Forbes.com

Pulling out of a tailspin

Successful turnarounds require leadership that understands the diverse elements of change and makes sure that every one is in place.

Par Till Vestring and Satish Shankar

First published on août 21, 2007
min


This article originally appeared on Forbes.com. Like many national carriers in Asia and throughout the world, Malaysian Airlines Systems faced woes that have become familiar to even the most casual followers of the airline industry. Fuel prices spiral and so do labor costs, even in a relatively low-labor-cost nation like Malaysia. Add to this intensifying competition. By December 2005, MAS was losing money so fast it only had three months' worth of cash left in its coffers. That's when the government-owned company turned to an outsider named Idris Jala. Unlike his predecessors, the 48-year-old executive had no experience in the airline industry. But he does know how to turn red ink black. Most of his career had been spent with Royal Dutch Shell (nyse: RDSA—news—people ), where he helped turn around troubled business units. Even so, this would be a tough job for MAS's new managing director and CEO. The struggling airline had endured several unsuccessful government and private market turnaround attempts over the years. But on Jala's second day on the job, the prime minister publicly announced that this time, the government wouldn't bail out the airline. Jala not only took on the challenge, but exceeded expectations. Within a year after his arrival, the company posted two consecutive profitable quarters, and then a third that was fodder for headlines: In the first quarter of 2007, it earned $37.7 million, more than double the $14.4 million it had anticipated earning in the entire year. Those dramatic returns caught the attention of airline industry observers. What they found is a turnaround story that could serve as a model for other airlines and companies in any capital-intensive industry looking to return to profitability and position themselves for growth—without substantial government support. Jala's plan set a standard because he strictly adhered to a systematic approach for keeping his change plan on track, and he had a slavish devotion to a change system in which all elements reinforce each other. Acting quickly and decisively, Jala and his team diagnosed MAS's starting point and plotted their course. He put the right people in the right jobs. He made hard decisions over and over. He tracked results and adjusted the course as necessary. He held people accountable and left nothing to chance. For Jala, diagnosing his current situation meant finding out why MAS's yield—how much money it makes per passenger per kilometer—was so low. He found, among other ills, that the carrier was too aggressively discounting prices, failing to charge for excess baggage and holding on to unprofitable routes. After careful analysis of the data, Jala focused on the few key areas that would drive profitability. In a 47-page document, Jala's team spelled out the four major areas for improvement: revenue/yields, network, productivity and costs. The plan laid out goals that seemed impossible, but were in fact within the airline's reach. Jala wanted a $511 million improvement in the bottom line over three years. The next element of his turnaround involved creating milestones and rallying the troops around them. To accomplish this, Jala held so-called "laboratories"—prolonged brainstorming sessions that involved key managers and, if necessary, outsiders. The objective was to craft plans to achieve critical interim goals, such as improving the company's cash position. The laboratory team broke down the projected improvement by activity—sales of specific assets, better borrowing terms and other key issues—and assigned responsibility for each one. With plans in place, Jala then created a system for keeping people accountable and maintaining the momentum. At MAS's monthly management meetings, managers describe what they have done to improve the profit-and-loss statements that they are responsible for. By monitoring progress, MAS could see the tactical moves necessary to engineer the turnaround. Senior management focused on tactics in each of the four major areas for improvement. To boost yield and revenues, the airline segmented customers and became more selective about offering discount fares. It also got stricter about excess baggage. To improve its network efficiency, MAS sought government approval to stop flying unprofitable domestic routes. At the same time, MAS launched its own low-cost carrier, Firefly, to fly six domestic routes that had no air service. The airline improved productivity by reducing manpower by 15%, cutting overhead and maintenance costs. In a recent interview, Jala explained, "We only focus on activities that have big financial impact." Tracking the performance of its moves—a critical element to any successful turnaround—became an obsession that kept MAS sharply focused on its journey. Jala's turnaround plan had spelled out in detail the anticipated effect of every move on the profit-and-loss statement. Every route has a profit-and-loss statement, as well as a regional manager responsible for overseeing that P&L, who closely follows a small number of performance indicators—such as cash in the bank, and sales and passenger load—that align with his initiative's overall goals. As other turnaround artists have learned, paying close attention to the numbers is critical if you intend to keep a change program on course. By every indicator, the national carrier has found a patch of smooth sky. In the first quarter of 2007, revenues grew by 21%. Since Jala's arrival, the all-important passenger-per-kilometer yield rose 27%, from 20.5 to 26.1. The seat factor—how many people the airline flew relative to its total capacity—was up two percentage points to 75%. And MAS's new price structure has attracted more customers. Like other change masters, Jala keeps raising the bar. Just as he was posting profits, he pushed the organization to shoot for an even higher profit target, from $14 million to between $85 million and $199 million. He announced the purchase of new aircraft to replace aging planes and expand MAS's fleet. And Jala raised the full-year earnings forecast. A turnaround as dramatic as MAS's isn't magic. It's the result of leadership that understands the diverse elements of change and makes sure that every one is in place. Till Vestring and Satish Shankar are partners in Bain & Company's Singapore office. While Bain cannot identify clients under confidentiality agreements, its partners may write about a mix of client and non-client companies.

