Thursday, April 26, 2012

The Malaysian Airline Business

Now that the "low-cost" airline has successfully crippled the "national flag carrier", it does look like the small fly may eat the big bug, in small snatches.

Introducing the low cost airline cannot be to "increase competition" of the Malaysian aviation industry. You have two totally different products: one "full cost" and the other "low cost". In no way should "full cost" be thought of as "high cost" and "low cost" to be "better value". It is just the way the competitor has cleverly maneuvered itself into the public psyche that created this perception. If pricing is cost-plus, then one should be getting probably almost the same value for the services rendered.

As a corollary, it is also true that "low cost" means "low price" (which the airline is now trying to reposition itself) but not necessarily "better value." The apparent disgust that the low cost operator treats its customers must be something that the average consumer must constantly deal with which in more technical parlance means the loss of consumer rights. It is OK for the operator not to deliver as promised, but woe betide the consumer who happens to try to alter a little bit of the contract. It is this lopsidedness that is the peculiar feature of the "business model" of the low cost flyer, and not its much touted greater "operational efficiency". If you set a computer system to deal with customers who have not way to communicate back to the system, and if you program the computer system to generate a certain amount of profit from every customer, then obviously you are going to get that profit as programmed. Once the "parameters" change, as we see the low cost flyer pulling out of Europe, then you know that it is out of its depth to cope with a more challenging environment.

It is not rocket science to know that to get the average price down, every flight must operate at a certain high capacity. It is this targeting that we see to be promotional strategy of the low cost flyer, as well as the constant attempt to juggle flights in order to pack passengers into a certain targeted "high capacity" which is otherwise termed as operational efficiency.

The national carrier becomes disoriented when the low cost flyer enters the story. How does one compete with a "low cost" competitor? This is the wrong question. The correct response is how to redefine the full-cost market now that the competitor is going to soak up all the cheap customers. It is not surprising if the first impact the national carrier feels is that more than half of its customers are all gone. If we work on the simple Pareto rule of 20% business class and 80% economy class and if the normal capacity on the economy class is 60% and if half of the 80% is lost to the competitor, then you have a mix of 20% business class and 20% economy class. It is instant death to the national carrier.

The objective of the national carrier must be to concentrate on how to get back its economy class passengers. By imitating the competitor in its treatment of customers, the national carrier takes the risk of alienating itself from its customer base. Its computer system is not geared to dealing with online booking and changes to online booking. It simply does not know how to handling this cut-throat business of low price. Instead, the national carrier should build up a new market for traditional full-service flying and at the  same time overhaul its operating system to lower cost by automating more of its internal operations. Instead, the national carrier tries to become a low cost flyer and in the process simply cannot compete as the low cost competitor is king in the business of low cost flying. It automates all its external communications with the customers, an area where the old method should have given it an edge. The national carrier has fallen into a trap, all on its own doing.

At the end of the day, probably one of the most vital factors that determines which airline survives in this globally competitive business is its management of its cost of fuel - supposedly a major cost element. If this is set right, all the other costs are small in comparison. If the fuel cost is too high, then it has to weather it. The low cost flyer simply pass this down to the average consumer in the form of a "fuel surcharge" which really is one of the most appalling abuses of consumers in the market place. Unable to get a team to get its fuel cost right, the response to saving the national carrier is to send in a marketing and accounting team to manage the accounts, and probably not the operations. The operations can only deteriorate with neglect.

So how does one then "rationalise" the national carrier with the low cost flyer? It is as if the low cost flyer has business class travellers to bring to the table, while it will certainly try to soak up the remaining of the economy class passengers from the national carrier. There is also room for further cannibalism by the small of the big. What other experience and expertise does one have that the other does not have.

The Malaysian airline business may just be one episode that shows the general fragility of the national economic fabric. There is a lot of communications and clever talk, but all those who could do are sidelined and relegated to the dungeon to work in the galley to keep the ship going.


walla said...

Consider the postal service. It started as a monopoly with a large network of assets offering standard fare at low price. Then the market changed. New, smaller and more nimble entrants offered faster deliveries but at higher prices for assured delivery. Their personalized service built contacts capital which eroded the market share of the displaced and cold monopoly because people were willing to pay more for what they saw as extra value.

There are juxtaposed elements in this example for the present MAS-AirAsia conjoint which bear consideration.

What is that extra value in flying MAS over AirAsia? People who have flown in both will say there is something substantial there, not just from the experiences with both but also when toting up the actual price elements and perks.

MAS should focus on its extra value and build around it a phase one for its recovery, not so much to get back old customers lost to others because it will be costly to do so even if it happens as an incidental bonus but to target new customers, perhaps those who are flying for the first time who are savvy with channels like social media which should be considered as a marketing campaign tool.

In view of its standing debt, this phase one is critical. In fact, MAS can turn threat to opportunity. Perception of MAS is low and morale is down. It should start a marketing campaign to make positive use of that perception to say "yes we are down and desperate SO that is why we are now offering you fly-two free-one.." or something like that. The arithmetic needs to be done precisely if to avoid adding to the decline but if don't try, how will know and what else to do? Giving the staff something to work on will also help them help the airline to help them help themselves.

Phase two has to do with internal restructuring based on lessons learned. Whether it is about decoupling from politics and national objectives, or going lean and smart, or getting to the bottom on inventory, maintenance and cargo, MAS should take this phase as its last redemption to throw-off the yolk of legacy issues such as being forced to buy three different engine makes for political and other motives.

Phase three should tackle KLIA the place. On paper it might be separate from MAS but right now it is the hub for the airline's spoke routes. The terminal is underutilized and bleeding. Despite its location, new features can turn it into a more active and thriving place for people to make money and therefore attract free publicity. Additionally, there should be integration with KLIA2 and Cargo for symbiotic benefits.

Aviation fuel is about new planes and revenue-optimized routes, latter implying landing rights; if blocked, find new destinations which means working with tourist agencies to create new tours and business destinations.

Lastly, aviation management should be populated by mathematicians, especially those schooled in optimal control and other maths theories. SIA rose because they took the best from UM in that field. The engine of the airline industry is not rolls royce or general electric but numerical optimization.

Which comes next to MAS as one in the family of other bleeding subpar local behemoths. It is only political cowardice that stands in the way of real improvement and progress.

But this being an economist's blog, next.

Joseph said...

Do you think that airways industries effects the economy if yes than i think by offering cheap flights airways companies can make positive effects on economy.

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