Manuscript Reference Number: AJM – 0004

CASE STUDY DOOM AND GLOOM OF RAYANI AIR:

FIRST SHARIAH-COMPLIANT AIRLINE IN THIS REGION

ABSTRACT developed halal tourism as a promising niche to attract more Muslim tourists to the country. Due to the variety of Islamic offerings, it seems a good country for the tourists who care about Islamic values not only in their daily life, but also while travelling. It has a rich Islamic heritage as well as halal food, Muslim friendly people and wide Islamic environment which provide Muslim tourists with a good Islamic experience. Rayani Air of Malaysia described as the first Islamic-compliant airline in this region, has begun offering cabin service compliant with Shariah law. The company requires Muslim flight crew-members to wear the hijab whilst non-Muslim crews are forbidden from wearing revealing clothing. In-flight meals are completely halal and alcohol consumption is strictly banned. Less than four months after launching operations, the airline that pitches itself as fully Shariah-compliant, has been grounded. Malaysia’s Department of Civil Aviation (DCA) confirmed that the company’s Air Operator’s Certificate has been temporarily revoked while it is subjected to “a full administration and safety audit.” Security risks, pilots’ strike, salary outstanding, cash-flow problem, criticism from passengers and the government are among the reasons the airline was grounded. Although the founders are 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. The Rayani Air’s non-compliance of DCA requirement fits very well in the above scenario.

Key words: Halal Tourism, Rayani Air, Shariah Compliant, Halal Food, Security Risks, Administrative Issues, Pilot Strike, Cash flow, Department of Civil Aviation, Air Operator’s Certificate.

INTRODUCTION Rayani Air of Malaysia, described as the country’s first Islamic-compliant airline, has begun offering cabin service compliant with Shariah law in 20th Dec 2015. It was the first Shariah Compliant airline in Malaysia and the fourth such airline in the world, after , Saudi Arabian Airlines and . No alcoholic beverages or pork were served on board in accordance with Islamic dietary laws and prayers were recited before every flight. Rayani Air was founded by Mr. Ravi Alagendran and his wife Ms. Karthiyani Govindan, both of whom are Malaysians of ethnic Indian descent.

Rayani Airlines was originally intended to be based at Malacca International Airport in 2014. However the airline changed its base to Langkawi International Airport to attract tourists to the resort island. It was previously rumored that Rayani Air would be launched as a Low Cost

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Carrier; however the airline officially positioned itself as a Full Service Carrier in December 2015. On 20 December 2015, the airline's inaugural flight to Langkawi (RN600) took off smoothly. The airline was planning to co-operate with Royal Brunei Airlines to strengthen the Shariah-compliant airline concept within the aviation industry.

POTENTIAL OF RAYANI AIR There are about 240 million Muslims in the South East Asia (SEA) region. That is approximately, 40% of the entire population mix of South East Asia. Most of the Muslims are found in Malaysia, Indonesia, Brunei, Thailand ad from Philippines. Along with the entire Asia, SEA has one of the busiest air routes in the world.

The South East Region Potential

15% 22% AirAsia/Air Asia X Lion SIA Garuda 15% 4% Thai MAS 5% Cebu Pacific Vietnam Airlines 5% 9% PAL

7% Others 9% 9%

Graph 1: South East Asia Capacity Share / Source: CAPA – Centre for Aviation and OAG

Over the last few years, SEA has been impacted by over-crowding airports. The passenger volumes and the number of flights flying into the major airports have been rising steadily over the years. As the demand continues to grow, the recent wave of consolidation and capacity adjustments should lead to more favorable conditions of air travel operators and passengers. SEA has already established itself as one of the world’s fastest growing aviation market. Nearly, all of the 10 ASEAN countries have robust economies and expanding middle classes. In all, the market demand is already there and continues to grow. Rayani Air is entering the market at the right time.

Population Country Seats ASK GDP (Billions) (Millions) Singapore 1,355,735 4,513,321,060 304.1 5.5 Thailand 1,258,241 3,997,304,619 373.6 68.6

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Malaysia 1,083,506 2,965,177,154 343 30.1 Indonesia 758,932 2,080,280,701 859.3 251.5 Philippines 476,244 1,623,472,877 291.8 99.4 Vietnam 406,627 981,657,270 187.8 90.6 Cambodia 136,937 117,583,272 16.9 15.6 Myanmar 88,954 128,887,144 60.3 66.2 Brunei Darussalam 42,101 101,162,715 16.8 0.4 Laos Republic 35,866 27,813,666 10.8 6.9 Table 1: South East Asia Weekly Capacity by Country

Source: CAPA – Centre for Aviation and OAG

With 40% of SEA population being Muslims, Rayani Air could expect them to try its’ services at least once when they travel. Probably, they are curious to explore the services provided by Shariah compliant airline. This curiosity can act as added advantage when comes to future marketing focus.

