Ahmad Fuaad Dahlan: A Fresh start for Malaysia Airlines

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By Nicholas Ionides in Kuala Lumpur  Photography by Kevin Phillips

In the wake of its great financial restructuring, Ahmad Fuaad Dahlan has set about taking Malaysia Airlines forward with major upgrades to product, fleet and network

When asked about personal interests, many chief executives will talk about reading, outdoor activities and, perhaps, collecting fine art. Not Ahmad Fuaad Dahlan of Malaysia Airlines (MAS). His main passion is watching top-flight English football on television, proudly proclaiming himself as a fan of Arsenal, one of the leading soccer teams.

Such is Ahmad Fuaad's style, surprisingly laid back and easygoing. While his predecessors generally did not care much for public relations, Ahmad Fuaad is bringing a more open attitude to the managing director and chief executive's position at the MAS building in the heart of Kuala Lumpur.

His relaxed and unpretentious style of management does not mean Ahmad Fuaad is not serious about the job at hand, however. MAS has put its troubled past behind it after a successful financial turnaround, thanks to a government-backed reorganisation:now the focus is on improving the product, growing the international network and boosting the international brand through membership of a multilateral alliance.

Until comparatively recently MAS was a mess. It had a huge and growing debt, consistently suffered steep losses and had allowed its in-flight product to deteriorate, giving competitors an opportunity to eat into its market share. By 2000 the national airline's debt had ballooned to more than $2.5 billion and the Malaysian government, which in 1994 sold the biggest single stake to a group backed by local tycoon Tajudin Ramli, decided enough was enough. It opened talks on a buy-back of the 29% held by Tajudin-controlled aviation holding company Naluri and early in 2001 completed a controversial 1.8 billion ringgit ($474 million) renationalisation.

The government agreed as part of the deal to pay 8 ringgit a share - more than double the trading value at the time - prompting charges of favouritism towards former high-flyer Tajudin, who was previously close to then-Malaysian prime minister Mahathir Mohamad. The controversy was short-lived, however, and a sweeping restructuring began under newly installed managing director Mohamad Nor Yusof, a former top banker and finance ministry adviser.

Soon after Mohamad Nor's appointment, MAS announced plans to suspend services on some loss-making international routes and improve internal operations, in large part by boosting productivity and cutting costs. But there was no easy way to rid the airline of its growing debt. The carrier and government eventually came up with was a sophisticated financial re-engineering plan worthy of a masters business thesis:MAS was converted into a true "virtual airline" with few assets and its liabilities were wiped out through debt-for-equity swaps.

Formalised late in 2002, the so-called Widespread Asset Unbundling programme saw a government company taking direct ownership of most of the carrier's assets, which were immediately leased back by the airline. More successful international passenger services and cargo operations were at the same time split from loss-making domestic passenger services, which were transferred to an entity under government control, but operated by MAS on behalf of the state for a fee. Lufthansa Group in-flight catering division LSG Sky Chefs later took a majority shareholding in the carrier's catering operations.

Successful plan
Although the Malaysian taxpayer bore the ultimate brunt of the effects of years of MAS debt accumulation and mounting losses, from an investor's standpoint the plan was a phenomenal success as the listed entity now has no exposure to losses from domestic services, which the airline long complained it was forced to operate uneconomically due to "social obligation". Positive results have since been quick to materialise. In May 2003 MAS posted its first full-year net profit in six years and 12 months later - despite suffering from the effects of the SARS outbreak for some of the financial year - it posted its largest annual profit since its 1985 listing.

With publicity-shy managing director Mohamad Nor's work done, early in 2004 the government named him chairman of the country's Securities Commission. Chosen to replace him was career airline executive Ahmad Fuaad.

Ahmad Fuaad, 54, has intimate knowledge of both the airline's strengths and weaknesses, having been heavily involved in its development over the years. He has held many overseas positions. Before becoming managing director and chief executive in April 2004, held the title of senior general manager for sales, distribution and marketing. In that role he was heavily involved in focusing strategic efforts on growing the airline's operations after the September 2001 terrorist attacks in the USA, rather than consolidating like so many other carriers.

"The restructuring turned us into a virtual airline where we could then concentrate on the issues of expanding," he says. "At the time it was really the low point for the aviation industry, but it is true that if you look at the present situation that it was a good judgement call that the airline did not consolidate but looked for opportunities to expand."

Fleet upgrades
Plans included a major upgrade of a somewhat neglected in-flight product with an "investment to the tune of $200 million", says Ahmad Fuaad. The results are now being progressively rolled out and they include new in-flight entertainment systems and new business- and first-class offerings on its widebody aircraft, for example. First class has been eliminated from regional international routes and Ahmad Fuaad says this is already resulting in financial gains.

