Malaysia Airlines (MAS), also known as Malaysian Airline System, has been our nation’s flag carrier ever since it’s establishment in May ’47. Throughout a large piece of its lifetime and not without material support from the government, MAS had overseen a history of growth and augmentation, expanding its airways both domestically and foreign. Their revenues often come as billions in every quarter of the year, which further underline the size of the organization. However MAS continuously face a profitability issue since the recent decades, generating heavy amounts of losses that shouldn’t dwindle anytime soon. This overview of MAS’ historical and current situation will be the base of my research, to which I will structure with relatable microeconomics theories that should explain the reason behind its fluctuating financial figures and its survivability among its competitors in the market. (Malaysia Airlines, 2013)
Supply
Petroleum is a commodity for everything in the economical world. The seesaw but overall hike in its prices over time can be said to be the chief of many factors that determines prices of goods and services. Fought wars in the name of oiled lands and drifts in the tides political favour due to oil price subsidies further emphasizes the importance of the fuel, and the reason behind this madness is because fuel is the blood that is pumped from the heart of this technological era, keeping everything from transportation to machinery functioning. (Packham, 2013)
Fuel can also be metaphorically described as the blood of MAS. Being a business that provides transportation as their principal service, MAS heavy dependent on fuel also spells their cost-obligation towards the shift in fuel prices. An increase in fuel prices should also see a decrease in MAS’ purchasing power on fuel, and a decrease in MAS’ affordability on fuel means the firm has to spend more on fuel supply if it wants to operate its planes as often as compared to better times.
If translated into a Demand and Supply diagram, the phenomenon related can be illustrated as a left shift in the supply curve, leading to a decrease in quantity supplied. Shifting the supply curve to the left (providing the demand curve does not fall as much or more than the supply curve) will create a new and higher equilibrium point at the new and also higher intersection point between the supply and demand curve, meaning there will be an increase in the price of the good or service and a new quantity demanded for the good. (Khan Academy, 2013) In English, this starts off with MAS not being able to purchase as much fuel with the same amount of money as before, thus lessening the firm’s supply for flight services available in the market. Assuming that the quantity demanded for flights does not fall as much or more than the quantity supplied, the diminishment of available flight services will create a shortage, to which MAS can only recover if it increases its flight prices. An increase in flight prices logically means that not as many consumers will demand for MAS’ flight services anymore. Such is the influence petroleum prices have over a carrier firm like Malaysia Airlines.
Demand
Mankind’s history of development has evolved us in bizarre ways that we sometimes cannot comprehend. Overtime, we realized that a treaty instead of war could sometimes be a more prosperous alternative for the people; that winning the people meant winning political favour; that educating the uneducated meant creating a larger and more vibrant economy. With that, our welfare blossomed, but so did our expectations. Not too long ago, back when computers weighed by the tonnes and travelling to the moon was a dream, a lot of thing we take as familiar now were known as luxurious, including air travelling.
The reason why airborne travelling is so common now is because it has become more affordable to make planes thanks to global industrialization, thus making it more affordable for consumers to travel through planes. With that the demand for flight services soared because more and more people possess the purchasing power to do so. The large demand for flights is the reason why majority of airline firms like MAS are in business, but what happens when the demand for flight services falls?
If translated into a Demand and Supply Curve, a fall in the demand will cause the demand curve to shift to the left, leading to a decrease in quantity demanded. The new quantity demanded (which should be lower, assuming the supply curve does not fall as much or more than the demand curve) could be determined from the new and lower equilibrium point, which will also determine the new and lower equilibrium price. A reason to explain a fall in demand for MAS flight services would be the contraction of the economy. An economical downfall would mean less people are able to afford air travelling, thus decreasing the demand for flight services. An example would be the 1997 Asian Financial Crisis, where the Malaysian currency significantly devalued and the demand for travel dropped, sparking the first signs of MAS’ age of unprofitability. The decrease in quantity demanded means MAS ends up with a surplus (assuming the quantity supplied does not fall as much or more than the quantity demanded), and also means that MAS has to find a way to make its flight services more affordable. (Khan Academy, 2013)
Oligopoly
Malaysian Airlines is not the only firm in the airlines industry. AirAsia remains as MAS’ largest domestic competitor, being an airline business that offers budget flight services. Other competition includes airlines from Qatar, Brunei, Indonesia and Singapore. Compared to AirAsia, MAS’ relatively expensive flight services fail to receive favour from consumers, but that does not mean the end of the line for MAS.
