Question

MALAYSIA AIRLINES: THE MARKETING CHALLENGE AFTER MH370 AND MH17

MAS was the national carrier of Malaysia. The company started as Malayan Airways Limited and had its first commercial flight in 1947. After the separation of Singapore from Malaysia, the former partners formed separate entities in 1972, and were independently branded as Singapore Airlines and MAS. The larger part of MAS’s shareholdings (69.4 per cent) was retained by the Malaysian government’s sovereign wealth fund, Khazanah Nasional Berhad.8 MAS’s two subsidiary airlines, Firefly and MASwings, operated on different routes; Firefly operated only between tertiary cities in Malaysia and its two home bases, while MASwings operated inter-Borneo flights.9 Committed to customer service, MAS has received many awards, including a five-star rating from Skytrax and the title of “world’s leading airline to Asia” at the World Travel Awards.10 MASkargo and MASCharter, the other subsidiaries, operated cargo and charter flights, respectively. The airline’s non-aeronautical services included maintenance, repair and overhaul (MRO) (see Exhibit 1).

First Phase of Loss

In 1997, the Asian financial crisis brought the expansion of MAS to a halt. Reports revealed that much of the company’s growth had been ego-driven and without efficient management.14 During this turbulent phase, the organization suffered a loss of RM260 million. The airline reduced its losses by 63 per cent in FY1998/99, but the trend turned downwards again. There were subsequent losses of RM417 million in FY2000/01, and RM836 million in FY2001/02.15

Second Phase of Loss

The second phase of loss occurred in 2005. Although the business saw an increase in passenger traffic (10.2 per cent) and passenger revenues (10.3 per cent) as compared to 2004, MAS still incurred a loss of RM1.3 billion. The main reasons for this decline included a decrease in cargo revenues in comparison to the previous year (4.2 per cent) and an increase in the various cost overheads, which primarily consisted of increased fuel prices (40.4 per cent), handling and landing, MRO, and widespread assets unbundling (WAU) charges and leases.16

Turnaround Phase (2005 to 2007)

Management realized that a business turnaround was needed to sustain MAS. Starting in 2005, the senior management team decided to draft a new blueprint to drastically improve the situation. At the end of 2005, Idris Jala was inducted as managing director to implement the business turnaround plan. While publicizing the restructuring plan, Jala was quoted as saying,

We are dedicated to the creation of a company that will be a source of pride and admiration for its employees and indeed all its stakeholders. The Malaysia airline of tomorrow will maintain its fivestar product, have a competitive cost structure in the region, be renowned as being one of the best places to work in Malaysia, have closed much of the revenue performance gap to our peers, and will return to profitability in 2007. We can do this, and we will.17

After the plan was put into practice, MAS announced a profit of RM851 million by the end of 200718 — far beyond the expected target of RM300 million. The restructuring exercise emphasized the key areas of pricing, revenue management, route rationalizing, rescheduling of flights and tweaking the operating model (from point-to-point services to hub and spoke).

Third Phase of Loss

MAS recorded a massive loss of RM2.52 billion in 2011, due to an increase in fuel (25 per cent) and nonfuel expenses (50 per cent).19 Although revenues improved marginally from RM13.5 billion in 2010, to RM13.9 billion in 2011, the higher fuel and non-fuel expenditures — namely, the redelivery of aircrafts (RM602 million), impairment of freighters (RM314 million) and stock obsolescence (RM179 million) — pushed the organization towards another loss.20 As part of a major restructuring of the leadership team, Yahya was appointed managing director and group CEO in September 2011.21

Subsequent Turnaround Phase

Led by its new CEO, MAS implemented various initiatives in response to its losses, such as route rationalization. The rerouting exercise enabled the airline to reduce available seat kilometres, one of the key performance indicators (KPIs) in the aviation industry, by 6 per cent. The company posted a net profit of RM51.4 million for the fourth quarter of 2012, a turnaround from the year before when the company was running at a net loss of RM1.3 billion.22 Yahya stated, “We continue to gain traction in multiple initiatives that focus on increasing revenue and managing costs. The results are very encouraging for our teams who have worked hard throughout the year.”23

Although aggressive pricing improved the seat capacity and protected the market share of MAS, the weakening of the national currency increased the operating cost of its expanding fleet. The airline recorded a loss of RM375.4 million in the first half of 2013.24 Yahya expressed his concerns: “We are extremely disappointed with these results, which emphasize the need to maintain our focus on cost control and drive improved efficiency and performance across all divisions.”

