http://biz.thestar.com.my/news/story.asp?f...43&sec=business

Saturday June 11, 2011

MAS: On a wing and prayer

The short term appears bleak but there are signs that MAS may improve.

The woes of national carrier Malaysia Airlines' are aplenty. They range from an aging core fleet, escalating cost structure, high leasing cost and legacy issues to a network that's not far reaching enough. And these keep coming back to haunt the airline despite its hard-fought efforts to get back on steady ground.

To tackle these issues, it needs nothing less than dynamism. Take for example its recent entry into the much-vaunted oneworld. This should have been done years ago.

It's tough out there factors such as rising oil prices sparked by tensions in the Middle East and the earthquake/tsunami in Japan leave an impact on the global airline industry.

Even so, other airlines are able to report profits. Sadly, MAS once again plunged into the red territory with a RM242mil net loss for the first quarter of the year, shocking many who had thought the worst was over when the carrier reported a RM225mil in net profit for 2010.

“I wish I could say we could have done things differently and the losses had nothing to do with fuel prices but the volatility in fuel prices was a major contributor to our loses,'' says MAS managing director Tengku Datuk Seri Azmil Zahruddin.

To Shukor Yusof, a Singapore-based airline analyst for Standard and Poor's “MAS biggest threat in the last seven to eight years has been AirAsia” and the fact that it is still struggling to overcome legacy issues. “For as long as they do not have a clear vision of where they are headed, they will continue to have issues going forward,'' says Shukor.

The issue is made worse as no one can predict the direction of jet fuel prices. International Air Transport Association (IATA) director general and CEO Giovanni Bisignani says that “remains a concern.'

A Maybank IB analyst adds that MAS needs to sort out its unresolved fundamental issues. “They are doing it but the pace needs to hasten as the world is not waiting for them.''

The question to ask - after a host of revamps and reforms labelled with acronyms such as WAU (Widespread Asset Unbundling), BTP1 (Business Transformation Programme) and BTP2 - what could the airline possibly do - more?

The red ink

Rising jet fuel prices and high leasing made up 58% of total cost that drove MAS into the red in the first quarter. This sent shockwaves to the analysts fraternity.

Of 18 analysts, 12 have a sell call on the stock. Jet fuel raced to US$113 a barrel during the period. MAS hedges 25% of its fuel requirements at US$93 a barrel. Fuel made up 38% of its total cost in the first quarter, aircraft leases 20%, staff cost about 12%-15% and the rest is for maintenance, landing and parking and others.

Its cost per available seat km (CASK) is 8.25 US cents versus SIA's 7.13, and AirAsia's was 4.2 US cents. Even a single cent change can make a difference during turbulent times. MAS is seeking a 15% CASK reduction by 2015.

The airline also added 11% capacity during the year. Had it not, would things have been better? “Unlikely...the fuel pricing would have hit it anyway,'' says an analyst.

Encouraged by the bullish projections that this will be a good year, MAS has added more seats to its network.

“Had we known it (about the tensions in the Middle East that pushed fuel prices and the earthquake in Japan), we would not have put in so much capacity. About 38% of our cost is fuel and with this kind of volatility, we can mitigate but cannot eliminate,'' Azmil says.

It has been a humbling experience. On June 1, MAS was booted out of the MSCI Malaysia Index.

The counter has lost much ground since it released its results closing Friday at RM1.43. Its archrival on the domestic front, AirAsia has also overtaken it in terms of market value at RM8.8bil versus MAS' RM4.8bil.

So, can it keep to its full year projections despite the first quarter blip? “We are on track,'' Azmil says.

Fleet dilemma

Having older planes are one thing but utilitising them to the maximum is another. But here's one of the roots of MAS' headache.

In the past, MAS has been somewhat slow to replace its fleet whenever there was a new generation aircraft launched.

While its rivals would be the first to hop on and make the orders, MAS would take the “wait and see'' approach.

Furthermore, the fuel and maintenance cost of its aging fleet is high. Some attribute this lack of agility then to its dire financial straits.

But that seems to have changed, with Azmil at the helm. The airline has ordered 35 B737-800 and 15 A330-300, some of which have arrived and the bulk coming the next and the following year.