Malaysia Airlines has larger and more comfortable planes, which serve better food and better business class services in comparison with the smaller and cheaper planes in AirAsia. Combined with its large destination scope in six different continents, MAS is the preferred choice for long and comfortable flights or for consumers who can afford it. This makes Malaysia Airlines a normal good, and AirAsia and inferior good.
Being the national flag carrier, Malaysia Airlines also receive relatively more government support in terms of investments and more importantly, a destination other airlines can’t touch. MAS remains the only airline firm that has authorization to land its aircrafts in Mecca, Saudi Arabia, where Muslims travel to for holy purposes. Being a Muslim country with a majority of Muslim citizens, MAS possesses and unfair advantage over its competitors. This government intervention ensures there is a demand in Malaysia Airlines’ flight services.
Diseconomies of Scale
Malaysia Airlines’ profits has been a downward spiral ever since the departure of Dato' Seri Idris Jala in 2009. The man was appointed at 2005, who then recorded a RM850 million profit countering the RM1.3 billion loss a couple of years ago. In 2011 after his departure, MAS recorded a net loss of RM2.52 billion. You don’t need a rocket scientist to point out that this is a case of mismanagement. However, some disputed that poor global economy was a major cause of MAS’ unprofitability, to which other rebutted, pointing at Singapore Airlines who in contrast recorded positive profits in 2011. (Lim, 2013)
Malaysia Airlines main supplier for fuel is Petron Malaysia, which is an oil and gas firm that is owned by the billionaire son of a ex-Malaysian Prime Minister. Pointing fingers, some conspiracy theorists claim that corruption is not absent in this contract between MAS and Petron Malaysia. MAS’ catering services is also outsourced from a catering company that is owned by another ex-Malaysian Prime Minister’s son. (Malaysiakini.com, 2013) With all this politics involved, nobody would be surprised if individuals make negative decisions for their own benefit.
This mismanagement present in Malaysia Airlines is not without harm to the firm. Mismanagement leads to inefficiency and ultimately a higher average cost of operation. This phenomenon is described as the diseconomies of scale of an organization, where the average cost of production increases as the output increases. Diseconomies of scale happens to a firm in the long-run, when the organization is to large for complete control and management being too wide for governing.
Khan Academy. 2013. Khan Academy. [online] Available at: https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium [Accessed: 25 Oct 2013].
Lim, G. 2013. Shocking RM2.52 billion losses in 2011 suffered by MAS marks a spiralling dive of no return for our national carrier. [online] Available at: http://dapmalaysia.org/english/2012/mar12/lge/lge1545.htm [Accessed: 25 Oct 2013].
Malaysia Airlines. 2013. English | Malaysia Airlines. [online] Available at: http://www.malaysiaairlines.com/my/en.html [Accessed: 25 Oct 2013].
Malaysiakini.com. 2013. MAS - a tragic tale of jingoism and corruption - Malaysiakini. [online] Available at: http://www.malaysiakini.com/news/215094 [Accessed: 25 Oct 2013].
Packham, C. 2013. The historical price of petrol – how bad do we have it? - Web Exclusive Article - Significance Magazine. [online] Available at: http://www.significancemagazine.org/details/webexclusive/1397283/The-historical-price-of-petrol--how-bad-do-we-have-it.html [Accessed: 25 Oct 2013].
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