An important lesson to learn from sudden collaspe of MYAirline

17 October 2023

The suspension of operations on Thursday (Oct 12) by Malaysian budget carrier MYAirline, which was launched less than a year ago, should provide an important lesson for regulators in Malaysia as well as throughout Southeast Asia.

How did Malaysian budget carrier MYAirline fail so quickly? Malaysia should review requirements and policies for new airlines following the sudden collapse of MYAirline, writes aviation analyst Brendan Sobie.

The suspension was abruptly announced by the airline at about 5.30am, only 45 minutes before the first of 40 MYAirline flights scheduled on Oct 12 were supposed to depart.

Hundreds of unsuspecting passengers arrived at Kuala Lumpur International Airport Terminal 2, where almost all MYAirline routes originate, to find closed check-in desks. The government stated it also did not receive any prior notification.

Future flights to another 125,000 passengers had been sold under tickets valued at more than RM20 million (US$4.2 million) that will now not be honored.

MYAirline had carried almost 2 million passengers on nine domestic and two international routes since commencing operations on Dec 1, 2022. It had captured about a 10 per cent share of Malaysia’s domestic market, which currently consists of about 2 million passengers per month.

MYAirline had nine second-hand aircraft with commitments for several more.

Just a few months ago, management was raving about plans for ordering at least 100 new aircraft and an initial public offering.

How did the airline fail after only 10 months and such big ambitions?

NOT A SURPRISE FOR INDUSTRY FOLLOWERS

The suspension was not a surprise for industry followers as the airline had financial issues for several months, sparking concerns with suppliers and employees.

MYAirline was behind in paying salaries, airport fees and many other items. It had been trying to secure new investors for the last few months with a last-ditch attempt failing on Oct 11, when a deal with a potential white knight fell through.

It is hard to imagine how regulators did not realise MYAirline was in financial distress.

In Malaysia, the Malaysia Aviation Commission (Mavcom) regulates economic matters and ensures airlines are financially fit while the Civil Aviation Authority of Malaysia (CAAM) is responsible for making sure an airline meets technical requirements, including safety.

While it is not unusual for an airline to cease operations, particularly a start-up airline, it is unusual for regulators not to be aware of airlines’ financial issues, and not to hold regular discussions with struggling airlines.

The Malaysia government immediately expressed its disappointment, with Transport Minister Anthony Loke calling MYAirline irresponsible and stating that “Mavcom was caught completely off guard”.

However, a regulator should be regularly monitoring an airline’s health and not relying on it to voluntarily discuss its problems.

FLAWED BUSINESS PLANS

Mavcom initially awarded MYAirline an air service licence in November 2022, essentially concluding it had sufficient capital, sound shareholders and a viable business strategy. It is questionable whether MYAirline met these requirements, and prior to its launch, many industry observers thought its business plan were unrealistic.

The biggest flaw in the business plan was a misguided assumption that AirAsia was in a weak state following the pandemic, leaving a void in the market.

AirAsia, which has an over 50 per cent share of Malaysia’s domestic market, is not as financially strong as prior to the pandemic, but was still able to fight back. A weak gorilla is still a gorilla.

AirAsia dumped fares and capacity on all MYAirline routes – which should not be a surprise as this is how AirAsia also responded to new competition prior to the pandemic.

AirAsia was not making money on any of the 11 routes that MYAirline operated – despite load factors of virtually 100 per cent – but it was able to cross-subsidise due to profits on non-overlapping routes.

The AirAsia strategy worked and MYAirline was extremely unprofitable as its airfares were too low to cover costs. MYAirline’s initial tranche of capital, which it thought would be sufficient for at least one year, ended up running out after only six months.

Over the last few months MYAirline realised its domestic operation was bleeding and was trying to pivot to the international market.

MYAirline cut two of its nine domestic routes earlier this month and was working on launching several new scheduled international routes, including Chiang Mai, Da Nang, Ho Chi Minh City, Medan and Phuket. It was also working on launching charter flights to Bangladesh, China and Saudi Arabia.

However, the pivot required significant investment and the airline ran out of time. MYAirline also failed to secure slots at some of the international airports it was targeting for several months, including Singapore.

Even if MYAirline had secured the capital to implement a new business plan, it would have been an uphill battle given intense aviation competition in Malaysia and regionally.

Ultimately, Malaysia’s market is simply not large enough for more than three main competitors. In addition to the AirAsia Group, Malaysia Airlines Group and Batik Air Malaysia (formerly known as Malindo Air) are well established, leaving little room for new entrants.

However, there always seems to be a steady stream of entrepreneurs wanting to start an airline, not realising how much capital is required and how difficult it is to achieve profitability.

LESSONS FOR REGULATORS

Having more airlines is good for consumers and pleases politicians as their constituents have access to lower fares, but having a sustainable industry is critical in the long-term.

Malaysia should relook its policies for start-up airlines to ensure any new airline is financially fit and has a decent chance of surviving. It should also review requirements for maintaining a licence to ensure an airline has sufficient capital to continue operating.

At a minimum, airlines should be required to file quarterly financial reports and have regular meetings with authorities.

It should not be acceptable for an airline to continue operating for months after essentially running out of capital, by relying on revenue from future bookings to pay current or overdue salaries and other bills.

These would be prudent recommendations not only Malaysia but several other Southeast Asian countries who over the years have suffered from similar airline failures.

In Malaysia, another Malaysian start-up airline, Rayani Air, ceased operations in 2016 after only five months, although its sudden exit had less of an impact as it was only operating two aircraft.

Approving airlines that are likely to fail not only risks leaving passengers in the lurch, but could potentially damage a country’s tourism sector.

Almost certainly there will be more start-up airline failures – in Malaysia and throughout Southeast Asia. While regulators should be more careful, any lessons learned from the MYAirline collapse are likely to be quickly forgotten.

Brendan Sobie is the founder of Singapore-based independent aviation consulting and analysis firm Sobie Aviation.

Source: www.channelnewsasia.com

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