The shift in strategy from being asset light to having a third leased and a third owned is best to balance its portfolio and hopefully it will drive cost down as these are next generation aircraft that are far more fuel efficient than its existing fleet.

“The old ones are sucking too much fuel and does not help yields. Its direct competitors have the latest generation of planes that are much more fuel efficient. Two of the B737-800 that it took delivery of this year are flying 16 hours. That shows there is better utilisation of its fleet to earn better yields,'' says the Maybank IB analyst.

Azmil says many new aircraft are coming into system. “This year, we will see new aircraft coming in and you will see the difference in the economy class and also the front end of the cabin,'' says Azmil.

Next year, MAS will get its long-awaited A380 aircraft but they come years after rivals SIA, Emirates and Qantas. It will certainly lift MAS portfolio of offerings.

Its recent shift in strategy to focus on front end by expanding its portfolio to more market segments is the way to go as MAS would need to bump that up to match the yields enjoyed by SIA.

The yield gap has been widening over the years and some say this is because MAS has been caught up fending off competition on the local front by trying to be both premium and a low cost airlines.

The realisation has set in that a premium product cannot be low cost. So, it now has a portfolio of products offering premium, value (Firefly turboprops) and low cost (Firefly low cost).

Firefly is managed separately though it is a unit of MAS and even SIA is getting directly into the long-haul low-cost market which is competitive as the low-cost carriers are eating into premium airlines' margins.

“Firefly is a bright spot for MAS and will keep improving when it takes more 737-800s. But the revenue contribution isn't that big to MAS overall bottomline. MAS needs to fly more profitable routes especially with the A380s coming in 2012,'' says Shukor.

The brand of choice

One analyst compared air travel withfast-moving consumer goods where there's no loyalty. In this era, airlines need to distinguish themselves from the rest of the pack through right pricing and the soft touch. Also, having a brand new plane gives the perception that it is also safer so that's a factor travellers will consider.

With that, the new planes bode well for MAS. Having the A380, will put MAS in the same ranks as SIA or even Cathay but still, it does not guarantee the loads. With A380, MAS will have to fill over 500 passengers at one go at a time when competition is bursting, not just from the premium carriers but low cost as well which offer business class seats a fraction of the cost.

To address that, the airline is focusing on filling the front end of the cabin.

Although the strategy was crafted recently, the front end loads have picked up, according to MAS senior general manager sales and marketing Datuk Bernard Francis.

The recently launched Global Deals Dream Getaways is showing results and the focus from overdependence on corporate sector has widened.

Internally, the target is 25% which means a RM650mil contribution to earnings. The airline has thus far hit 23%. Average load is about 70% and forward preloads are 18% higher than last year in the second half.

Though MAS flies to many countries, it is hard to match the branding that SIA and Cathay command. This is another issue the national carrier needs to address.

“People rather pay more for the rival planes which are newer, with latest interiors. So, it is a perception of better quality even tough MAS' soft skills are excellent,'' says an analyst.

The change afoot for the airline is not just limited to new aircraft and new seats. It has also started from the first touch point.

MAS is one of the first airlines in the world apart from Delta to use iphones, ipads, Facebook and even Android's as tools to check-in and even buy tickets.

The food offering is changing and it has “chef on call'' for the first class to make sure you get the meal the way you want it. It also offers “ferrero rocher'' which is a premium chocolate as a dessert and it is buying new planes. The only set back - the planes cannot arrive any faster.

The ties that bind

Twelve years and two attempts. That is how long the courtship with oneworld took. MAS was invited 12 years ago but due to technical issues, nothing had materialised.

“The board gave the management up to June to get into an alliance,'' says MAS chairman Tan Sri Dr Munir Majid.

After the first attempt, MAS search continued but its balance sheets did not make it “pretty'' enough to be considered as a member.

What changed this time around was that MAS is looking much better despite its recent quarterly blip. Geographically, it is well located as oneworld needs to get smack into the South-East Asian markets since growth in passenger traffic is expected to be robust in the region.

IATA expects Asia to lead traffic growth. All these had strengthened MAS case. This time, following an invitation, the pact was sealed after a 12-hour meeting over the past weekend. “It is the best fit for us and MAS is the best fit for oneworld,” says Azmil.

The full impact is likely to be felt in 2013.

