Earning the business in the airline business

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It hasn’t been a great year for Malaysia Airlines. Duncan Bureau, the company’s senior vice president for global sales and distribution, chats with Penang Monthly on the airline’s fortunes and on what needs doing.

As Malaysia Airlines (Mas) senior vice president for global sales and distribution Duncan Bureau gave his presentation at the inaugural Asia Pacific Tourism, Hospitality and Technology (Apthat) Conference in Kuching last November, the word “PROFIT” popped up on one of his slides. “Being in the airline business, I didn’t know what it meant,” he said dryly. “I had to look it up.”

The audience laughed knowingly. Earlier in the presentation, Bureau pointed out that the average return on invested capital for an airline was a ridiculous -5%. And as if to hammer the point home, just days before his presentation Mas posted a massive third quarter loss in 2013 of RM375.4mil, even though revenue had actually gone up over the previous year to RM3.906bil.

In fact, the airline’s passenger traffic increased by 37%, and for the nine months ending September 2013 it flew some 12.5 million passengers – an increase of 29% over the previous year. None of these could prevent the company from posting its worst quarterly performance of the year, largely attributed to a weaker Ringgit and higher fuel costs.

Bureau had been on the other side of the equation before. The 22-year veteran of the airline industry had spent 10 years at Canadian airliner WestJet, a highly profitable low cost carrier that is also the ninth largest airline in North America. He joined Mas in June 2012 to help turn the ailing carrier’s fortunes around by growing revenue, with an aim to return to profitability by 2014. And while revenue has gone up, high costs continue to drag the airline down. There’s clearly a lot more work to be done.

During your presentation, you mentioned that it was so hard to turn a profit in an airline... (chuckles) Yeah.

So I was wondering, why have you spent over 20 years in this business? I love airplanes. For me, it’s about the challenge. At WestJet we were profitable the entire time – it was a very well- managed company with great network, great leadership and a great team. When I had the opportunity to come (to Mas), it was an entirely different challenge, moving from a very successful low cost start-up to a legacy airline that, quite frankly, had a tough year the year before I got here with a two and a half billion ringgit loss. So it was an opportunity to try and turn that around.

When they hired you, what was your task?
Our CEO’s1 message to me was, “Grow revenue.” That was the focus of the team. If you look at how we’ve grown revenue and corporate contracts, and reengaged with the trade, it’s all been extremely successful. We’ll end the year well over a billion ringgit in incremental revenue from last year. We’re growing at more than 30% in passenger volume. Yield continues to be a challenge, not only for Mas, but for all airlines, and we’ve seen significant pressure on yield based on the increase in capacity.

But at the end of the day, the team’s done a great job in growing revenue, which is what I was brought here to do.

What were some of the measures that you implemented?
We reengaged with the travel trade. We went back to the travel trade and restructured our agreements with all the key travel agencies and travel management companies. We restructured our corporate contracting process and our call centre as well. We’re investing heavily in all profitable channels to make sure that we’re driving revenue to the organisation. It’s really about making sure that we’ve got as many products on as many shelves as possible.

Mas has done a great job in reengaging trade and the consumer. Dean Dacko2 and his team have been doing a great job, working very closely with Google and focusing on building the brand across our entire network. So we’re spending more money across key networks to ensure that we’re a relevant brand. We can get lost pretty quickly in high media markets; London and Los Angeles are pretty expensive places to advertise. So we have to find channels where the media (mix) makes sense.

Most companies in general are spending or starting to spend more and more of their advertising dollars in new media, and we’re no different. The good thing about new media is that we can actually manage and measure its effectiveness, such as Google word searches or sales generated from a banner we’ve put online. We’re very focused on being able to measure the results. Our CEO’s very adamant that we spend intelligently, and when we do spend on marketing, it generates a return.

You have all this success in growing revenue, but then the third quarter report comes out...
The reality is that we’re doing a lot of things right. (But) we have some legacy costs in the organisation that we need to address. We need to be more nimble, we need to get higher productivity out of our asset base and we need to grow revenue. Foreign exchange and fuel are things that we can’t control. Escalation in fuel (prices) can be triggered by anything. Foreign exchange – same thing. The aircrafts that we purchase are in US dollars. Our fuel is in US dollars. So any exposure of the Ringgit against the Dollar or the Euro is painful.

