Malaysia Airlines to Cut 6,000 Jobs to Return to Profit

Aug 29, 2014 6:18 am ET

(Adds flights under review in sixth paragraph.)

Aug. 29 (Bloomberg) -- Malaysian Airline System Bhd., which lost two jetliners in air disasters this year, will eliminate 6,000 jobs as the national carrier restructures.

Chief Executive Officer Ahmad Jauhari Yahya, whose term was due to end next month, will lead the carrier until July 1, Azman Mokhtar, managing director of majority owner Khazanah Nasional Bhd., said today in Kuala Lumpur. The full impact of the disasters will only be seen in the second half, the airline said yesterday after reporting its sixth quarterly loss.

Sovereign wealth fund Khazanah made a 1.38-billion ringgit ($438 million) buyout offer this month to take Malaysia Airlines private, and the funds are part of 6 billion ringgit it is investing to return the carrier to profit in three years. Prime Minister Najib Razak has said “painful steps” need to be taken to overhaul the airline, which has racked up 4.9 billion ringgit in losses since the start of 2011.

“We believe the fastest way is actually to create a hard reset and create a clean slate,” Azman said. “We needed to have a fresh start because the current MAS, unfortunately the cost structure does not work, unfortunately the revenue has been consistently below its cost.”

The national carrier that traces its beginnings to the 1930s will cut its workforce to 14,000 from 20,000, with Khazanah setting aside funds for retrenchment costs. It’s struggling to repair its image after MH370 vanished in March and MH17 was shot down over Ukraine last month.

CEO Search

As part of the restructuring, Khazanah will review Malaysia Airlines’ services to Europe, renegotiate supply contracts and move the carrier’s headquarters and operations to Kuala Lumpur International Airport, the fund said. It will spend 1.6 billion ringgit on revamp and retrenchment costs.

Khazanah’s buyout will result in the company’s delisting, targeted for completion by year-end. The airline is expected to be relisted in three to five years, Khazanah said. A global search will be carried out to find a new CEO by the end of this year, it said.

Khazanah will invest in a “staggered and conditional basis” over the next three years, it said in a statement. “While funds have been made available, they come with strict conditions, so as to ensure that MAS truly resets its business model and cost structures, in order to be truly sustainable.”

The 6 billion ringgit it is pumping into the carrier is not a bailout, Azman said today as the fund outlined its plans in a 40-page report titled “Rebuilding a National Icon.” Shares of Malaysia Airlines were suspended from trading today. They have lost 19 percent of its market value this year.

Tainted Image

“The need to restructure the company was accelerated” after the disasters damaged the brand, Ahmad Jauhari said in a statement yesterday. “Our company has had to undergo a thorough re-examination and re-evaluation in order to reposition ourselves as a stronger and more sustainable Malaysia Airlines for the future.”

The March 8 disappearance of Flight 370, en route to Beijing from Kuala Lumpur with 239 people on board, sparked street protests in Beijing and prompted boycotts by Chinese travelers. No trace of the plane has been found in the world’s longest search for a missing jet in modern aviation history.

The airline’s yields, or measure of ticket prices, fell 4 percent in the second quarter to 21.7 sen, the company said. It filled 73.7 percent of its seats in that period, 6.7 percentage points lower than a year earlier.

Rebuild Sales

“We expected the impact of MH370” on second-quarter performance, Ahmad Jauhari said. “Given that, our team put in much hard work and effort to regain market confidence and rebuild sales. Tragically, just as we were beginning to see signs of recovery in all regions, we were dealt the blow of MH17.”

Flight 17 carried 298 people and was shot down in Ukraine July 17 on a route Malaysia Airlines said was declared safe by the International Civil Aviation Organization. The Ukrainian government blamed the downing on pro-Russian rebels in the country’s eastern part.

Average weekly bookings fell 33 percent immediately after the incident, the airline said yesterday. Unverified images of near-empty Malaysia Airlines planes have circulated on social media since MH17 crashed. The airline will review its European routes, Khazanah said today.

Malaysia Airlines said it retired its older Boeing Co. 737-400 aircraft at the end of June, six months earlier than planned, to save fuel costs and increase productivity. It had a fleet of 127 aircraft at mid-August.

The company’s cash and cash equivalent dropped to 2.38 billion ringgit at the end of June, compared with 3.25 billion ringgit at the end of March, it said.

The net loss widened to 307 million ringgit last quarter from a year earlier, the company said. Revenue fell to 3.59 billion ringgit. The carrier will probably lose more than 1 billion ringgit in 2014 and continue to report losses through 2016, according to analyst estimates compiled by Bloomberg.

--With assistance from Kyunghee Park in Singapore and Niluksi Koswanage in Kuala Lumpur.