“But don't expect investors to jump to buy the stock as it will take time before we can see the results. Surely, there will be benefits from ferrying member passengers around and the geographic reach for MAS travellers just gets bigger. More so now, there are more avenues to earn miles for the travellers,'' says an analyst.

Centre for Asia Pacific Aviation analyst Brendan Sobie says MAS is going in the right direction as the alliance helps strengthen its position in Asia and widens its reach.

An analyst remarks that the only reason oneworld is losing to SkyTeam and Star Alliance is that they do not have a representative in SEA. “Now, they do with MAS,” he says. The other factor that could boost traffic is Qantas willingness to work with MAS via oneworld to tap into SEA.

Transformation mode

As rightly pointed out by Azmil, MAS is in transformation mode, no longer turnaround .

“Transformation takes long but it will stick with you versus business turnaround, which is for a short time only,'' he says.

An analyst likes the sound of it: “He is going back to the textbooks and this is something which should have been done 12 years ago.”

More crucially, what does that mean for the consumer? “You will see a very different value proposition from MAS from how you buy tickets, whether you use a website, the call centre, the facebook or the androids to the ipad.

It is a different experience when you get to the airport. We are improving the first and business class and looking to improve the economy offering. We are getting new aircraft and modern products.

“At the end of the day, it is not just a transformation, but we are changing the mindset,'' Azmil says.

http://biz.thestar.com.my/news/story.asp?f...10&sec=business

Saturday June 11, 2011

MAS needs the ‘wow’ factor again

THE tale of Malaysia Airlines is one of many twists and turns. The national carrier has nose-dived into turbulence as well as picked itself up many times over.

Analysts tracking the airline concur that its history, both financially and operationally, is an eventful one, especially since the onslaught of fierce competition from low cost carriers (LCCs) and high oil prices.

“The carrier has faced severe financial challenges over time. Yet, it has managed to survive them. It's interesting in the sense that one day it was flying high and the next thing you know, it has hit bottom but it has, through it all, managed to turnaround,” says an analyst.

“We're not sure if the ride is over yet,” says another analyst, referring to MAS' net loss of RM242.3mil in the first quarter ended March 31 on rising fuel prices and the stronger ringgit.

However, he expects the next few years to be exciting for MAS as the carrier will expand its routes and capacity again after years of consolidation.

High fixed costs

What are the main reasons for MAS' headaches? Analysts say the aviation industry is one with high fixed costs such as aircraft and expensive fuel. The company is also vulnerable to wild swings in demand and external shocks which it has little or no control over. Therefore the company needs to be armed with a good strategy to keep itself in the game.

A decade ago, MAS suffered high losses due to poor management and fuel price increases. Even after the Government took control of the airline from Tan Sri Tajudin Ramli in 2000, it failed to turn around. The Government had renationalised MAS then by buying back Tajudin's shares at RM8 each, over two times the prevailing market price of RM3.62.

After years of mismanagement, MAS lost much of its core competencies in many areas of operations and was burdened by route and fleet expansion programme.

Eventually, MAS reported an operating loss of RM776.6mil and a net loss of RM835.6mil for the year ended March 31, 2002.

Revamp

In the same year, MAS underwent the famous Widespread Asset Unbundling or WAU revamp to restructure the whole group.

The WAU exercise wowed many with the almost instant result to turnaround MAS dire state to a positive position.

Penerbangan Malaysia Bhd (PMB) was set up in 2002 as a wholly-owned subsidiary of the Minister of Finance Inc following the restructuring of MAS.

What happened under the WAU was that 73 aircraft of MAS (which were tagged with a value of RM5.1bil) as well as an associated RM7bil in debt were taken over by PMB.

The shortfall of RM1.9bil was made up by issuing additional MAS shares to PMB at then RM3.85 each.

The aircraft were then leased back to MAS to enable the carrier to focus on operational efficiency.

With no aircraft assets on its balance sheet, MAS essentially became a marketing entity and operator of leased passenger and cargo capacity on international routes.

Basically, the restructuring transformed MAS's gearing ratio of 700% as at March 21, 2002 to a net cash position thus creating an “asset-light” airline.

The restructuring was successfully executed by Nov 6, 2002 in a record duration of 8.5 months for a restructuring worth billions in size.

