Tony Fernandes CEO Blog

Given that the issue of Rural Air Services has been raised again recently in the public, we wish to provide the following clarification:

• Rural Air Services has been an on-going service provided by the Government of Malaysia for the benefit of providing transportation services to the rural communities in East Malaysia. The Government contracts the provision of these services initially to Malaysia Airlines, and then subsequently to Fly Asian Xpress from August 2006 to September 2007, and now to MASWings.

• All three operators receive subsidies from the Government to cover the costs of operations. All the subsidies only cover the cost of operations and no financial benefits are accrued to the main airline operations. Subsidy payments are fully audited by the Auditor-General’s Office, who has confirmed that there were no irregularities in the amounts paid to Fly Asian Xpress.

• During the period when Fly Asian Xpress (FAX) operated the service, it earned a revenue of RM164 million, against operating costs of RM343 million, for a loss of RM179 million. A further RM70 million was incurred in capital expenditure, for a total amount of RM249 million, which was funded by a subsidy from the Malaysian Government.

• When RAS was operated by the other carriers, it also similarly generated significant operating losses which were also fully subsidised by the Malaysian Government. There were no differences in arrangements compared to Fly Asian Xpress.

• A number of factors contributed to the higher subsidy amounts during the FAX tenure:

– RM48 million was paid to MAS Engineering (FAX was charged commercial rates instead of at cost). FAX had to take over the aircraft in August 2006 from MAS on an “as is” basis, without the benefit of historical aircraft maintenance records which were withheld by MAS. Abnormally high number of overhauls and repairs were required, and with MAS as the only licensed engineering provider, no supplier competition was available to extract better rates.

i. Actual overhaul costs were much higher than initial budget prepared without historical MAS records
ii. High aircraft downtime resulted in cancelled flights and less revenue earned versus budget
iii. Aircraft downtime also led to poor customer reliability reputation.

• 4 out of 7 Fokker 50 aircraft required ‘C’ checks (once every 20 months)
• 10 out of 14 Fokker 50 engines overhauled (once every 3 years) and 10 Fokker 50 propellers
• 7 out of 14 Twin Otter engines overhauled (once every 3 years) and 3 Twin Otter propellers
• 6 planes requiring major stabilizer modifications (requiring 9-day downtime)

MASWings benefited from the amount spent by FAX because 80% of the amount spent would not have to be incurred in the 12 months after MASWings took over.

– RM72 million was paid to a third party provider for additional maintenance services not done by MAS because MAS were slow to respond to requests and ultimately wanted to charge higher rates. FAX had not built up its own maintenance capability in the first year.
– MAS also priced other services to FAX using commercial rates with margin mark-ups, compared to a cost-recovery basis when it was the RAS operator previously:

i. Ground handling and other service charges by MAS: RM25 million

ii. Interest charged on loan spares from MAS: RM16 million
(MAS had critical spares and only lent it to FAX with interest, and subsequently sold them to FAX at list price)
iii. Write-down on spares purchased: RM9 million
(At the end of operations, despite tender to 11 parties, no interest to buy back FAX spares except MAS, who only offered RM200k, since planes are not commonly used elsewhere)
iv. Fees paid to MAS for pilot secondments from Aug-06 to Mar-07:RM9 million

– Finally, other contributing factor in the difference in subsidy claims is the higher global fuel price versus prior years under MAS: RM10 million

• Fly Asian Xpress was the sole operator of the Rural Air Services, and not AirAsia Berhad. AirAsia Berhad did not receive any financial benefit arising from the RAS operations.

Although the shareholders of FAX were similar to AirAsia Berhad, they ended up losing almost RM5 million of shareholder capital, because the wind-up costs of FAX, including retrenchment payments, were not covered by the Government subsidy.