EVENTS IN 2014 The MH370 Disaster

MAS flight 370 was an international passenger flight departing from Kuala Lumpur and bound for Beijing. The airplane vanished on March 8, 2014, after losing contact with air traffic control within an hour of taking off. The plane carried 227 passengers of 15 different nationalities and 12 crew members.25 The search operation, supported by numerous nations, started in the Gulf of Thailand and expanded to the South China Sea, the Strait of Malacca and the Andaman Sea.26 A week-long investigation concluded that the airplane had diverged from its original route plan.27 Thus, the search area was expanded to the Southern Indian Ocean (West Australia).28 The internationally supported investigation teams used various tools, such as satellite communication, hydroacoustic data and ping detections, and considered possible in-flight happenings, such as a power failure, an unresponsive crew and passenger/crew involvement, to rule out various explanations. After an extensive search of all likely locations, no debris was retrieved. None of the locations could be declared the crash site. Although the lack of information gave rise to many wild speculations about the disappearance of the aircraft, flight MH370 was eventually declared as having fallen into the Southern Indian Ocean.29 The hunt for MH370 was the most expensive search ever undertaken, with costs reaching as high as US$100 million.30 Unsurprisingly, the tragic disappearance had an enormous impact on MAS’s post-performance figures. The company’s stock prices declined, booking rates plummeted, cancellations increased31 and there were even boycotts by travel agents in China.32

The MH17 Tragedy

Just 131 days after the MH370 disaster, MAS suffered yet another blow. On July 17, 2014, flight MH17, en route to Kuala Lumpur from Amsterdam, was hit by a surface-to-air missile while flying over Eastern Ukraine near the Russian border.33 The conjecture was that the aircraft was brought down by pro-Russian separatists with weapons provided by Russia.34 The killing of 298 passengers, 66 per cent of whom were citizens of the Netherlands, was announced as the deadliest air incident35 and the worst civilian airline shootdown in aviation history.36 In light of this catastrophe, various airlines, including Aeroflot, Transaero, Air France, Turkish Airlines, Virgin Atlantic, Lufthansa and S7 Airlines decided to detour around Ukrainian airspace.37

The two unforgettable tragedies, along with other competitive and operational difficulties, left MAS in a vortex of challenges. What immediate strategy could the leadership team use to counter such obstacles?

THE IMPACT OF TWO DISASTERS

The 2014 catastrophes had deeply impacted each member of the business value chain. MAS employees were in a state of emotional shock. The president of the flight attendants union reported, “Some of our members cannot fly because they have been affected mentally.”

MAS stock prices dropped drastically (13 per cent)39 after the MH17 tragedy, and the impact of the crisis was felt throughout the world. The markets in the United States and Europe witnessed a decline. Chris Weston, an IG market analyst, noted, “Today is going to be a pretty ugly day.”

Apart from MAS, the stock process of other global airlines also recorded a downturn. Some of these losses included the stocks of Delta Air Lines (by 3.4 per cent), United Continental (3.9 per cent), China Eastern (2.2 per cent) and American Airlines (3.3 per cent).41 Overall, MAS lost US$148 million in the first quarter of 2014. The loss included the cancellations or delays of more than 30,000 bookings after the first disaster.

