MAS Poised To Soar Again

[Ken K. Kour 0]

MAS poised to soar again

 

BY RITA BENOY BUSHON

 

EPF has an 11% stake in Malaysia Airline (MAS) while Penerbangan Malaysia Bhd (PMB), a Khazanah-owned company, owns 69%. The national carrier has a fleet of 110 aircraft flying over 100 destinations compared with Singapore Airlines' 92, Thai Airways' 87 and Cathay Pacific's 97. The average age of MAS' fleet is 10.6 years.

 

how can they say taht? 747s have been put into LTP, Domestic Routes have been slashed left and right, i highly highly doubt MH has 100+ international routes...)

 

MAS was accorded five-star status in 2005 by Skytrax, a global aviation rating agency, placing it among the best airlines together with Cathay Pacific, Singapore Airlines and Thai Airways. It also ranked among the top three for “best cabin crew†and won the Economy Class Service Excellence award for 2006. This is testament that MAS has strong brand equity.

 

Operating in a global environment, however, MAS has to face the challenges of competing with the best in the world.

 

The industry has been facing upheavals recently. Many operators that were unable to take this pressure had to rationalise. The industry has suffered financial losses since 2001 and up to 2005, the loss was to the tune of US$40bil globally. This is despite global passenger traffic growth of 7.2% and freight growth of 3.2% in 2005.

 

Higher fuel price was the major contributor as it represents one-third of costs of most airlines. Another factor was competition from low-cost carriers or that not only added capacity but gave the traditional full service carriers a run for their money.

 

Pricing strategies became aggressive and some full-service carriers had to slash prices below cost just to retain passengers. Many full service carriers also announced significant expansion plans, adding capacity over the next five years. All these factors could further cause prices to become more competitive going forward.

 

MAS had been making losses for many years understatement of the year to me. Since the restructuring under the asset unbundling exercise in 2002, some profits were registered in financial year 2003 (FY03) and FY04. However, it registered losses again in FY05, attributed to increase in input costs, mainly escalating oil prices and staff costs that increased year-on-year (yoy) by 40% and 21% respectively. The losses were to the tune of RM1.26bil. This was despite a 10% increase in passenger traffic to 7.1 million passengers, increase in load factor to 71% and increase in yields measured by sen/revenue passenger per km.

 

For the first quarter FY06, revenue was on the uptrend reaching RM3.03bil but the bottomline was still in the red amounting to RM321mil for the same reasons as FY05. Its operating costs increased 9% yoy to RM3.34bil attributed to the high fuel cost of RM1.1bil.

 

Other costs such as aircraft hire and lease charges too increased as a result of higher interest rates. In addition, the new Financial Reporting Standards rule meant that depreciation charges escalated by 35% despite MAS having fewer assets.

 

In December 2005, Idris Jala was brought in as managing director to turn MAS around. In February, he announced a business turnaround plan to return the company to profitability by 2008. The plan centred around two core areas, i.e. improving yields and managing costs.

 

Measures implemented included tighter control of ticket inventory, excess baggage charge collection and increase of fuel surcharge. It implemented a mutual separation scheme to reduce its staff strength by about 6,500 by 2008 from 23,000 currently. Its focus is to raise productivity by employing high calibre personnel.

 

The restructuring has gained momentum. Seven unprofitable routes have been terminated in 2006. It managed to get entry into the Sky Team alliance, one of the three main alliances globally. It plans to focus on a few hubs and have connectivity to spokes using code-sharing alliances instead of a point-to-point system.

 

For example, in Europe the focus would be on only four hubs instead of 10 destinations. It will also continue to operate 22 domestic trunk routes with AirAsia.

 

To address concern on fuel price, it has engaged in hedging tools to make fuel cost a constant. MAS revealed that currently, 70% of its fuel requirement has been hedged at US$57/barrel. To improve yields, it recently increased fares for its very popular Singapore-KL route by 20% for its confirmed economy class which we see to be a good move because it has a de facto monopoly of this route with SIA.

 

The numbers are expected to improve going forward as the cost-cutting and yield-enhancing programmes take effect. However, shareholders will have to wait for at least two years before any dividend can be paid.

 

 

 

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1, KL-Singapore route, all well and good when you increase prices to increase yields.. but its a completely different thing when you increase prices to the extent people turn to fly SQ, or take a bus...

 

2, We joined skyteam?! really? when.. how does none of us know this? this is either poor research by the writer, or a massive massive hint for the future.. somehow i doubt its the latter...

 

3, i doubt the numbers states in the beginning, about fleet size and routes served..

 

 

Overall, i think this article is semi-biased, as none of MAS's bigger problems are mentioned, for example the number of routes out of its stated 100+ is actually returning a profit....

 

but its still a good read... though i doubt MH will be soaring anytime soon, especially if this latest middle eastern conflict keeps going on... terrorism anyone? sure feels like it..

[Pieter C. 5]

MAS poised to soar again

It managed to get entry into the Sky Team alliance, one of the three main alliances globally.

 

2, We joined skyteam?! really? when.. how does none of us know this? this is either poor research by the writer, or a massive massive hint for the future.. somehow i doubt its the latter...

 

Indeed: how come even Skyteam airlines don't know about this ? (unless the writer does mean 'codeshare with Skyteam airlines' i.s.o. 'joining')

[Radzi 2]

Don't worry too much about that. Remembet that the article is written by a reporter, so he could've seen / known hings that we will never heard of. Like, all small aircraft are Cessna, all big aircraft are Boeings. So take it with a pinch of salt.