PROBLEM STATEMENT On 9th February 2016, Rayani Air flight RN180 scheduled for Kuala Lumpur International Airport 2 (KLIA2) was cancelled due to a broken cockpit windshield. The next day, the airline issued a press statement apologising for the flight cancellation and attributed the shattered windshield to a night flight previously. Rayani Air said they were investigating to see if the broken windshield was an act of sabotage and would liaise with relevant authorities to deal with this. In March 2016, Rayani Air was plagued with numerous issues and complaints. Passengers complained that the airline frequently rescheduled flights, often up to 13 hours later. The airline also frequently cancelled flights without advance notice and without compensation or assistance to affected passengers. The consumer complaints were highlighted in several media outlets and DCA. It was reported that pilots refused to fly due to aircraft's poor condition.

On 9th April 2016, Rayani Air temporarily suspended all operations until further notice, citing 'restructuring exercises' on the announcement made by its co-founder. Malaysian Aviation Commission (Mavcom) in a statement on 13th June 2016 announced that Rayani Air license has been revoked, citing “it had breached the conditions of its license and it also lacks the financial and management capacity to continue operating as a commercial airline”. The Star reported that on April 11, Rayani Air's air operations certificate (AOC) was suspended for three months after the airline temporarily halted operations following a strike by pilots. It was reported that Rayani Air's operations were suspended for allegedly breaching the Civil Aviation Regulations 1966.

PORTER’S FIVE FORCES OF RAYANI AIR The five forces model was invented by M. Porter it’s a commonly used framework to analyze the competitive environment of an industry. Porter has said that there are 5 driving forces

Page 3 of 8 which are relevant to influence a firm’s position within the industry. It assesses the attractiveness of the industry and also figures out the position of the firm within the industry. Moreover he also points out the whether the industry is attractive or not and helps the firm to take a decision of whether they are going to compete in the market (Dess, 2007).

Figure 1: Five Forces Analysis of Rayani Air

Threat of new Entrants The industry in which Rayani Air operates, an airline industry, the threat of new entrants is low. This is mainly due to the fact that barriers to entry are high. New airline trying to enter the airline industry are faced with a great deal of challenges, the biggest being the capital requirement as to start an airline will require number of aircrafts. The Rayani Air management does not believe that their airline will face any real threats from new entrants as Malaysia DCA stop giving new license to new entrants. They stated that the airline industry is already saturated and it is one of the most expensive industries to operate in. On top of that, the airline has to fulfill very stringent safety requirements that make it more expensive to operate.

Bargaining Power of Suppliers Power rests with the suppliers in the form of price and quality of supplies. Suppliers can increase the price or lower the quality of their goods and services. In the airline industry, there are mainly two suppliers of airplanes, namely Boeing and Airbus. The demand for their planes is very high due to the fact that there are lots of airlines and the manufacturers can only produce so much. Therefore, the power of suppliers is quite high and they have a firm grip on the market. Moreover, the price of oil is one of the major factors of cost for all the airlines and Rayani Air following a cost focus strategy is more vulnerable to changes in oil prices.

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Bargaining Power of Buyers In the airline industry, the bargaining power of buyers is high and is increasing as there are number of airlines to choose from, such as Air Asia, and MAS. Moreover, there are lots of travel agents and customers can now buy ticket online from even intermediaries. Therefore, they do not really have to stick to one airline and this increases the buying power of customers.

Threat of Substitutes Customers can choose to fly with other airlines such as Air Asia, FireFly, MAS and MAS Wings (West Malaysia) instead of Rayani Air. The threat of substitute is very high for Rayani Air.

FACTORS THAT LEADS RAYANI AIR SUSPENSION Rayani Air, the Shariah-compliant airline, might just go down in history as one of the flight carriers which has clocked-in the least mileage since its operation. This comes about as after only 3 months of operations, they finally rest their wings on 9th April 2016. The airline which grew in popularity for being the first such airline in Malaysia dwindled in its response when issues cropped up one by one, finally leading to DCA shutting them down completely. Rayani Air’s early dismissal from entering the sky was caused by numerous factors which ultimately led to their downfall.

