20-Jun-2017 12:48 PM

Malaysia Airlines again adjusts its widebody strategy, to resume long haul growth in 2018

Analysis

Malaysia Airlines is planning to launch a new long haul route in 2018, using its new A350 fleet. Destinations in continental Europe are under evaluation. London has been Malaysia Airlines' only destination in Europe since early 2016, when the flag carrier suspended services to Amsterdam and Paris as part of the last phase of its network restructuring project.

Malaysia Airlines plans to use four A350s to replace A380s on its twice daily London service under a recently accelerated schedule which includes transitioning the first London flight in 1Q2018. The other two A350s were initially intended for medium haul routes within Asia Pacific, including Auckland, but are now earmarked for a new not yet decided long haul route.

Malaysia Airlines is also planning to nearly double the size of its passenger widebody fleet over the next few years - from 21 aircraft to 36 aircraft. The lease of approximately 15 additional A330s will enable Malaysia Airlines to upgauge several routes from the 737-800 as it shrinks its narrowbody fleet.

Malaysia Airlines has a small widebody operation

Malaysia Airlines currently operates a relatively small widebody passenger fleet of 21 aircraft, including six A380s and 15 A330-300s. Prior to the start of a major restructuring project in late 2014 the airline also operated 13 777-200ERs, for a total widebody passenger fleet of 34 aircraft. The airline's cargo unit, MASkargo, also has a small freighter fleet, which currently consists of three aircraft: A330-200Fs.

Malaysia Airlines widebody fleet summary: as of 13-Jun-2017

Aircraft	In service	On order
Airbus A330-200F	3	0
Airbus A330-300E	15	0
Airbus A350-900XWB	0	6
Airbus A380-800	6	0
Total:	24	6

The six A380s are currently only used on one scheduled route, from Kuala Lumpur to London Heathrow. The 15 A330s are used on 10 medium haul routes: from Kuala Lumpur to Adelaide, Auckland, Beijing, Delhi, Jeddah, Melbourne, Osaka, Seoul, Sydney and Tokyo. The A330 fleet is also used to operate some flights to Bali, Hong Kong and Shanghai - routes which are also served with 737-800s (based on OAG schedules for the week commencing 12-Jun-2017).

Perth was also served with A330s until May-2017, when it was downgauged to 737-800s. Kuala Lumpur-Perth, which has a block time of nearly six hours, has become Malaysia Airlines longest narrowbody route. Kuala Lumpur-Shanghai, served with one daily A330 frequency and one daily 737-800 frequency, has a slightly shorter block time.

A350s - delayed - are still in line to replace A380s

In 2015 Malaysia Airlines decided, as part of its restructuring exercise, to replace its A380s with A350s. It agreed (in Sep-2015) to lease four A350-900s from Air Lease, and committed to another two aircraft from Air Lease in May-2016.

The six A350s were initially slated to be delivered from Oct-2017 to May-2018, enabling Malaysia Airlines to phase out its A380 fleet in mid-2018. Malaysia Airlines expects these aircraft will not be delivered on time, although it is still waiting on clarity from Airbus on the extent of the delays. The most likely scenario is that the first aircraft - and possibly the first two aircraft - will still be delivered in 2017, but not until December.

Malaysia Airlines initially tried to remarket its A380 fleet before deciding instead, in 2016, to establish a separate charter airline which will take over all six of its A380s in 2H2018 - after all six A350s are delivered. As CAPA has noted in previous analysis, Malaysia Airlines plans to reconfigure the six A380s to a high density configuration and transfer the aircraft to a new airline, which will primarily operate religious pilgrimage charters to Saudi Arabia (from Malaysia and other points).

Malaysia Airlines accelerates transition of London route to A350

Over the past year Malaysia Airlines has adjusted its plans for the A350 fleet multiple times. While four of the A350s were always intended to operate both London flights, the timing of the transition for the London route and the plans for the other two aircraft have been in flux.

Initially, Malaysia Airlines was planning to wait until all six A350s were delivered before transitioning both London frequencies. As CAPA highlighted in a Mar-2017 analysis report, the objective was to transition both Kuala Lumpur-London flights from the A380 to A350 in Sep-2018. The Sep-2018 date was selected as it enabled Malaysia Airlines to use the higher capacity A380 on the London route through the peak summer season in 2018.

