How and why did Malaysia Airlines (MAS), the flagship carrier and pride of the nation, end up being the disaster that it currently is, after multiple bailouts that cost taxpayers tens of billions of ringgit? Khazanah Malaysia is reported to have sunk RM28 billion into MAS between 2000 and 2020 and had, at end-2020, committed to put in RM3.6 billion till 2025.
That must be the question in the minds of many Malaysians. That MAS is in financial trouble is nothing new. The airline has been mired in huge losses for the better part of the last 30 years. It has had multiple changes of CEOs, who had attempted unsuccessfully to turn the company around. But the recent string of emergency landings and flight diversions due to technical issues and a surprise audit by the Civil Aviation Authority of Malaysia (CAAM) that led to the shortening of its air operator certificate (AOC) from three years to only one year must surely be a new low for the national carrier.
The audit identified serious problems ranging from lack of skilled workers for aircraft maintenance and shortage of critical parts, which led to MAS announcing a temporary 20% reduction in flights and routes. Transport Minister Anthony Loke said that the airline would have to provide monthly reports to CAAM, detailing the implementation of mitigation measures on the issues raised in the audit report.
The immediate reaction is to look for faults of the recent past. Please read till the end of this article. Our contention is that the current predicament of MAS is principally the result of terrible decisions made, abuses and mismanagement that happened in the distant past. The landslide you now see at the bottom of the hill is the result of what people had done at the hilltop in the past.
Prior to 1972, MAS and Singapore Airlines C6L (SIA) were the same company, before the two countries decided to split what was then called Malaysia-Singapore Airlines (MSA) due to differing national strategic interests and management styles. Notably, Singapore wanted MSA to be management-driven, to run “on a proper economic basis” and jobs given based on meritocracy while the Malaysian government wanted to be more interventionist, in line with the non-economic national agenda.
Both MAS and SIA operate in the same intensely competitive environment that is the global airline industry. Today, SIA is regularly voted as one of the best airlines in the world by travellers and has a market capitalisation of S$19.3 billion (or more than RM63 billion). So again, what went wrong?
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A bit of history
MAS’ current problems are deeply rooted. We traced its historical financial performance and key events as far back as we could. Though there are some gaps (due to data unavailability), we believe the Chart above tells the story.
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The history of MAS can be broadly separated into three periods:
1. From 1972 (following the splitting of MSA) to 1994, before the government sold a substantial stake held by Bank Negara Malaysia to Tan Sri Tajudin Ramli;
2. From 1994 to 2000, when Tajudin was in full control of MAS with his 32% stake; and
3. Post-2000, after the government bailed Tajudin out, and Khazanah then took MAS private in 2014.
After the splitting of MSA, MAS focused primarily on domestic routes with some regional destinations including Singapore, Hong Kong, Bangkok, Medan, Jakarta and Brunei. The carrier was primarily owned by the Malaysian government until its privatisation in 1984 — where 40% of issued shares were sold to the public to raise capital for expansion. After the initial public offering, the government continued to retain substantial ownership, and the CEO position was held by top civil servants.
The airline was consistently profitable every year, save for FYMarch1982 (in the midst of one of the most severe global economic downturns since the Great Depression). Revenue grew from RM157 million in FY1974 to RM4.081 billion in FY1994, which translates into a compound annual growth rate (CAGR) of 17.7%. Note that this was higher than the CAGR revenue growth reported by SIA of 14.7% over the same period, albeit from a higher base. In other words, MAS was holding its own, even though it was having difficulties securing landing rights and scoring lower than SIA in terms of service quality and traveller experience.
The big turning point, for the worse, came in 1994 — when Tajudin acquired a 32% stake in the airline from Bank Negara for RM1.79 billion, reportedly to help the latter recover from its massive foreign exchange losses (totalling some RM31.5 billion due to excessive and speculative forex dealings). Tajudin raised the money for the purchase through bank borrowings.
For more stories about where money flows, click here for Capital Section
MAS too took on a lot more debt under Tajudin’s stewardship to expand its fleet and routes, and move operations from Subang to KLIA in 1998. Worse, there was significant mismanagement within the airline and conflicts of interest, including the award of contracts-projects that were in violation of its internal procedures. For example, MAS suffered persistent losses from the relocation of its cargo operations in Amsterdam and Frankfurt to a newly built logistics centre in Hahn, Germany. The decision to move went ahead despite misgivings following a similar shift in its cargo hub in Dubai to Sharjah in the UAE, and against strong reservations and objections from its own board of directors. MAS also added many non-economical destinations.
