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Is this the end for Malaysia Airlines?

07/18/2014| 11:35:09 AM|

The loss of a second Boeing 777 in 131 days has put Malaysia Airlines at a very serious financial risk as it struggles to overcome industry and consumer fallout after the disappearance of Flight 370.

On Thursday, Flight MH17 heading from Amsterdam to Kuala Lumpur crashed in eastern Ukraine, killing all 298 passengers and crew on board, according to reports from the Russian news agency Interfax.  

Early speculation centered on the possibility it was shot down at an altitude of more than 30,000 feet.

The tragedy has pushed down the airline’s share price by 5.5 per cent in US trading, comes just as the airline had been hoping to return to a more normal state.

The stock tumbled 8.9 percent as of 8:34 a.m. in Kuala Lumpur. It had declined 27 percent this year through yesterday. Malaysia’s ringgit weakened 0.5 percent against the dollar, heading for its biggest drop in four months.

Malaysian Air had been speeding up an overhaul of its business after the disappearance of Flight 370 spurred the longest search for a missing plane in modern aviation history.

Bloomberg reports the airline has lost a total 4.57 billion ringgit ($1.4 billion) since the start of 2011, and the company has said the lost jet had put additional stress on operations.

“This is shocking, there will be a selloff as investors will want to sell first and get more information later,” Geoffrey Ng, an adviser for strategic investments at Fortress Capital Asset Management Sdn., which oversees about 1 billion ringgit, was quoted as saying by Bloomberg in Kuala Lumpur.

“This will raise concerns about the safety culture of airlines in general.”

Slumping into the red

The airline has been in the red for the last three years.

Last year alone, its losses ballooned to 1.17 billion ringgit ($363 million), nearly three times larger than its 433 million ringgit loss in 2012.

As a flag carrier, it is required to fly unprofitable domestic routes, and its strong union has resisted operational changes. Nimbler discount rivals such as Air Asia have expanded rapidly, while Malaysia Airlines has been like a supertanker, slow to change direction.

The disappearance of Flight 370 with 239 people on board — about two-thirds from China — further compounded the airline's woes by affecting public confidence and damaging its business with China.

It put the carrier under global scrutiny, jeopardising its reputation and prompting boycotts in China. It has also hurt the country as a travel destination, with Chinese tourists canceling their visits to the Southeast Asian nation, according to Malaysia’s tourism promotion agency

In an interview last month, Malaysia Airlines Chief Executive Ahmad Jauhari Yahya said the airline, which kept a low profile after Flight 370 disappeared on March 8, began to boost its marketing again this month.

"We need to operate far more efficiently. We cannot simply go on with incremental improvements. Our only option at this point is radical or sweeping change," Jauhari said. "We have had a lot of financial reset but we have never had an operational reset."

Jauhari declined to say what the changes will entail, but said the airline is looking at all avenues, including a possible downsizing. A detailed business plan will be rolled out later, he added.

Jauhari said the airline will retire more than a dozen Boeing 777 planes in three years as part of a fleet renewal. Before that, the planes will be sent for refitting in October to add more seats to help boost capacity and revenue, he added.

Flight 370 went missing while flying from Kuala Lumpur to Beijing. It is thought to have crashed in the southern Indian Ocean but no trace has been found.

Officials said the underwater search for the jet will shift to an area south of the first suspected crash site in the Indian Ocean.

Malaysia Airlines Chairman Mohamad Nor Yusof said the carrier is still "grappling with (repairing) confidence and reputation" after the plane's disappearance but that the company is not currently thinking of bankruptcy as part of a restructuring.

"We will consider bankruptcy if we are insolvent but we are not. We will consider bankruptcy if we cannot meet our obligations to creditors but we are not in that state," he said, adding that the airline still has a strong cash flow of more than 3 billion ringgit ($931 million).

Officials said the airline's earnings were also hit by last year's depreciation of the Malaysian currency, the ringgit, because 60 percent of its costs were denominated in U.S. dollars.

Before the MH370 incident, the only deaths on a 777 had occurred during the crash of an Asiana Airlines plane upon landing in San Francisco last year.

In a statement after the MH17 incident, Boeing said: “Our thoughts and prayers are with those on board the Malaysia Airlines airplane lost over Ukrainian airspace, as well as their families and loved ones. Boeing stands ready to provide whatever assistance is requested by authorities.”

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TAGS: MH370 | MH17 | Malaysia Airlines
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