The success of the WAU exercise speaks for itself. In the following year, MAS posted a significant improvement after its restructuring exercise. The carrier narrowed its operating loss to RM47mil in 2003. It turned around in 2004 with an operating profit of RM195.6mil and RM317.7mil in 2005.

Not only did MAS managed to turnaround its operation, the carrier also saw its share price increased from RM3.06 on Nov 5, 2002 upon shareholder approval of the WAU restructuring and reached a high of RM5.60 on March 31, 2004.

“At every results briefing post-WAU, investors had left with the impression that the airline was finally getting its fundamentals right,” an analyst recalls.

Precarious state

But MAS continued to be in a precarious state despite having had all its debts transferred and seeing some improvements operationally and financially. High jet fuel prices was a serious concern and were a big factor in pushing it from a newly turnaround company into the red again due to high oil prices in 2005.

Analysts were also critical of MAS fuel hedging strategies then. For the period from April to December 2005, MAS losses amounted to RM1.3bil shocking the market with its worst results since the WAU exercise.

Again, the company needed a restructuring plan to turn the company around - one more time. This time around, the government appointed Datuk Seri Idris Jala as new CEO on Dec 1, 2005 to steer the company out of turbulence.

Within three months he came up with a Business Turnaround Plan 1 (BTP1) where he played a key role in helping MAS return to the black.

Several weaknesses in airline operations were identified as the causes of the RM1.3bil loss. These included escalating fuel prices, increased maintenance and repair costs, staff costs, low yield per available seat kilometre via poor yield management and an inefficient route network.

Fuel costs

Analysts say the most substantial factor for the massive losses was fuel costs. Another factor for the losses was high operating costs. MAS substantially lagged its peers on yield.

The success of the BTP1 saw the airline reporting record net profit of RM851mil for the financial year ended Dec 31, 2007 from a loss of RM1.3bil in 2005.

Jala launched BTP2, a five-year plan to transform MAS into a five-star value carrier and turn in profit of at least RM1.5bil in 2010 according to the plan. MAS posted a net profit of RM234.5mil for the financial year ended Dec 31, 2010.

The plans saw improvement on its quarterly results and the group is getting to a stage where it is ready to start on the next phase to grow again.

Fleet modernisation

MAS is currently embarking on a fleet modernisation and capacity expansion plan to stay ahead of its competitors.

In an interview with StarBiz last year, MAS senior general manager (network and revenue management) Dr Amin Khan says MAS will dispose of some old aircraft and replace them with modern planes.

The rationale is quite clear. Amin points out that leases are generally more expensive than on-balance sheet financing.

“We aim to own a third of our fleet to lower our costs. It's definitely cheaper to own the aircraft than to lease it,” he adds, elaborating that the airline could enjoy cost savings.

MAS currently leases all its aircraft from PMB and will eventually return the aircraft to the latter when the lease expires.

Under its fleet renewal exercise, MAS could potentially own an additional 56 aircraft by 2016 excluding options for 20 B737-800 and 10 A330-300. The aircraft deliveries are scheduled up to 2016.

Net loss

While things are shaping up nicely, MAS shocked the market again when it announced a net loss of RM242.3mil in the first quarter ended March 31, 2011 on rising fuel prices and stronger ringgit.

The net loss reported brought up some questions if the BTP had lost its momentum and its operational efficiency restructuring.

“MAS' poor results will shock the market and we expect significant downgrades by analysts, which may be the key de-rating catalyst,” CIMB Equities Research said.

The brokerage said MAS “significantly undershot” its expectations with a first-quarter core net loss of RM415mil.

“We have forecast RM247mil core net profit for the full year and have been too optimistic in our projections,” it said.

It expressed shock at MAS' performance in the international passenger segment, which saw a 5% year-on-year fall in yields, reversing three consecutive quarters of year-on-year improvement.

Not consistent

Analysts say MAS had not been consistent in its performance of the last decade, disappointing investors at times. “Sometimes when you are thinking things are becoming better for the carrier and then they announce a huge net loss, it disappoints,” an analyst says.

He added that the inconsistency in MAS' performance would only dampened investors confidence. “We think that if MAS is able to step up its performance, it would be an attractive growth story.”

Analysts say MAS' recent operational and financial numbers still indicate that the national carrier needs a more convincing story to tell investors.