Friday, November 25, 2005

PMB & MAS Need To Give Up The Domestic Routes, Among Other Things...

Up until the Widespread Asset Unbundling (WAU) exercise in November 2002, Malaysia Airlines had been booking massive losses from its domestic air services division. At one point, losses amounted to RM360m a year. Under the WAU, the ownership of the domestic operations was transferred to Penerbangan Malaysia Berhad (PMB), with Malaysia Airlines retained as the operator. Since the transfer of the domestic division to PMB, these losses are no longer reflected in the national carrier's accounts. By the financial year ended March 31, 2003, the losses had narrowed to RM150 million, but a huge financial burden for PMB to bear nonetheless. Although the domestic division is of little concern to shareholders these days, how much longer should PMB/the government subsidise the operations. Is the WAU a temporary measure or a special purpose vehicle?

Most of the losses to the rural air services in Sabah and Sarawak. MAS continues to operate these zero-profit routes as a social obligation. PMB badly needed to raise fares in these sectors, which it was not allowed to do the past 14 years. Another reason is that the fleet of aircraft flying the domestic routes is old. MAS revealed that it was awaiting response from aircraft manufacturers concerning its proposal to replace its ageing 737s and Fokker 50s with an order of up to 78 new aircraft at a catalogue price of US$3bn. Without a corresponding fare hike, making returns on that investment would be nada. Thanks to low cost carriers, the pressure on fares is downwards and not up. If we remember correctly, MAS even offered excess tickets on domestic flights at huge discounts two years ago to fend off competition from AirAsia. AirAsia will welcome the opportunity to increase its domestic frequencies. With its expertise in short-haul flying and quick turnarounds, the chances of making profits on these routes are probably higher with AirAsia. Why is PMB/MAS still holding onto the domestic routes?? Just give ALL existing and new domestic routes to Air Asia as their business model and quick turnaround should ensure a better result. Chances are, it is not that MAS/PMB fear that AirAsia will fail in the task, but rather that AirAsia will succeed in the task - slap in face guys, take it anyway you want, MAS/PMB have had a very long time trying to turn around the domestic operations, give the proven upstart a go and leave your egos at home.

If naysayers retort that AirAsia will then scrap the unprofitable domestic routes, then just make it clear in the agreement that AirAsia must service all the existing domestic routes undertaken by MAS and any new routes that they choose to add on. Then we won't have "excuses" all the time of how unprofitable rural routes in East Malaysia are.

What is in the best interests of the country? PMB, although run like a private entity, is ultimately financed by taxpayers. It has to make commercial decisions to become a viable business entity.

1 March, 2005 - MAS net profit for the nine months ended December 31 2004 rose 30 per cent to RM216.91m, but rising fuel costs hit third quarter profit which declined 75 per cent year on year. The nine-month net profit was achieved on a higher revenue of RM8.02bn against RM6.16bn previously. In the third quarter, however, net profit fell to RM57.62m from RM230.08m in the last corresponding quarter, attributing the period's less favourable performance to rising fuel prices. Fuel cost during the quarter under review had risen by about 88 per cent or RM534m.

4 March, 2005 - MAS plans to spend RM1.5bn to improve operations and make its planes more comfortable in an effort to win more business class travellers. MAS faces competition from AirAsia Bhd and other discount carriers on economy fares. It lags Singapore Airlines Ltd and Cathay Pacific Airways Ltd in attracting business and first-class travellers, who pay at least double the fare of economy-class passengers. The airline aims to boost sales by increasing the percentage of high-fare passengers. MAS carried 4.66 million passengers in the third quarter, filling 71.2% of seats on average. The airline filled one of every five first-class seats available, 60% of business seats and between 70% and 80% of economy seats.

24 March, 2005 - MAS expects up to 25 per cent return on investment from its on-going RM700m facelift on the premium seats and cabins of its 34 planes. MAS senior general manager sales, distribution and marketing Datuk Rashid Khan said the yield return would be contributed in many forms,such as higher passenger load, higher earnings and net profit or higher ticket sales. The RM700m facelift initiative, which started in the middle of last year, is expected to be completed by July next year, involving 17 units of the B747-400 and 17 units of B777-200.

31 May, 2005 - MAS has allocated RM1.0bn in capital expenditure for the nine months to December 2005, compared with RM1.0bn rgt for the past 12 months to March 2005, chief financial officer Low Chee Teng said. The capex is for engineering equipment, seat upgrade, construction of a hangar. Low said last year's capex included some RM300m in expenditure on its establishment of the Four Seasons Resort in Langkawi. MAS has hedged 50-55 pct of its fuel requirement for the nine months to December 2005 at an average jet fuel price of US$61.50 a barrel. MAS's load factor for the year to March 2005 rose to 69 pct from 67.6 pct ayear earlier. The international load factor for 2005 stood at 68.7 pct against 67.1 pct in the previous year, while domestic load factor was 71.3 pct, down slightly from 71.4 pct previously

18 June, 2005 - MAS may hand over a big chunk of its domestic flights to budget airline Air Asia Bhd under a plan that could help the Government reduce its financial burden.The Government now absorbs the costs of MAS' local services through PMB. MAS made operational losses of some RM281m for domestic flights in fiscal 2005, an almost 80 per cent increase from RM156.7m it lost a year earlier. According to sources close to the deal, MAS would probably concentrate on Malaysia's major cities, namely Penang, Langkawi, Kuching and KotaKinabalu, while AirAsia will service less profitable routes in the country.

