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.

Wednesday, April 25, 2012

Japan: High-Income Economy

Just got back from Japan and here are some of my observations.

Before this trip, I had dropped into Japan several times on quick dips and transit simply because it was very expensive. With the strengthening of the yen, thanks, I think, to the Plaza Accord of 1985 when the US forced Japan to revalue by a third, Japan has been forced into a downward spiral. The reduced growth of the economy was then bolstered by an expansionary monetary policy ("quantitative measure") that caused the asset bubble in the 1990s and the subsequent asset deflation which is still happening. That revaluation and the asset bubble made Japan so expensive today - for Malaysians (!) who also have to be content with a depressed ringgit.

Japan today, to my eyes, has become a developed nation after years of hard work and economic growth since the end of World War II. Factories are everywhere in the smaller cities and towns. The transportation system all working perfectly and well-interlinked. The people putting their heads down, working and coming and going to work. There is that busyness which lay below the headline of a slow and anemic growth for the Japanese economy. Japan has reached the saturation of its heavy industrialisation. There is so much pollution that can be generated.

On the ground, the Japan society seems to have reached its zenith. Roads are perfectly clean and tidy, houses tidy and cute swarmed along both sides, people ever so polite and socially conscious, the traditional food perfectly healthy and well-proportioned and identically well presented everywhere - the social system working like a clock and the people simply moving along this huge conveyor belt system.

But this is a system and utopia created by the post-war heroes of Japan which are now happily enriched with their cosy little houses and the comfortably big pensions. These old people are the ones who are now challenging themselves to live long so that they can maximise the benefits of the pensions. That longevity is now being obtained through strenuous hard work of brisk working, exercising and working on projects in order to keep the mind alert. Everywhere in Japan, you see old people who are well-dressed and well-kept.

The new children who are being produced in Japan today now has to face a situation where there are no more jobs in the industrial sector. They walk by factories and feel no affinity to them. Factories have no meaning to the young people, except fatherly neglect and a lonely mother. Against the industrial perfection of Japan comes the counter-cultural revolution at the other extreme of the arts. The children all dressed untraditional in order to disgust their parents, and probably as they do that for a few more years, to find themselves. It is this undercurrent of the young generation on the search for their own soul which is exciting for me because it will represents the saviour of the Japanese society and economy.

Japan has been, so far, known for its mechanical perfection but not its innovation or inventiveness. We may now be witnessing Japan at the inflexion point. As the Japanese society rebels against tradition and structure, it learns to think for itself. By looking inward, Japan will discover a new self which we have not seen yet. This may be time for Japan to leave the stereotype that the whole world knows, and to have the confidence to reveal a new self which will incorporate the simplicity of its forbears but the new outlook of life which is better integrated with the rest of the world. This is the excitement I found when I visited Japan recently.