Money-losing Malaysia Air struggles in tough climate

Leslie Shaffer | Writer for
Malaysia Airlines in precarious situation: S&P

The disappearance of a Malaysia Airlines flight to Beijing has put a spotlight on the difficult operations of the flag carrier as it struggles to implement its latest turnaround plan.

More than 70 aircraft and ships are involved in the search for Malaysia Airlines flight MH370, but thus far they have failed to find any sign of the Boeing aircraft which lost contact with air traffic control en route to Beijing from Kuala Lumpur on Saturday.

(Read more: No trace yet of missing Malaysia jet)

Malaysia needs to explain the shift in search for MH370: Pro

"Although financially stricken, we do not believe that MAS (Malaysian Airline System) had compromised on its quality in terms of its aircraft maintenance. MAS has consistently maintained a high standard of quality and maintenance checks," said Sharifah Farah, an analyst at Affin Investment Bank, in a note.

But while the carrier's safety record has been solid, its financial performance – as well as the results of a long series of turnaround plans – has left much to be desired. The carrier posted a net loss of 1.17 billion ringgit (around $360 million) in 2013, worse than many analysts' expectations. Few expect the carrier to be profitable in 2014, with losses potentially extending into 2015 as well.

(Read more: In pictures: Latest on missing Malaysian jet)

MAS didn't immediately return an email requesting comment.

"They have always been in a very precarious position. I think if MAS was a patient, it would have been in ICU (intensive care unit) permanently," said Shukor Yusof, an analyst at Standard & Poor's Capital IQ.

"They have a habit of losing money. They've changed CEOs multiple times. It hasn't changed anything. It's a question of legacy issues; it's a question of shoddy management. It's a question of government interference," he told CNBC.

(Read more: Distraught relatives in missing MH370 increasingly frustrated)

He noted that in 2002, MAS' debt load was shunted off to a separate company. "Here we are 10-12 years later and we're back at square one," Yusof said. At the end of 2013, MAS had around 10.36 billion ringgit of long-term debt. In May of last year, MAS raised 3.07 billion ringgit in a rights issue sold at 23 sen (7 U.S. cents) each.

Yusof said the carrier has a history of "careless" financial mistakes, citing its decision in 2003 to enter a non-negotiable 25-year catering contract worth around 250 million ringgit a year.

Roslan Rahman | AFP | Getty Images

The details of the catering contract haven't been released, noted Mohshin Aziz, an analyst at Maybank. "It's been presumed that it's a lopsided contract. The effect has been to pay too much for their food and catering on board and unfortunately, they're stuck," Aziz said.

The catering company, Brahim's Airline Catering, is majority owned by Brahim's Holdings, which didn't immediately return an email requesting comment.

He said MAS has been through many turnaround plans over the years. "The one in 2006-7 had glimmers of hope. It was even profitable for a year. It's probably the closest they've had for success. Thereafter, not much," he said.

(Read more: How will Malaysian Airlines investors endure tragedy?)

Others aren't optimistic about the current turnaround plan. "The company's restructuring plan will likely take longer than anticipated (as management contends with a weak macro climate, FX headwinds and heightened competition)," Michael Beer, an analyst at Citigroup, said in a report last month.

"The current operating environment is likely to impair management's ability to right the ship, in our view. Management was able to improve its aircraft utilization and streamline costs during the second half of 2013, but at the expense of passenger fares (which would have likely been under pressure anyway)," Beer said.

(Read more: Passports are weak link in overseas airports)

Labor issues are another factor in the carrier's inability to post a profit.

Aziz noted the company faces "very demanding" unions, with concerns over working hours and processes as well as perks and promotions "really putting a strain on the company's financials."

In 2000, the government bailed out the carrier by buying back a 29 percent stake from businessman Tajudin Ramli at 8 ringgit a share. The stock never traded over 2 ringgit during 2000, according to Reuters data; it closed Wednesday at 27 sen.

MAS is around 69 percent owned by Khazanah Nasional, Malaysia's sovereign wealth fund.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1