This was a sensible strategy, given that Malaysia Airlines is not planning to transfer the A380s to the new charter airline until 4Q2018, and the fact that it could initially operate its A350s on medium haul routes within Asia Pacific before making the switch on London. It also gave Malaysia Airlines flexibility in the case of A350 delivery delays and an opportunity to iron out any kinks with the new fleet on shorter routes before deploying the type on London.

However, Malaysia Airlines recently decided to accelerate, by several months, the transition of the Kuala Lumpur-London route from A380s to A350s.

Malaysia Airlines CEO Peter Bellew told CAPA on the sidelines of the 4-Jun-2017 IATA AGM that the morning departure from Kuala Lumpur to London will now transition from the A380 to A350 in Feb-2018 or Mar-2017, with the exact launch date hinging on when the airline receives its first two A350s. Mr Bellew said the second Kuala Lumpur to London flight, which departs Kuala Lumpur just before midnight, will transition to the A350 once the airline receives its third and fourth A350.

As a result, Malaysia Airlines will be reducing capacity on the Kuala Lumpur-London route by over 40% before the start of the 2018 peak summer season. First class capacity will shrink by 50%, and business class capacity by nearly 50%, while economy seat capacity will be cut by approximately 40%.

Malaysia Airlines drops plans to deploy A350 to Auckland

Malaysia Airlines was initially planning to use its first two A350s on Kuala Lumpur-Auckland and one other medium haul route - most likely Kuala Lumpur-Tokyo Narita. However, Mr Bellew told CAPA that Malaysia Airlines no longer has any intention of operating the A350 to Auckland or any other destination in Asia Pacific.

Mr Bellew said the Auckland market can no longer support the A350 as it has become extremely competitive following the launch of nonstop flights from Emirates and Qatar. Malaysia Airlines plans to continue serving the Auckland market with A330-300s, which has a smaller business class cabin than the A350 and does not have any first class seats.

The new nonstop flights to Dubai and Doha have impacted Malaysia Airlines traffic from Auckland to London and India. Mr Bellew said most of the airline's New Zealand traffic is heading to, or is originating in, the UK/Ireland or India. "Emirates and Qatar went in on the route and the fares plummeted", he said.

Emirates and Qatar are able to attract significant New Zealand-India traffic, although transiting in the Middle East requires backtracking by offering "unbelievably low fares", according to Mr Bellew.

Malaysia Airlines to launch new long haul route with two A350s

Malaysia Airlines could have selected an alternative market to Auckland in Asia Pacific - either in Australia or North Asia - for the A350. However, Mr Bellew said the airline had determined that the A350 is too expensive to operate on medium haul routes to be profitable.

Other A350 operators use the aircraft on medium haul routes, but Mr Bellew pointed out that these operators have much bigger fleets. Malaysia Airlines has no intention of expanding its A350 fleet beyond six aircraft, making the aircraft a niche fleet that can only be profitable if the fleet is used entirely for long haul routes, according to Malaysia Airlines calculations.

Mr Bellew said that therefore Malaysia Airlines had no choice but to find a new long haul route. "We are looking at all kinds of (long haul) routes", he said. "We are just discussing with some airports and we are discussing with some other airline partners at the moment."

Resuming services to continental Europe is under consideration and would be the most logical scenario. Malaysia Airlines suspended services to Amsterdam and Paris in early 2016 as it phased out its 777 fleet. In 2015 the airline dropped Frankfurt and Istanbul as part of an earlier phase in its network restructuring initiative.

"We've got the A350, it's an expensive aircraft and we have to find something meaty and significant to do with it," Mr Bellew said. "We hope to find something more than nine hours. We haven't landed on one thing. We are looking at European destinations. We are looking at things further afield than Asia but I haven't landed on something where I can make it work."

Malaysia Airlines about to complete A380 overhauls

While Malaysia Airlines has been operating the A380 on only one scheduled route for the past few years, the airline cannot entirely rely on London to keep all six of its A350s busy.