"Our Boeing 777s and Airbus A330s are based now on a two-class business and economy product purely to cater for the market where first-class travellers are almost non-existent - on five- to six-hour flights," he says. "The yields are much higher on the five- to six- hour region, rather than the long haul, apart from the high-density long-haul routes such as Australia and London."

MAS is also aggressively looking at growth opportunities. In particular it has been focusing its expansion eyes on the booming inbound and outbound passenger travel markets of China and India. In 2004 it added several new services to both following their steady opening up in terms of granting traffic rights. By the end of the current winter season MASwill have added another four destinations, Kunming and Xian in China and Ahmedabad and Kolkata in India.

Ahmad Fuaad says a modernisation of the airline's short-haul Boeing narrowbody fleet and the Fokker 50 domestic fleet is also crucial, and this should be settled by the middle of 2005 after MAS completes an assessment of new aircraft to replace its 39 Boeing 737-400s and 10 Fokker 50s. He says 40 new Airbus or Boeing narrowbodies are likely to be taken on firm order from 2006 to replace the 737-400s, while there will also be options to allow for growth. Its 737s are mainly used for domestic services within peninsular Malaysia as well as for some intra-Asia services.

"We will need 40 aircraft for replacement and probably another 15 or 20 options," he says, noting that some of the aircraft can be used on services to "the new emerging markets such as in India and China".

He says a type selection for the Fokker 50 replacements will be made at the same time as that for Airbus A320-family or 737 Next Generation aircraft to replace the 737-400s. The Fokker 50s are used in the less-developed eastern Malaysian states of Sabah and Sarawak.

MAS, which has a fleet of more than 100 aircraft, also has six ultra-large Airbus A380s on firm order through holding company Penerbangan Malaysia (PMB) for delivery from 2007. It recently took delivery of a 777 widebody that was the first equipped with its new business-class product and is about to roll out its new first-class product on the long-haul 747-400s.

MAS, 69%-owned by PMB following the debt-for-equity deals, will also this year consider longer-term replacement plans for its A330s and 777s, says Ahmad Fuaad, and 200- to 250-seat aircraft will be considered such as the Boeing 7E7 and Airbus's rival A350.

"The initial phase of development is to refresh the 737-400 fleet and also to look at the Fokker 50s...and this will take us over the next five years. We will then have to make some decisions within a year to look at the possibility of the replacement of the A330s and the 777s. There will be much better offerings and this will have to be decided for 2010 and beyond."

MAS is not for the time being interested in ultra-long-haul operations with Airbus A340-500s or Boeing 777-200LRs, however, as Ahmad Fuaad believes it is still unclear whether the market is big enough to sustain such services. Noting that rival Singapore Airlines is now operating A340-500s on non-stop services to the USA from South-East Asia, he says MAS prefers to "wait and see" if the market will be there for this in the longer term.

Meanwhile, the airline is not neglecting its cargo operations, which have become increasingly important in terms of revenue generation in recent years. Cargo arm MASkargo operates a sizeable fleet of Boeing 747-200 freighters and has two new 747-400Fs on firm order. Ahmad Fuaad says: "There is an opportunity there for more growth on the freighter side."

MAS is also assessing multilateral alliance possibilities for international passenger operations and both oneworld and SkyTeam remain under consideration. The Star Alliance is not a possibility as South-East Asian rivals Singapore Airlines and Thai Airways International are already members.

"We are opening both options," Ahmad Fuaad says of oneworld and SkyTeam. "They have to deliberate and see whether there is an interest from their side. Post-11 September nobody was interested in alliances... but now the interest and focus on mega alliances is actually coming back."

Alliance options
"We are ready to join an alliance, but a mega alliance is a club membership where the members will have to agree, and know that they benefit from it before they can come to accepting you as a member. So it may take one year, one year and a half, for both sides,"he adds. "We also need to know whether it is interesting for us on the revenue and cost reduction aspect of it."

MAS began studying whether to join an alliance in the late 1990s and has since had on/off talks with the major groupings. The renewed interest is largely based on potential cost savings, such as in "the fuel, engineering and maintenance and distribution aspects. Originally alliances were mainly revenue-based, but now the cost has come into play," he says.

MAS has no particularly strong leanings in terms of codeshare relationships to any one grouping, although it arguably has closer ties with major SkyTeam members - such as KLM and Korean Air - than with members of oneworld .

