How it all went wrong for Malaysia’s ‘halal’ airline

Less than four months after launching operations, Rayani Air, the Malaysian airline that pitches itself as fully Shariah-compliant, has been grounded.

Malaysia’s Department of Civil Aviation confirmed on Monday that the company’s Air Operator’s Certificate has temporarily been revoked while it is subjected to “a full administration and safety audit.”

The carrier’s woes only deepened on Tuesday when “fuming customers” reportedly stormed i’s offices to demand refunds.

Although founder Ravi Alagendrran is vowing to restore operations as soon as possible, few start-up carriers are given a second chance once their brand has been tainted by suspensions. Jitters about further flight cancellations will typically derail any prospect of a re-launch.

With senior management telling Flightglobal that Rayani now needs “another investor” before it can even consider resuming flights, the outlook seems bleak.

So what went wrong?

In purely financial terms, Rayani appears to have stumbled at the first hurdle facing any start-up airline: cash-flow.

When an unknown carrier enters the market, many passengers will be reluctant to patronise the company until its reputation is cemented by word-of-mouth reviews and positive media publicity. This “unfamiliarity factor” often translates into load factors – or seat occupancy rates – well below 50% during the initial launch phase.

Happier days In this Dec. 22, 2015, photo, a Rayani Air flight crew walks down the aisle on board before departure at Kuala Lumpur International Airport 2 in Sepang, Malaysia. (AP)

The trouble for management is that low sales do not equate to low overheads. Airlines have notoriously high fixed-expenses – it costs roughly the same to fly a full plane as an empty one – so sustaining operations is only possible with large cash reserves.

Launching an airline with limited coffers or over-optimistic projections for revenue and load factor is a sure-fire recipe for disaster.

When news broke earlier this month that Rayani’s pilots had gone on strike – allegedly due to non-payment of salaries – it became clear that Alagendrran’s team had miscalculated their finances and run out of cash. Their fate was sealed by the negative headlines that followed.

Rookie mistakes

Poor fleet selection appears to have been another of their rookie mistakes.

Aircraft, like motor vehicles, vary in value according to age. Selecting the right vintage is not a perfect science, but management will usually try to balance reliability with price. Splurge on a new plane and you’ll have no money left in reserve; go bargain-hunting for a banger and you’ll spend more time in the repair shop than on the runway.

There is no question that Rayani’s bosses were blinded by the allure of cheap leases. Their two Boeing 737-400s were both 23 years old – an age at which most passenger planes are retired or converted to cargo jets.

Though perfectly safe to operate, the inevitable maintenance issues that accompany older aircraft can be highly disruptive – especially when no “backup” units are available. During its short history, Rayani’s social media accounts were awash with complaints of flight delays.

Press articles ridiculing the airline for its hand-written boarding passes were the final nail in the coffin – irrespective of whether they posed a genuine security risk, as claimed by some.

If we put the financial autopsy to one side, though, Rayani made an even more fundamental and troubling mistake.

It prioritised savvy marketing above commercial planning.

When the airline began flying in December, management scored free publicity around the world by claiming to have set up Malaysia's first fully Shariah-compliant private-sector airline. Much like the flag-carriers of Saudi Arabia, Iran and Brunei, Rayani offered a halal service on-board – no alcohol or pork; hijabs for female cabin crew; and prayer sessions before each flight.

Its message found a welcome reception in Muslim-majority Malaysia, where some religious groups had begun criticising the secular business model of flag-carrier Malaysia Airlines after two of its Boeing 777s crashed in unrelated incidents in 2014.

Even western media outlets expressed admiration for Rayani, acknowledging that there is probably a gap in the market for devout Muslim travellers.

Yet the execution fell well-short of the idea.

Whatever the arguments in favour of a halal airline – of which there are many, not least the fact that nearly one-quarter of the world’s population is Muslim – Rayani focussed too much on its USP and too little on the ABCs of running an airline.

Asyraf Wajdi Dusuki, Malaysia’s deputy minister of religious affairs, summed up the airline’s folly in a Facebook post in March – before its license was revoked, but after the complaints started piling up.

Bogus claims

“Islam is not a label to be bought or sold,” he wrote of the airline’s Shariah-compliant claims. “Its principles, values and morals need to be fulfilled.” Dusuki urged against using Islamic credentials as a selling-point to gain popularity.

To his credit, founder Alagendrran has been up-front about the mistakes made during Rayani’s short time in the sky.

“I humbly apologize to our loyal passengers [for] causing difficulties directly or indirectly in recent weeks,” he said in a Facebook posting. “We at Rayani Air are upset with the poor services and we will try our best to rectify and fix them. Rayani Air is a new airline in the country. We have a lot to improve and learn.”

Management can also be commended for continuing to update their social-media accounts – sharing information with customers about refund procedures and rescue fares being offered by rival carriers.

That contrasts with the cut-and-run approach taken by many airline bosses once their efforts have come unstuck.

Local news outlet Free Malaysian Today argued that the airline came crashing down to the ground because “it wasn’t truly Shariah-compliant,” citing poor management and lack of ethics as being behind its failure.

Whatever the cause, Rayani has let down its customers and staff while squandering a compelling business opportunity. When the next attempt is made at launching a Shariah-compliant airline, investors would be well-advised to focus on business basics – sound financial planning, operational reliability, and managerial competence.