In recent years Malaysia Airlines has been using one to two A380s for charters. Since early 2016 the airline also has had the equivalent of one A380 out of service for heavy maintenance. With the new A350 fleet, Malaysia Airlines will not have the flexibility to pursue charters (since the new A380 airline will handle charters) and no heavy maintenance will be required for a few years.

Malaysia Airlines is also about to complete the heavy maintenance check on its sixth and final A380, concluding an in-house maintenance project which began in early 2016. This will again give the airline a full complement of six A380s - from Jul-2017 until it is time to transfer the A380 fleet to the new charter airline.

Malaysia Airlines has added some A380 flights on the Kuala Lumpur to Tokyo and Seoul routes to its schedule for Aug-2017 and Sep-2017, which will free up A330s for expansion in other markets. Some A380 flights to destinations other than London will likely continue during peak periods for the next year. This will give Malaysia Airlines the opportunity to add capacity in medium haul markets prior to the planned expansion of the A330 fleet.

Malaysia Airlines closes in on second hand A330 lease deals

For the past several months Malaysia Airlines has been in the market for several additional second hand A330s. As CAPA has previously highlighted, the additional A330s will mainly be used to upgauge several high demand medium haul routes that are now operated with 737-800s.

Mr Bellew told CAPA on the sidelines of the IATA AGM that in Jul-2017 the airline aims to conclude lease deals on second hand A330s for delivery as early as Nov-2017. He said one A330-300 could be delivered in Nov-2017 and a second aircraft in Dec-2017, followed by several more aircraft in 2018 and 2019.

"We are well into the final negotiations. We are getting into discussions with engine manufacturers on warranties and total care agreements around second hand aircraft we have targeted", Mr Bellew said. "We found aircraft at more or less the price we want and the time. We hope to have that locked in after the second week of July."

The new Malaysia Airlines fleet plan envisages the A330 fleet increasing to approximately 30 aircraft within the next three years. The total widebody passenger fleet will increase from 21 aircraft currently to 37 aircraft, when the six A350s which will replace the six A380s are also included.

Malaysia Airlines continues to evaluate new generation widebody aircraft

For the past several months Malaysia Airlines has also been considering placing an order for new generation widebody aircraft, which will be used to replace its existing 15 A330-300s as they come off lease in 2019 to 2021. Malaysia Airlines has evaluated the 787-9 and A330-900neo, but so far has not been able to secure the prices it seeks.

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Mr Bellew told CAPA on the sidelines of the IATA AGM that the new aircraft being offered by Airbus and Boeing "are still too expensive" and that Airbus and Boeing "are not being realistic on their prices".

Mr Bellew expects the prices for 787-9s and A330-900neos will come down, enabling Malaysia Airlines to place an order. If the prices are not adjusted, the airline is prepared to stick with A330-300s and could extend the leases on its existing 15 aircraft.

"We keep holding out. There will be a collapse in the pricing of new planes," Mr Bellew predicted. "I think there will be an opportunity to do a good deal in the next six to nine months. There are very few people out there buying at the moment."

Malaysia Airlines will reduce its narrowbody fleet

While Malaysia Airlines plans to expand its widebody fleet by approximately 15 aircraft over the next three years, it plans to reduce its narrowbody fleet by a similar number.

Mr Bellew told CAPA during the IATA AGM that Malaysia Airlines had completed negotiations covering the return of six 737-800s in 2H2017, resulting in a reduction in the narrowbody fleet from 54 to 48 aircraft. Mr Bellew added that he expects the 737-800 fleet will be reduced by a further eight aircraft over the next few years, to approximately 40 aircraft.

The planned reduction in the 737-800 fleet is not surprising, given the airline's aspirations to upgauge several routes to South Asia and North Asia from the 737-800 to A330-300 as the A330 fleet is expanded. The upgauging plans are driven partially by slot constraints, which prevent Malaysia Airlines from adding frequencies on several routes that are now experiencing high demand.

Mr Bellew told CAPA TV during a May-2017 interview at CAPA's Airline Leader Summit in Dublin that there are seven or eight routes that can accommodate larger gauge aircraft. "We are really running up to the limit on the 737 on a number of routes. There are seven or eight routes where we don't have enough seats, particularly in business class, where we are achieving are very good yield. We are looking for a quick way to return some 737s we have and replace them with second hand A330s."