When you say “legacy costs”... Legacy costs are things like reservation systems or infrastructure costs. Labour. The airline’s been around for almost 65 years. Your costs don’t go down in labour – they go up. (But) in terms of productivity, we’re probably the most efficient airline relative to employees per tail.

That said, we need to increase the productivity of our assets and we need to increase the productivity of our employees. Our CEO is very focused on making sure that we increase asset utilisation.

So what’s the next step?
Cost is important. How can we reduce cost and get better utilisation of the asset base? When you fly the asset more, you spread your cost over more seat miles, which reduces your unit cost. As you increase your frequency and increase flying, your unit cost comes down on a per unit basis. And so your revenue has to exceed that, right?

We’re all in a number of different facilities and offices. So consolidating into a single office is one area of opportunity for us to reduce cost. Things like ensuring quicker aircraft turnaround, acquiring fuel or even how we fly the airplane to save on fuel – those are all things that are important.

In February, Mas joined the Oneworld Alliance. Why now?
The airline’s been in discussions with Oneworld for a number of years. It’s a two-year process – you need to be sponsored by a current Oneworld carrier and you need to go through rigorous IT customer service and frequent flyer programme projects to make sure you’re aligned.

We have 68 destinations as Mas, but with Oneworld, we have 859. You become relevant to some very large international companies. We’ve been able to sign some corporate contracts with some very large brands that we otherwise would not have had the opportunity to do. When I fly, I talk to people in business class quite often and I ask them what they’re doing on board and who they are, and I’m hearing more and more people say that they’re flying us because of the Oneworld relationship.

During your talk, you sounded a bit sceptical about AirAsia’s business model. Not at all. I’m actually a big believer in AirAsia’s model. I think they’re doing a great job. What worries me is operators putting up seat sales and conditioning consumers to believe that it costs RM35 to fly from KL to Singapore. That’s not reality. You’re only as smart as your dumbest competitor, and if you have competitors – and not specifically AirAsia – in the marketplace doing really silly things relative to price, it’s not sustainable.

I think the AirAsia model is a good model. It’s obviously a successful airline, spreading its brand across Asia, and it’s becoming a Pan-Asian carrier. And, quite frankly, it’s creating a lot of headaches for a lot of legacy airlines.

Is there more pressure on you now?
Of course. Our shareholders expect us to generate a return. So do our employees. No one wants to work for a company that loses money. At the end of the day, we all want to make money. We all want to do it ethically, we all want to make sure we’re doing it as an airline and we don’t want to cut corners. Nobody wants to play second fiddle, and I certainly don’t. I’m used to working for an airline that never lost money, and it doesn’t feel good to be on the other side of the equation.

Was there a major change in culture moving from WestJet to Mas?
Well, it’s a very different culture than in WestJet. It’s a very different culture than a low cost carrier. There’s an opportunity for us to improve productivity and identify some low-hanging fruits and get better utilisation of our assets.

There needs to be a change. We really do need to focus on the things that will make us profitable as a team. It’s not about having unions. I think organisations get the unions they deserve, so if you treat the unions with respect and there’s communication between the unions and the leadership team, they can survive very well together. Southwest is a heavily unionised airline, and it’s been profitable for 32 years. I don’t think being unionised means you automatically can’t be profitable. I don’t believe that at all.

With oil prices going up, is biofuel a viable alternative?
We will look at biofuel options, particularly if it can reduce our fuel cost. The reality is we’re quite a few years away from biofuels. I just don’t think it’s a mature enough product yet to really be a large portion of our overall fuel mix. Going forward, I suspect that we will take a certain portion of biofuel and incorporate it more and more, as it gets proven.

Mas aims to be profitable by 2014. Is this still achievable?
Of course it’s achievable. A year before we got here we lost two and a half billion, so we’re well on our way to reducing those losses. It requires everybody on the same team showing up for work and growing in the same direction. We need to find every single opportunity to be more efficient, drive cost out of the business and continuously look at how we can get better penetration in corporate businesses to improve our yield. At the same time, there has to be a very, very focused effort on cost and reliability of service.

We’re no longer a monopoly airline, so the idea that consumers have to fly us is not true anymore. They have choices. We have to earn our consumers’ business every single day. That’s a culture change, right? It’s the change of mindset of a company that has been a monopoly airline for 30 years. We don’t have a right to business. We have to earn it.

Jeffrey Hardy Quah is deputy editor of Penang Monthly.



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