More drastic actions may be taken

KUALA LUMPUR: Malaysia Aviation Group’s (MAG) subsidiary, Malaysia Airlines Bhd (MAB) is taking immediate measures to curtail losses, save cash and sustain its business, amid the ‘highly changeable’ uncertainty of the Covid-19 pandemic.

MAG group chief financial officer Boo Hui Yee said the national carrier would undertake more hard decisions to ensure the company’s sustainability through this critical time.

She also cautioned that many airlines including MAB were exposed at risk of bankruptcy due to plummeting demand for air travel globally over the fear of Covid-19 pandemic outbreak.

Boo said the situation has deteriorated rapidly over the weekend forcing stricter travel restrictions by governments globally, which has posed greater challenges in the airline’s operations.

“Passengers are jamming our global contact centre and social media accounts to cancel bookings, putting us in a critical situation. Many airlines are now at the risk of going bankrupt and Malaysia Airlines is no different,” she said via an internal email to MAB’s employees sighted by the New Straits Times (NST) yesterday.

Boo said airlines have taken drastic actions such as cancelling flights and grounding aircraft, imposing unpaid leave, pay cut and retrenched staff to reduce losses and cash bum.

“On the local front, we are facing political uncertainty which has caused volatility in foreign exchange, coupled with oil price slump while the ringgit has weakened against the US dollar,” she said.

Boo said this has resulted in higher cost for the airline, exacerbating its critical financial situation due to slump in travel demand and sales. Thus, more countries had imposed travel restriction and lockdown affected towns, amongst others.

“The start of 2020 has been very challenging thus far. The Covid-19 pandemic has unprecedented wide-ranging impact on travel, trade and supply chain worldwide,” she said.

Recently, the national carrier had been offering the voluntary unpaid leave programme (VLP) to all its 13,000 employees effective from this month.

MAB said such scheme was also extended to staff of its parent company MAG and subsidiaries including MAB Kargo, MAB Engineering, Firefly and MASwings.

“Drastic actions have been taken to ensure the sustainability of cash flow for the business and this includes capacity management, deferring non-critical spend, seeking vendors’ concession, freezing of discretionary spend and cost-cutting in many areas,” she said.

Khazanah Nasional Bhd managing director Datuk Shahril Ridza Redzuan said the entire global industry was in survival mode.

“No airline, including MAB, can withstand the disruption to revenue. We are of course looking at how best to support them (MAB) through this uncertainty,” he told NST.

Bloomberg Intelligence transport analyst James Teo said airlines’ measures were focused primarily on preserving cash to ensure sufficient liquidity.

“These include cutting flights which can’t even cover variable costs, negotiating with suppliers to extend payment terms, deferring non-critical expenditures or projects and asking staff to go on unpaid leave or take pay cuts,” he told NST recently.

Although morale could be affected, he said management of some companies like Singapore Airlines was taking the lead with immediate pay cuts between five per cent and 15 per cent from March 1.

“I believe employees generally understand that collective pay cuts where everyone suffers a little, are a better alternative than job cuts. In past crises like the 2003 SARS and the 2008 financial crisis, management also has some leeway in compensating staff with slightly higher bonuses after profitability returns,” he said.

Teo said the morale issue can be managed via management leading by example and communicating well with staff on why pay cuts, while painful, are necessary in the near term.

He said the measures could be prolonged dependent on how long it would take for countries around the world to contain the Covid-19 outbreak.

“In the case of SARS, things came under control within a few months, and travel was back to normal within about six to seven months, as pent-up demand drove a swift V-shaped recovery.

“Given how much more contagious COVID-19 appears to be though (over 100,000 cases now vs just 8000 worldwide for SARS), we could see a prolonged period of weak demand (like a U-shape), although the recovery could still be quick once the virus is contained,” he said.

MAG had recently induced huge capacity cuts in the first-quarter (Q1) this year with a 7.1 per cent reduction of fight capacity.

“To date, we have cancelled more than 1,600 flights and the number is increasing,” said MAG group chief executive officer Captain Izham Ismail.

Izham said MAB had removed 53 per cent of its capacity in China, followed by 23 per cent in (North Asia) – Korea and Japan.

“We are not the only one. At the rate and momentum of this crisis, more flights will have to be cancelled due to less demand from the marketplace.

“MAG is not spared from all of this (revenue loss). The impact to the market is tremendous. People are not travelling. Businesses are not operating as it used to be. The landscape of the industry has changed tremendously,” he added.

Izham said Covid-19 has hampered MAB’s growth momentum and cashflow in the past nine weeks including the aviation industry in totality.

Relatively, CAPA – Centre for Aviation projected most airlines in the world will be bankrupt by the end of May-2020.

An independent aviation market intelligence provider said coordinated government and industry action is needed to avoid catastrophe (bankruptcy).

“As the impact of the coronavirus and multiple government travel reactions sweep through our world, many airlines have probably already been driven into technical bankruptcy, or are at least substantially in breach of debt covenants.

“Cash reserves are running down quickly as fleets are grounded and what flights there are operate much less than half full,” it said in a statement published on its website yesterday.

CAPA said forward bookings are far outweighed by cancellations and each time there is a new government recommendation it is to discourage flying.

“Demand is drying up in ways that are completely unprecedented. Normality is not yet on the horizon,” it added.

Global airlines could incur between US$63 billion and US$113 billion losses in revenue this year, according to the International Air Transport Association (IATA).

IATA said this would be based on two possible scenarios – limited spread and extensive spread – due to the evolving situation with Covid-19.

Source: NST