Malaysia Airlines: A nationalization failure
Credit to Author: Ben Kritz| Date: Mon, 03 Feb 2020 16:17:13 +0000
THE topic of nationalization, or government’s retaking ownership and control of key industries or services, became a more high-profile topic here after the controversies surrounding the two water distributors for Metro Manila were exposed late last year.
Because of the obvious failure of privatization in the case of the water utilities, nationalization of key public services has gained traction as a policy option.
As I have written before, the idea does have a great deal of merit, and if all things are equal in terms of execution, public ownership of basic services probably makes more sense.
But just as the one-size-fits-all solution of privatization that was popular in the 1990s (when Metro Manila’s water services were privatized) turned out to be problematic at times, re-nationalizing faltering public service enterprises has not always been effective, either.
Malaysia Airlines (MAS) is a near-perfect case study in failed nationalization. Since its formation by way of the breakup of Malaysia-Singapore Airlines in 1972, MAS has been a government-linked company, with the Malaysian government through its sovereign wealth fund Khazanah Nasional holding a majority stake and appointing key MAS executives. That stake gradually diminished to just under 70 percent by 2006, when new management and a better business plan briefly turned the airline to profitability.
That didn’t last long, for a variety of reasons, the main ones being intense competitive pressure from low-cost carriers and government interference that prevented MAS from fully rationalizing its domestic routes. Several years of unprofitability were capped off by the disastrous year 2014, when MAS lost flight MH370 under still-mysterious circumstances, and flight MH17 was shot down over Ukraine. By August of that year, Khazanah Nasional had begun the process of buying 30 percent of the airline it didn’t already own, delisting it from the stock market.
If anything, things got even worse under full government ownership. MAS continued to hemorrhage money, and went through three chief executive officers between September 2015 and October 2017. In August of last year, Khazanah Nasional provided a 300-million ringgit ($72 million) cash infusion to keep the airline operating, and quietly began casting around for a buyer to take MAS off the government’s hands.
About two weeks ago, the Malaysian government announced that it had received four proposals, which, if combined, would absorb all of Khazanah Nasional’s stake. Air France-KLM has offered to take a 49- percent stake, while Japan Airlines, which is already an alliance partner of MAS, expressed interest in a 25-percent stake. The other two interested players are Malaysia’s AirAsia group and Malindo Air, which is the Malaysian subsidiary of Indonesia’s Lion Air.
The government did, however, express some misgivings about AirAsia’s offer, saying that it might cause competition concerns. On the other hand, given the moribund state of Malaysia Airline’s finances, it seems likely the Malaysian government would accept a minority stake for AirAsia if one of the other prospective investors is otherwise unwilling to increase its offer, just to be rid of what has become a chronic, expensive headache.
Nationalization did not work in the case of Malaysia Airlines, and a legitimate question to ask is whether that was because the model itself was defective or misapplied, or if there were specific flaws in the way MAS was managed that led it to failure. The number of similar experiences in other countries in the recent past suggests the reason was the former: Nationalization is simply ill-suited for a competitive business such as an airline, even though the government may quite rightly regard an airline as a public service. Other government-owned airlines that have struggled in the same way as MAS include South African Airways, which just received a cash bailout from the government in order to keep operating; Kuwait Airways, which has been preparing for privatization for several years; and Saudia, which has been undergoing a similar process, beginning with spinning off its subsidiaries, since at least 2006.
The lesson in all of this is that a black-and-white position on nationalization vs privatization is not sensible, and that public services should be considered on a case-by-case basis. It may make sense to put water distribution back under government control, but doing the same with, for instance, an airline or a railroad may not work. And it will almost certainly not work, one way or the other, if the initiative is undertaken on the basis of pique rather than a hard-headed assessment of the economics and social factors involved.
ben.kritz@manilatimes.net
Twitter: @benkritz