It was reported on Sept 4 that the Tourism Minister had assembled a team from Sarawak and Sabah to negotiate the purchase of MASwings from Malaysia Airlines Berhad. In fact, he had stated the State’s interest some time ago.
MASwings plies the domestic circuit of Sabah and Sarawak. Even in the pre-MASwings days the domestic sector was a graveyard sector to Malaysia Airlines. It was never profitable. At best it was run as a welfare service for the rural folks. Indeed it is hard to see any profit from some of the sectors.
On the broader share investment circles, the airline counter has always been seen as a poor returns counter. MAS itself is an example of a bad, bad counter. Now AirAsia is also on the down-trend and there are talks of privatization and there are still detractors to the low-cost model.
Therefore, for the state to venture into this business and to buy shares of MASwings is nothing short of risky. It may even be argued as foolhardy.
So, with so much stacked against this industry, is this only an emotional and nationalistic decision that overlooks economic outcomes?
Another issue currently hot in the local media is the State’s education policy and from it is the argument that past persistence to push away English in favour of exclusive protection of our national language is a nationalistic decision that does not bear economic substance. The whole country is paying for it now.
Will our decision to invest in an airline one day come to this sad conclusion? Is this a patriotic proposition without the substantive business supposition?
If indeed MASwings was still in the red, then Malaysia Airlines Berhad would be most happy to unload a loss-making subsidiary. However, two weeks ago came the news that MAB have thought twice about her disposal and may now deny the state government of the purchase as it wants to spin off MASwings as a regional airline.
Perhaps this is a respite that the Sarawak government should use as an opportunity to take stock of and reassess its decision in such a venture.
Indeed, our minister has not stated how to approach the market or what strategic advantage there is in Sarawak government owning this airline. Being Minister Of Tourism, Abang Zohari had stated that he believed that if MASwings was to come under Sabah and Sarawak, the goal of tourism markets could be achieved.
What is the business model for the airline to survive, much less to thrive?
MASwings currently runs only turboprop aircraft, including Twin Otters. The Minister had stated the Government’s intention of making MASwings into a regional airline. It has ambition to fly the regions including Southern China, the BIMP-EAGA region, as well as the Asean capitals.
In Wingless Over Borneo, I argued that it is not the airline that makes the passengers but the economy of the destination that makes it a worthy destination for the airlines. Thus it is reiterated that buying an airline for the state does not per se create the passengers. It is dangerous to base a huge investment of public fund on this notion; that you bring in the flights and people will fly in.
A closer analysis will perhaps see a flaw in that notion. Does the destination make the airline or the airline make the destination? If Kuching was so developed and appealing to visitors, then why are the airlines not sustaining their flights into Kuching?
AirAsia had tried flying from several destinations into Kuching, with Kuching-Hong Kong, Kuching-Jakarta, Kuching-Macau, Kuching-Bali all routes that could not last. Dragonair is another casualty.
So was it Kuching that could not feed the flights, or was it Hong Kong, or Macau or Jakarta or Bali?
On a wider issue, perhaps there is just no business in Sarawak for travellers to fly into Sarawak, hence the need to stimulate our wider economy before anything else?
Perhaps Kuchingites, and Sarawakians for that matter, still do not have the economic standing for constant holiday trips? Why is tourism always pointed out to be the culprit for poor traveller arrivals?
In the case of AirAsia they can pull off one flight and try other destinations. It will not be easy for the government if the airline fails.
The state airline will have to connect the whole state, sustaining flights to Sibu, Miri, Mukah and all the other small towns. It has no option to pick and choose destination.
If say, Sibu is a loss-making sector, the airline cannot just pull the plug. There is a welfare issue now, as well as the sustenance of the state economy. How long can Sarawak government withstand the losses?
In any case, economists around the world have repeatedly expounded that it is not the business of the government to venture into business. A local example of state-owned enterprise that did not take off would be
First Silicon, now taken over by X-Fab.
There are also ominous signs against setting up of airlines in the region. It is a very competitive region. Do we have the deep pockets of Singapore Airlines? Cebu Pacific and Malindo are crowding into the Philippines and Indonesia respectively. Scoot, Silkair, Jetstar fly from Singapore and into the region that are our intended market.
This is in addition to the conventional airlines or ‘legacy airlines’ as Tony Fernandez cynically calls them. Followers in the industry will find it harder and harder to survive, let along catch up.
The regulations that Asean governments once controlled and allowed local airlines to dominate their local market are now dismantled. So MASwings cannot expect any governmental protection in the field.
If, God forbid, this Sarawak government-owned airline flounders and MAB has happily cut all the domestic sectors within Sarawak, what will the State Government do – go back to federal to ask them to take back the sector? If MAB still want to take back the domestic graveyard sector.
Then there is the question of human resources and expertise. While pilots may be easy to source, what about the back up staff, the aeronautic engineers, routing analysts etc. So when we do not have the expertise, can we attract expatriate? Our shrinking ringgit then is an issue.
Even if we do have the expertise, it is not the best time to enter the industry. With the world in turmoil and economically the region is at its weakest for some time.
Then it must be realized that Asean is now deregulating. For those airlines that want to capture the freer Asean, such as AirAsia, they have moved into this region already. In fact AirAsia has been thinking Asean for a long time, shifting its regional office to Indonesia for a while. So MASwings cannot expect any governmental protection. Asean is being opened up and the other airlines are well ahead in the region.
Another point to consider is the weakening ringgit. Currently, MASwings only has turboprop aircrafts. To realise the minister’s ambition to fly to Bangkok, Jakarta and the Asean region, the airline must purchase new jets.
An Airbus A319 costs US$88 million at list price, while an A320 would cost US$97 million per unit. At RM4 to US$1, that is RM352 million and RM388 million respectively. Even to lease or to buy second hand ones are generally quoted in US$.
AirAsia is now trying to dispose off their old aircrafts, so perhaps we could get it on the cheap! Even second hand ones need refurbishment. Thus, it is not just the initial cost of purchase of the shares of MASwings, but also the investment into the hardware that will be enormous.
So if the state should not buy the airline, then what alternative is there?
Previously Tony Fernandez had proposed to set up a low-cost terminal in Kuching so he could make Kuching a hub for the region. This was rejected by our minister saying that the current airport terminal is sufficient to accommodate passenger traffic.
Instead of throwing state funds into buying and operating an airline, Sarawak government should look into attempts to sustain and support the airlines already coming into Sarawak. Existing airlines are always looking for new opportunities and destinations so we should look into helping them when they come in.
What was the intention of Tony Fernandes in building a terminal for itself? Is it necessary to have a terminal for itself before Kuching is made into a hub? How can we help him make Kuching a hub, even if we did not give him a terminal? As a hub, he will be able to park his aircraft in Kuching overnight and then from here fly to and from its various destinations. It is primarily a cost issue.
Can the state incentivise him to set up the hub here, without building the low cost terminal? Does Malaysian Airport Holdings Bhd have to have monopoly over our airport sector? Do we need to create a more robust economy all-round before we can sustain more airline traffic?
There are a host of issues the State will have to think through before Sarawak can take up the shares of MASwings.
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