Further impacts of the MH370 and MH17 tragedies included increases in insurance premiums, particularly for flying over conflict zones such as Syria, Iraq and Afghanistan. Bypassing conflict areas and taking longer routes to reach destinations would substantially increase the fuel and other costs. As per the clauses of the international treaty, MAS was legally responsible for disbursing US$175,000 per person impacted by the tragedies, for a total of more than US$40 million.44 Beyond these costs, employee salaries, union pacts and catering agreements would have to be renegotiated to help overcome this challenge. How could MAS regain its position as one of the finest airlines in the world in order to retain and attract customers?

MALAYSIA: THE HUB Tourist Destination

Malaysia was known for its plethora of tourist attractions. Its rich history, culture and natural attractiveness made it an ideal vacation destination. In 2012, the United Nations World Tourism Organization listed Malaysia as the 10th-most visited country,46 and it had been witnessing a consistent increase in the number of tourist arrivals since 1998.

Tourism had been cited as a recession-proof industry, as both domestic and international travelers commuted throughout the year. Offers of affordable airfares by low-cost carriers emerged as an important enabler in promoting Malaysia as a popular tourist destination. The rising demand for medical tourism, ecological tourism, luxury tourism and business tourism had propelled Malaysia’s acceptance as a preferred tourist destination across the globe. Tourism had been designated a national key economic area by the Malaysian government. The government started the “Entry Point Project,” which included the removal of import duties, to help in eventually positioning Malaysia as a popular and duty-free shopping country. Its geographical proximity to China and India also helped in increasing the flow of tourists.

The conducive legislative environment was one of the critical contributing factors in promoting tourism in Malaysia. The increased focus on medical tourism had also furthered economic growth. A government controlled agency called the Malaysia Healthcare Travel Council was introduced to supervise and promote healthcare-related travel. Malaysia attracted 236,836 foreign patients in 2012, generating RM751 million in value sales. To further improve business tourism, the Malaysia Convention and Exhibition Bureau (MyCEB) had been reinforced. To provide potential travelers with holistic entertainment, the Malaysia Mega Biodiversity Hub created many initiatives to develop and promote ecological tourism in Malaysia.48

Travel and Tourism: Future Potential

In 2013, travel and tourism directly contributed RM70.4billion to Malaysia’s gross domestic product (GDP) (7.2 per cent of total GDP) and this figure was anticipated to increase by 7 per cent in 2014. From 2014 to 2024, travel and tourism was expected to increase by 4.4 per cent per annum to eventually reach RM115.4 billion (7.6 per cent of total GDP) in 2024. Similarly, the total contribution of travel and tourism to the country’s GDP was RM158.2 billion (16.1 per cent of GDP) in 2013, and was predicted to increase by 6.8 per cent in 2014; the evaluation would reach RM262.5 billion (17.3 per cent of GDP) in 2024.

Moving in a phased manner, MAS planned to choose countries that may be prioritized as part of its restructuring plan. Data shows forecasted arrivals by country of origin from 2014 to 2017, with Singaporean and Indonesian nationals expected to make up the highest number. Singapore would provide the highest-spending tourists .Table shows that air travel would be the preferred mode of travel in the country. MAS, being the national carrier, could target a maximum share of this expected increase in air travel by incoming tourists.

The situation was equally promising in terms of departures. The number of passengers seeking overseas departures was expected to witness consistent growth. Of the potential tourists, the majority would leave for vacation purposes, and most were expected to travel by air.

FINANCIAL KPIS AND THE FUTURE

After the first tragedy in March 2014, MAS witnessed a decrease in the number of travelers and in revenue passenger kilometres, a criterion which was often used in evaluating aviation performance. In line with the broader trend, the Samoan women’s rugby team switched from MAS to Thai Airways on July 27, 2014, for a World Cup event in France.49 One travel agent who saw a cancellation rate of more than 30 per cent of MAS bookings in her office noted the anxiety of the passengers, saying they were “very, very afraid about anything else happening again.”50 MAS recorded an after-tax loss of RM576 million at the end of November 2014.51

Of all the possible options, could a restructured pricing strategy play a critical role in retaining and attracting customers to MAS? What specific new pricing structures would make customers choose MAS over other airlines? How should the tradeoff of decreasing price and increasing value be managed? After so many tragedies and such a massive backlash, what actions must be taken in order to recover loyalty to the airline and recoup MAS’s losses? Yahya knew that the answers to these questions would decide whether MAS would take off once again or remain grounded.

