAT EVERY COUNTRY IN THE WORLD SUPPORTS OR SUBSIDES THEIR STRATEGIC ASSETS WHEN NECESSARY AND DOES NOT PUT PURELY COMMERCIAL TERMS ON PERFORMANCE

The aviation business model has changed dramatically over the decades and will continue to change significantly over the coming years. What is certain is air travel has become commoditized. Loyalty to any airline is only as long as the passenger is sitting in the aircraft. Beyond that, the passenger will choose best connectivity and best pricing for his travel requirement. What is required is for Khazanah to not only measure MAS from a financial performance standpoint but also from a public/national agenda point of view. As mentioned in my earlier piece, the aviation space is a critical playing field for every nation, especially a country like Malaysia that is trying to pull in tourism income. Every country assists its aviation companies in one form or another, so we should not be fooled to think that it’s a level playing field out there. Get a proper and dynamic BUSINESS Model for MAS to prosper further. Shares swap especially WHEN NO MONEY IS INJECTED is not the answer.

THANK YOU

MAS LIBERATORS @ troubleshooters2011@gmail.com

09 October 2011