The heavy borrowing and operational missteps left MAS in a vulnerable position when the Asian financial crisis (AFC) hit in 1997. When the ringgit fell sharply against the US dollar, debts denominated in foreign currencies soared. MAS fell into the red for the next five straight years on the back of higher fuel and operating costs as well as interest expense amid shrinking regional demand for air travel due to the financial crisis. Its massive losses ate into cash flows and reserves, raising sustainability issues.
In 2000, despite evidence of mismanagement, the government then (under prime minister Dr Mahathir Mohamad and finance minister Daim Zainuddin) decided to bail Tajudin out, buying back his MAS shares for the same RM1.79 billion he paid in 1994 — or equivalent to RM8 per share even though the stock was at that time trading at only RM3.68. Subsequently in 2002, MAS lodged a police report against Tajudin for allegedly causing the carrier to suffer losses in excess of RM8 billion. There were also numerous civil suits filed by government-linked companies (GLCs) alleging that Tajudin profited from breach of fiduciary duties. In 2011, under the Najib Razak administration, the government directed the GLCs to cease all ongoing lawsuits against Tajudin.
Despite rounds of restructuring and capital injection from Khazanah, MAS never regained its footing. The airline struggled to compete in an increasingly competitive industry landscape, including from low-cost carriers. Between 2000 and 2014, MAS continued to suffer massive losses interspersed with some years of small profits. Finally, in 2014, Khazanah took the company private — MAS was on the brink of collapse, exacerbated by the catastrophic back-to-back loss of flights MH370 and MH17. It was burning cash and facing difficulty in raising additional capital as investors lost confidence in the company.
With its delisting from Bursa Malaysia, there was now less public scrutiny and shareholder pressure to perform — and perhaps accountability as well. MAS suffered even larger losses between FYDec2015 (it changed its financial year end to December in 2005) and FY2022, only managing to turn in a small profit in FY2023 before things took a turn for the worse this year. But make no mistake, although it is no longer a public listed company, it is wholly owned by Khazanah — and Khazanah’s losses are losses of the people of Malaysia.
Conclusion
Things seldom happen in isolation. And the current crisis in MAS is no exception — it is the culmination of a cascading effect years in the making. There is no question in our minds that the critical turning point was the sale of the 32% stake to Tajudin — the consequences of the bad decisions (lacking transparency, governance and accountability) made under his leadership continued to play out long after. The only question, maybe, is why? Why pick Tajudin and why the bailout, not of MAS but the private-sector businessman? Or perhaps it was not Tajudin who was bailed out?
The rapid expansion and mismanagement funded mostly with borrowings weakened MAS’ balance sheet going into the AFC. That left it vulnerable to economic downturns — high gearing and interest expenses took a big chunk out of cash flows. As losses piled up, there was less capital available for reinvestment, including in service quality and new aircrafts. It necessarily meant smaller budgets for technology and innovation as well as to attract and retain talent. Its ageing fleet became less fuel-efficient — and the airline less cost competitive — relative to, say, that of SIA, which has one of the youngest fleets in the world. All these made MAS a less attractive option for travellers, which in turn led to a lower load factor, more losses and even lesser cash for reinvestment. It is a vicious cycle.
Yes, there is a global shortage of aircraft components due to persistent supply chain disruptions stemming from the Covid-19 pandemic. But to say that the government did not sufficiently protect MAS from foreign competition (as some lawmakers have been quoted as saying) is defeatist, and probably part of the problem to begin with. If we cannot make an honest assessment, how can we prescribe the solution?
It has been 25 years since Khazanah took over MAS in 2000. Despite injecting billions of ringgit into the company, it has failed to turn it around. If anything, losses have grown even larger and its raft of problems worse. No doubt more taxpayer money will be pumped into MAS for the foreseeable future. The definition of insanity is doing the same thing over and over and expecting different results. It is irrational. To overcome the challenges of MAS, you need a new solution.
Why did we write this article? In many aspects, MAS is a microcosm of the many challenges we see in the broader Malaysian economy today — and a looking glass into the possible future. One single decision, at a critical juncture, can determine which path we take — by creating either a self-fulfilling virtuous cycle, or a vicious one.
The history of MAS has proven that private-sector ownership (under Tajudin) does not necessarily always do better than the government. It has also proven that government investment companies or government-linked investment companies (GIC/GLIC) are not best placed to create value, to be the catalyst for a turnaround. That is a myth created to perpetuate a national agenda that has gone haywire. We will write another article comparing the performance of companies run by GIC/GLICs versus the private sector to prove the point.