1. Faced with prospective restructuring options - namely rebranding, a merger, bankruptcy, and privatization - How should each be weighted to save MAS from monetary and non-monetary losses?

2. Of the three likely pricing strategies (i.e. increasing value, decreasing ticket prices or undertaking both), which would you choose if you were the CEO of MAS in order to retain and attract customers?

3. What is value communication? How can value communication strategies be classified? How could such a strategy be leveraged to restore MAS's market share?

4. Could change management bring about the desired transformation of MAS, particularly in terms of customer perception? In what contexts could change occur?

5. Bearing in mind potential of the travel and tourism industry in Malaysia, can diversification into this arena help MAS retain its market share?

Answer 1

1) Malaysian Airlines as an organization has been around for a few decades and overcome at least 3 phases where its business model was challenged in different contexts -

• In 1997 due to the Asian financial crisis
• In 2005, largely on account of internal operational inefficiencies
• In 2011, due to losses on account of increase in expenditures - fuel and non-fuel

Interestingly, on the last two occasions the response was led by a restructuring of the leadership team and a new leader at the help who took clear decisions to address the problem each time. The current scenario is a different kind of problem altogether as it stems from adverse PR due to extremely negative incidences of fatalities due to crashes which have led to a loss in confidence of the customer. As far as the business context is concerned there are adequate opportunities in terms of a growing tourism and travel industry - both inbound and outbound - in Malaysia which it can ride on. The fundamental issue is the loss of customer confidence and all financial results are as a result of this phenomenon, which is a natural human reaction to the scale of the disasters. In such a case the restructuring needs to be led by a rebranding strategy that has the fundamental marketing objective of restoring customer confidence in the brand and airline offerings. The airline has always had a heritage of quality of service and should look to leverage that in a communication driven strategy.

2) Pricing is not a fundamental issue in this case and should not be looked at for knee-jerk alteration to drive demand. Instead there should be a focus on increasing value of the services being offered and a communication of the value to the customer as she is currently unsure due to the recent air crash incidences. One of the fundamental areas where customer value can be pushed and also be communicated is passenger safety and the priority that the airline puts on passenger safety which directly addresses the issues that led to the crisis in the first place. If anything the pricing should stay the same, with tactical promotions such as discounted prices coinciding with the travel season as a sweetener to the overall offering.

3) Value communication is a type of customer communication strategy where the objective is to educate the customer about the value of the offering on your product versus what is available in the market so that the customer is able to make a more informed purchase decision. Typically this involves messaging about brand values such as heritage/trust (which competition may not be able to offer), a product USP which can be a key ingredient or unique benefit relevant to the customer etc.

Depending on the nature of the product or service, value communication can be

• Economic Value Communication - which directly justifies the difference in pricing in economic terms by providing tangible information
• Economic Value Assurance - which communicates assurances trying to justify the value e.g. brand trust, heritage etc.
• Psychological Benefit Assurance - communicate intangible benefits linked to the offering e.g. passenger safety
• Psychological Value Assurance - communicate intangible value to the customer e.g. peace of mind

Some or all of these strategies will be very relevant to MAS as they try to rebuild customer confidence in their offerings and focus on intangibles such as trust, heritage, passenger safety, loyalty etc.

4) A large part of the communication story that MAS takes to rebrand itself would be about change. While the logo etc. may remain the same to leverage the equity of the brand that has been established over the years the change would be in terms of the key message in an integrated campaign which chooses to focus on the key issue that the customer is saddled with - a loss of confidence in the airline being able to provide its basic services. Change management will be internal - in terms of employee focus on reassuring the customer in whatever interactions they have and also external in terms of communicating what has changed and improved in their offerings in light of what happened, without calling it out directly or referencing the crashes that triggered the slide in business.