Mr Bellew said during the May-2017 CAPA TV interview that Malaysia Airlines could "easily absorb" six or seven additional A330s in 2018 and another six or seven additional A330s in 2019. Given the low lease rates now being offered on second hand A330s, Mr Bellew said these aircraft can be immediately profitable on several routes now operated with the 737-800.

Malaysia Airlines CEO Peter Bellew discusses the group's fleet strategy, market conditions and expansion opportunities

Malaysia Airlines to offer an extra legroom product on A330s and A350s

The business class cabin on medium haul 737-800 routes, many of which operate overnight, are particularly insufficient in terms of both product and number of seats. Malaysia Airlines has 16 recliner style business class seats on its 737-800s, whereas the A330s have 27 lie flat business class seats.

Malaysia Airlines retrofitted its A330 fleet in 2016, improving the business class product and adding two rows of extra legroom seats at the front of the economy cabin. Malaysia Airlines is not yet selling the extra legroom seats on its A330 routes, but plans to begin selling extra legroom seats in mid-2018.

The extra legroom product will also be available on its new fleet of A350s. Mr Bellew said extra legroom sales on both the A350 and A330 will begin after the airline takes delivery of the last of its six A350s - or "around Jul-2018".

As CAPA has highlighted in prior analysis reports, Malaysia Airlines decided, under previous CEO Christoph Mueller, to introduce a premium economy product on the A330s, A350s and A380s. However, Malaysia Airlines never planned or acquired a separate seat for premium economy, only intending to offer an upgraded service and provide a regular economy seat with extra legroom.

A few months after taking over as CEO, Mr Bellew decided against offering a premium economy branded product. However, it was too late to change the configuration of the A350s or the retrofitted A330s. Malaysia Airlines will eventually sell the seats in these aircraft that were initially to be branded as premium economy as extra legroom seats. The same level of service will be provided as in the rest of the economy cabin.

Mr Bellew was able to halt the retrofit of the last three A380s after the initial three aircraft were already retrofitted with premium economy (or extra legroom) seats. As a result, Malaysia Airlines now operates three A380s with 486 seats and three A380s with the original 494-seat configuration. Malaysia Airlines does not sell the extra legroom seats on the three retrofitted aircraft and has no plans to sell these seats, because the aircraft will again be retrofitted in 2H2018 prior to their transfer to the new charter airline.

Malaysia Airlines keeps larger premium cabin on narrowbody fleet

Malaysia Airlines also has decided against proceeding with earlier plans to retrofit a portion of the 737-800 fleet into a new higher density configuration. Malaysia Airlines had been planning to reconfigure approximately half of its 737s from 160 seats (16 business and 144) to 178 seats (12 business and 166 economy). An all economy configuration for some aircraft was even under consideration in mid-2016.

Keeping 16 business class seats across its narrowbody fleet has proven to be the right move as premium demand has increased over the past year, leading to a 50% increase in business class loads. Malaysia Airlines is banking on further growth in premium traffic as it replaces 737-800s with A330-300s on several medium haul routes. Generating a higher portion of premium traffic has become a key component of the airline's turnaround attempt as Malaysia Airlines aims to become profitable by 2019, despite intensifying competition and yield pressures.

An even larger business class cabin on the narrowbody fleet is possible on its future fleet of 737 MAX 8s. While Malaysia Airlines plans to reduce its 737-800 fleet to approximately 40 aircraft over the next three years, it still plans to take delivery of 737 MAX aircraft from 2019. The airline has placed orders for at least 25 737 MAX 8 in 2016, and is now evaluating the larger 737 MAX 10.

Malaysia Airlines' narrowbody fleet plan will likely evolve considerably over the next couple of years. Further adjustments to the widebody fleet plan are also possible.

Dynamic market conditions and fluctuations in aircraft values dictate a flexible fleet strategy. Malaysia Airlines will need to continue being nimble and opportunistic with aircraft acquisitions for the group to successfully complete its turnaround attempt.