Security Risks The airline handed out boarding passes whereby the passengers’ details were hand-written which Malaysian Transport Minister Datuk Seri Liow Tiong Lai deemed to be a potential security threat.

Pilot Strikes When the pilots of Rayani Air went on a strike, passengers were stranded in airport and forced to reschedule their flights, clearly much to their own inconvenience. One of Rayani Air passenger, Siti Nadwatul for instance, told Star Online that she had her flight to Langkawi rescheduled 3 times before it finally received a cancellation. She, along with 10 family members, including her father who is wheelchair-bound had no other option but to opt for a bus and ferry ride to their destination.

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Salary Outstanding The pilot wasn’t the only one who went on a strike. The employees of Rayani Air too were equally as dissatisfied with their employer back in late April, so much so that an estimate of 416 staff members threatened legal action against their CEO, Ravi Alagendran and his wife Karthiyani Govindan should they fail to receive their salaries.

The station manager of Rayani Air, Zulkalnain Azdan told New Straits Time Online that the staff also found out that their Employees Provident Fund (EPF) and SOCSO deductions which comes up to RM900,000 was not paid to the organizations since September 2015.

Competitors Leverage When Rayani Air was curing its own set of hiccups, their competitors wisely took control of the situation and leveraged of it, providing services which Rayani Air clearly found hardship in completing. offered the stranded passengers of Rayani Air a chance to rebook their cancelled flights through them at discounted prices. AirAsia followed suit on the opportunity when they offered a 50% discount to all the Rayani Air passengers who had a confirmed flight booking.

In statement to The Star Malaysia, MAS chief commercial officer Paul Simmons said that as a national carrier, it was the duty of MAS to extend assistance to Rayani Air passengers. The MAS discounted fares are available until April 30 for immediate travel until July 31 this year.

Leadership Failure When the Rayani Air CEO was summoned for an inquiry by the Department of Civil Aviation in early May 2016, he mentioned that he had fainted due to high blood pressure. When The Star contacted him, he merely mentioned, “Yes, pressure high.”

Whilst it is in no way belittling a medical condition, Mr. Ravi had a set of responsibilities to fulfill, with the flight carrier and all its staffs’ fate resting on his shoulders. His failure to show up reflects poorly on the air carrier to the public, as a whole and the lack of ability to respond to the issue immediately is unfortunately one incident Rayani Air can’t take back.

Staffs Departure Deputy transport minister, Datuk Abdul Aziz Kaprawi mentioned to The Star that the company had a “fair number of experienced staff” during its proposal to the government on operating an airline. These experienced members did not stay on for too long as they left the company shortly after Rayani Air took off and without the puzzle pieces intact, it was hard for the airline to complete the picture to not only paying passengers, but also any potential investors.

Refund Passengers

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A healthy entity is one which is constantly evolving (for the better) and at the core of operations, earning a profit as well. Rayani Air was doing the exact opposite as they are on the process of refunding passengers who did not get exactly what they had paid for.

The CEO of Rayani Air took to Facebook where he posted a status update mentioning that they are committed in refunding passengers who had cancelled flights and their process of returning the fare will be ongoing at the office, which they see as a priority for their customers. While it is a necessary thing to do on Rayani Air’s part, it is unfortunate that they have reached this stage whereby it would be significantly harder now than ever to cut losses.

Unhappy Customers The customers are always right. After all, it is hard to be happy with Rayani Air which is not only unable to take the customers to their desired destination, but also delays the process with other elements thrown into the equation. The customers were at the losing end and ultimately their discontentment just adds to the fact that the flight carrier was problem-filled. Should Rayani Air still be able to continue their operations, they would suffer a major setback because of the lack of trust from their passengers due to flight delays and inconveniences caused to the elderly passengers

Cash-Flow Problem In purely financial terms, Rayani Air 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 patronize 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.

The trouble for management is that low sales do not equate to low overheads. Rayani Air has 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 that Rayani Air pilots had gone on strike allegedly due to non- payment of salaries, it became clear that Mr. Ravi’s team had miscalculated their finances and run out of cash. Their fate was sealed by the negative headlines that followed.

Fleet Selection Poor fleet selection appears to have been another of their rookie mistakes. There is no question that Rayani Air 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 it is 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 Air’s social media accounts were awash with complaints of flight delays.

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Shariah Complaint 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. Mr. Ravi Alagendran and Ms. Karthiyani Govindran, non- Muslims who raised eyebrows when it was revealed that they were the founders of pioneering Rayani Air, whom are Malaysians of ethnic Indian descent.

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