Box Article: Is it fair that savings of the poor are used to fund the investments and expenditures of the rich?
A couple of weeks back, we highlighted the fact that the US has historically attracted the largest chunk of global portfolio capital flows for myriad reasons, including the US dollar’s unique position as the primary reserve and trade settlement currency and perception as a safe haven, as well as its economic growth, market breadth, depth and liquidity. You can scan the QR code for a refresher on the article (“Contrary to theory, capital, ironically, flows to developed economies from emerging countries” published in The Edge on Oct 21, 2024). This continuous flow of capital from the rest of the world underpins its economic dynamism — capital drives innovation and growth, which in turn attract more talent and investment inflows in a self-perpetuating virtuous cycle. As a result, US stocks have outperformed many of the equity markets globally over the past decade, with the S&P 500 index giving investors a compound annual total return exceeding 13%, on average.
While the US is the largest equity market in the world, it also punches well above its weight in the benchmark MSCI All Country World Index, with a more than 64% share, even though the country contributes only about 26% to global gross domestic product. This is due, in large part, to its high market liquidity (index providers are selective with the countries and companies to be included in their indices), thanks to both domestic and foreign fund flows. Liquidity — which is further boosted by the rise of indexing and passive investing in exchange traded funds (ETFs) — raises stock valuations, further enhancing the market’s attractiveness to investors and future initial public offerings.
If that seems unfair, that the poor should use their hard-earned savings and scarce capital resources to fund and subsidise the rich, you would be right. It is. But capitalism was, is and always will be about maximising profits and returns to those who own and invest capital. Let’s not fool ourselves. Capitalism widens the incomewealth divide and perpetuates systemic inequality such as access to quality healthcare, education and opportunities. Yes, we said it.
Whilst there are attempts to integrate social justice into freemarket principles — through regulation, affirmative action, government-led interventions and such — with the objective of greater inclusiveness, whether that makes sense is debatable. There are other (better) ways to promote social justice — for fairer and more equitable distribution of resources, equality of rights and opportunities — such as progressive taxation, a strong social safety net and raising the standards of universal education. An axe is to cut wood. A spade is to dig holes. Don’t use a spade to chop wood. This inevitably leads to even greater inequalities, inefficiencies, wastages, corruption and so on.
Fair or not, this outsized US dominance is not expected to change in the foreseeable future. A recent report by JPMorgan Asset Management projects the country’s dominance in the global equity market will not decline by much over the next decade; it is estimated to hold around a 60% share by 2037 (see Screenshot). This is predicated on the broadening out of artificial intelligence spending and productivity gains, driving earnings growth across sectors of the economy.
This view dovetails with our belief that while there is a case for greater caution in the shorter term — because of prevailing high valuations (especially in the handful of largest-capitalisation stocks) and expectations amid heightened uncertainties — US corporates may well continue to outperform for the foreseeable future. That said, investors should also be prepared for lower average total returns over the next 10 years, due to the high base effect and concentration risks in the Magnificent Seven stocks, as recently highlighted by Goldman Sachs. We will elaborate on our market outlook as well as potential investing themes for 2025 soon.
—— End of Box Article ——
The Malaysian Portfolio fell 0.1% for the week ended Oct 29, outperforming the benchmark FBM KLCI, which fell 1.6%. Harbour-Link Group (+3.4%), United Plantations (+2.1%) and Kumpulan Kitacon (+1.4%) were the top gainers for the week; while the biggest losers were Insas Bhd – Warrants C (-7.9%), IOI Properties Group (-2.6%) and Gamuda (-1.1%). Total portfolio returns now stand at 200.6% since inception. This portfolio is outperforming the FBM KLCI, which is down 11.7% over the same period, by a long, long way.
The Absolute Returns Portfolio also ended 0.5% lower for the week, paring returns since inception to 12.5%. The top three gainers were CRH (+4.2%), CrowdStrike (+3.9%) and OCBC (+0.3%). DR Horton (-7.2%), Tencent (-2.3%) and Berkshire Hathaway (-1.3%) were the notable losers. Shares for DR Horton fell after the homebuilder reported weaker-than-expected sales and earnings, as higher-for-longer-interest rates and rising home prices negatively affected affordability. The company also provided a cautious guidance for FY2025 that were softer than market forecasts.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