15 August, 2005 - MAS and AirAsia Bhd are likely to post contrasting quarterly results for the period ended June 2005 despite having to operate in a similar turbulent environment.While MAS is expected to post a quarterly loss of between RM100m and RM200m, low-cost carrier AirAsia is tipped to remain in the black with an estimated profit of between RM25m and RM30m. MAS' first-quarter results are scheduled to be released on August 23 while AirAsia will release its fourth-quarter and full-year results on August 26. MAS' projected loss is due mainly to its vulnerability to fuel price increases and inability to cushion the impact due to high overhead costs. A US$1 increase in jet fuel price would erode MAS' annual earnings by 24 per cent or RM60m while a similar price increase would impact about 5 per cent of the earnings of AirAsia, Singapore Airlines (SIA) and Cathay Pacific. MAS and AirAsia are operating on different business models. AirAsia's lean cost structure is one reason why it is able to withstand the effect of high fuel prices. AirAsia has a more effective fuel price hedging strategy, while MAS fuel price hedging and fuel surcharge efforts were insufficient to offset the impact of the skyrocketing oil prices.To date, MAS has hedged around 61 per cent of its fuel requirements forthe first quarter and 65 per cent of its full-year requirements at arelatively high rate of US$62 per barrel. In addition, the fuel surcharge imposed by MAS is the lowest among the world's major carriers. MAS' overall earnings outlook for the current financial year ending December 31 2005 would remain vulnerable to the volatile fuel prices, continued increase in staff cost as well as sluggish growth inthe global cargo sector.

22 August, 2005 - MAS has booked a pre-tax loss of RM274.83m for its first quarter ended 30 June 2005 against a profit of RM22.5m for the same quarter last year due to higher fuel prices. It incurred an increase in fuel cost of RM248.1m during the current quarter. Revenue for the three months rose 16.7 per cent toRM2,846.288m from RM2,439.470m for the same period last year, it said in a filing to Bursa Malaysia.

22 August, 2005 - MAS will implement a 5-year program that aims to improve profitability during the period by up to RM1.0bn rgt, chairman Munir Majid said. The program includes restructuring the organisation to focus on key areas of business value; develop comprehensive plans to deliver the target improvement; and implement focused, short-term improvement projects to deliver immediate impact on the bottom line. "We target to save up to RM200m in cost savings in the first six months," Munir said, adding that the cost savings could come from further improvement in fuel efficiencies and yields. MAS yields currently stand at 18.5 pct while those of other airlines are in the region of 23-40 pct. Munir explained that the first-quarter loss wasdue to several factors and was not limited to high fuel prices. "This is a reality check. The company has not been making operating profits ever since the asset unbundling. The profits that have been reported are anaccounting profit attributable to gains from one-off benefits, not fromsustainable operational performance," he added.

29 August, 2005 - At every results briefing post-WAU, investors had left with the impression that the airline was finally getting its fundamentals right. It had spent good money on a financial management system, increased flights and connectivity to profitable routes such as cities in China and India, and embarked on an upgrade of its premium services.
The past nine months may have seen significant increases in fuel prices but this was believed to be manageable, with surcharges and hedging strategies. For the first time in the post-WAU era, MAS did not reveal revenue and expenditure figures that it transfers to parent PMB. The domestic air services division is believed to have netted a loss of between RM100m and RM150m during the quarter. In the financial year ended March 2004, the net PMB transfer suggests that domestic services alone incurred losses of RM280m. This quarter's domestic losses resulted in the imposition of a penalty charge of RM22.6m for under-performing in the domestic operations - which leads to the item of "other expenditure" in the airline's income statement. Analysts are also critical of MAS' fuel hedging strategies. Fuel costs jumped 58% to RM1.1bn for the quarter, accounting for 55% of losses. Jet fuel has risen 62% since the start of the year to a high of US$77.45 per barrel on Aug 17. Meanwhile, staff cost grew 17.5% and is anticipated to rise further as MAS has yet to finalise salary negotiations with its pilots.

19 September, 2005 - MAS has hedged 75pct of its fuel requirement for the second quarter to September at US$65 abarrel, as compared to 70 pct at US$62 in the first quarter.
Concluding Statements - Alright, MAS did a terrible job at hedging their fuel expenditure. The new guy Jala (from Shell) was obviously roped in to address that point specifically. If we were to take out the fuel factor from their bottom line, MAS did OK - its not good but not as bad as everyone makes it out to be. Suddenly, everyone from taxi drivers to MPs, seem to have solid "suggestions" on how to run MAS better.

The problems at MAS is not unsurmountable and not unique either. AirAsia has shown that the industry is not that bad. We, however, need to equalise the competitive landscape. Remove the ownership of domestic routes from PMB/MAS. Other issues are manageable by recruiting the "right people", issues such as "improving yields/load factors", "premium branding and service issues", "management of labour and union issues", "better management of asset and liabilities to be better matched with revenues", etc... these are issues that can be addressed by getting the "right people", any kind, no matter if they are local or foreign or otherwise.

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