Back at home, meanwhile, MAS has been facing intense competition from fast-growing low-cost carrier AirAsia, which is also based in Kuala Lumpur. AirAsia has eaten into MAS domestic growth and is now flying short-haul international services, but has not taken away existing business as such. If necessary, says Ahmad Fuaad, MAS could start a low-cost airline of its own relatively quickly, although he stresses there are no plans for this and it is only an emergency measure that may be introduced if market conditions change significantly.

Subsidy criticisms
MAS is often criticised for not having to compete on a level playing field, particularly since it is not exposed to domestic losses, which some say effectively amounts to a taxpayer-funded subsidy. When this is put to him, Ahmad Fuaad issues an uncharacteristically firm defence.

"I don't agree. It depends how you look at it,"he says, giving the example of peninsular Malaysia where MASasked the government for permission to increase fares for a decade and was finally allowed a 51.8% increase in 2001. "That is good, so we are not interested in any subsidy for peninsular Malaysia," he says. "But Malaysia also constitutes Sabah and Sarawak and it takes time for them to develop transport infrastructure. An average 20% of our operation is in Sabah and Sarawak and 80% of our domestic losses are in those areas, purely because we were not able to increase fares. Pricing has been controlled by the government because disposable income in those areas is much less than in peninsular Malaysia. No offence meant, but that is the reality. And so they did not allow an increase in fares for the past 12 years."

He continues:"Somebody has to take responsibility for this. If you look at the whole of the domestic system, the initial role and function of Malaysia Airlines as a national carrier has changed as the landscape has changed. At one point we took the bad eggs and the good eggs in one basket, but now other carriers have cherry-picked the good ones and left us with the bad eggs. So this is not a subsidy. It is just that you have to cater for this, otherwise you leave it to the market forces. We would love to drop some of these routes, not taking into consideration the social aspect of what we do. So if you say that we are being subsidised, I say that it is not true. It is just that the government is not willing, by good judgement, to increase the fares.

"I would love to run a low-cost carrier that doesn't have this problem, which is the burden of the past. I would love to have an airline, a low-cost airline, that has young fresh labour where everything is outsourced. I would love that kind of situation to start with, as that is an edge over the national carrier. But we have what we have."

However, while Ahmad Fuaad talks of the financial burden MAS traditionally had to bear on the domestic front, he says there are solid benefits in having a home market. This was made particularly clear between March and July 2003, when SARS hit many of its peers.

MAS was not as badly affected as some by the outbreak because it is less of an international hub carrier than competitors such as Cathay Pacific Airways in Hong Kong and nearby Singapore Airlines, both of which were forced to make significant capacity cuts during the SARS-induced downturn. MAS by contrast only cut passenger capacity at the height of the SARS outbreak by 8%.

"We have the domestic market where we can stimulate growth on the domestic side - we are not a 100% hub airline like those in Hong Kong and Singapore. We are much more diversified in that context and this is very much a benefit despite the other problems," he says.

The prospect has already been raised of MAS at some point taking back profit and loss responsibility for domestic services. Ahmad Fuaad says this could happen tomorrow in the case of peninsular Malaysia, as operations there are far healthier than they were before fares were increased in 2001. But he does not see it happening any time soon and it is low on the priority list with aggressive international growth efforts and product improvements to manage. In fact, with so much to oversee, Ahmad Fuaad has been struggling to find time to watch his favourite football team Arsenal take on its Premiership and European rivals.

Homegrown talent
Late in 2000, then-troubled Malaysia Airlines (MAS) seriously considered hiring an expatriate to take over as managing director and bring in foreign management expertise. Ahmad Fuaad Dahlan jokes that he was one of those being considered. Although he is a Malaysian national, he spent so many years on overseas postings with the national carrier that he was almost regarded as a foreigner.

At the time Ahmad Fuaad was based in London as vice-president for the UK and Europe, although not long after, in June 2001, he returned to Malaysia to take up a new position at home base as senior general manager for sales, distribution and marketing. The London posting would be the last of his overseas assignments as he was formally appointed managing director of the airline on 1 April 2004.

Born in June 1950 in Kuala Lumpur, Ahmad Fuaad graduated from the University of Malaya in 1973 with a Bachelor of Arts degree. In April 1973 he joined the ministry of foreign affairs and in July that year was moved to state-owned MAS where he has worked ever since. While he has held various senior airline jobs in Malaysia, in total 25 of his years with the airline have been on overseas postings, in Australia, France, Germany, Indonesia, Japan, the Philippines, the UK and the USA.

During his time overseas he and his wife had two daughters, one born in Manila and the other in Paris.

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