This article originally appeared on Forbes.com.

Like many national carriers in Asia and throughout the world, Malaysian Airlines Systems faced woes that have become familiar to even the most casual followers of the airline industry. Fuel prices spiral and so do labor costs, even in a relatively low-labor-cost nation like Malaysia. Add to this intensifying competition.

By December 2005, MAS was losing money so fast it only had three months' worth of cash left in its coffers.

That's when the government-owned company turned to an outsider named Idris Jala. Unlike his predecessors, the 48-year-old executive had no experience in the airline industry. But he does know how to turn red ink black. Most of his career had been spent with Royal Dutch Shell (nyse: RDSA—news—people ), where he helped turn around troubled business units.

Even so, this would be a tough job for MAS's new managing director and CEO. The struggling airline had endured several unsuccessful government and private market turnaround attempts over the years. But on Jala's second day on the job, the prime minister publicly announced that this time, the government wouldn't bail out the airline.

Jala not only took on the challenge, but exceeded expectations. Within a year after his arrival, the company posted two consecutive profitable quarters, and then a third that was fodder for headlines: In the first quarter of 2007, it earned $37.7 million, more than double the $14.4 million it had anticipated earning in the entire year. Those dramatic returns caught the attention of airline industry observers.

What they found is a turnaround story that could serve as a model for other airlines and companies in any capital-intensive industry looking to return to profitability and position themselves for growth—without substantial government support. Jala's plan set a standard because he strictly adhered to a systematic approach for keeping his change plan on track, and he had a slavish devotion to a change system in which all elements reinforce each other.

Acting quickly and decisively, Jala and his team diagnosed MAS's starting point and plotted their course. He put the right people in the right jobs. He made hard decisions over and over. He tracked results and adjusted the course as necessary. He held people accountable and left nothing to chance.

For Jala, diagnosing his current situation meant finding out why MAS's yield—how much money it makes per passenger per kilometer—was so low. He found, among other ills, that the carrier was too aggressively discounting prices, failing to charge for excess baggage and holding on to unprofitable routes. After careful analysis of the data, Jala focused on the few key areas that would drive profitability.

In a 47-page document, Jala's team spelled out the four major areas for improvement: revenue/yields, network, productivity and costs. The plan laid out goals that seemed impossible, but were in fact within the airline's reach. Jala wanted a $511 million improvement in the bottom line over three years.

The next element of his turnaround involved creating milestones and rallying the troops around them. To accomplish this, Jala held so-called "laboratories"—prolonged brainstorming sessions that involved key managers and, if necessary, outsiders. The objective was to craft plans to achieve critical interim goals, such as improving the company's cash position. The laboratory team broke down the projected improvement by activity—sales of specific assets, better borrowing terms and other key issues—and assigned responsibility for each one.

With plans in place, Jala then created a system for keeping people accountable and maintaining the momentum. At MAS's monthly management meetings, managers describe what they have done to improve the profit-and-loss statements that they are responsible for. By monitoring progress, MAS could see the tactical moves necessary to engineer the turnaround.

Senior management focused on tactics in each of the four major areas for improvement. To boost yield and revenues, the airline segmented customers and became more selective about offering discount fares. It also got stricter about excess baggage. To improve its network efficiency, MAS sought government approval to stop flying unprofitable domestic routes. At the same time, MAS launched its own low-cost carrier, Firefly, to fly six domestic routes that had no air service. The airline improved productivity by reducing manpower by 15%, cutting overhead and maintenance costs. In a recent interview, Jala explained, "We only focus on activities that have big financial impact."

Tracking the performance of its moves—a critical element to any successful turnaround—became an obsession that kept MAS sharply focused on its journey. Jala's turnaround plan had spelled out in detail the anticipated effect of every move on the profit-and-loss statement. Every route has a profit-and-loss statement, as well as a regional manager responsible for overseeing that P&L, who closely follows a small number of performance indicators—such as cash in the bank, and sales and passenger load—that align with his initiative's overall goals.

As other turnaround artists have learned, paying close attention to the numbers is critical if you intend to keep a change program on course. By every indicator, the national carrier has found a patch of smooth sky. In the first quarter of 2007, revenues grew by 21%. Since Jala's arrival, the all-important passenger-per-kilometer yield rose 27%, from 20.5 to 26.1. The seat factor—how many people the airline flew relative to its total capacity—was up two percentage points to 75%. And MAS's new price structure has attracted more customers.

Like other change masters, Jala keeps raising the bar. Just as he was posting profits, he pushed the organization to shoot for an even higher profit target, from $14 million to between $85 million and $199 million. He announced the purchase of new aircraft to replace aging planes and expand MAS's fleet. And Jala raised the full-year earnings forecast.

A turnaround as dramatic as MAS's isn't magic. It's the result of leadership that understands the diverse elements of change and makes sure that every one is in place.

Till Vestring and Satish Shankar are partners in Bain & Company's Singapore office. While Bain cannot identify clients under confidentiality agreements, its partners may write about a mix of client and non-client companies.