MAS should focus on niche segments instead of load-active strategy

KUCHING: Analysts suggest for Malaysian Airline System Bhd (MAS) to focus on niche segments in its business instead of retaining its current ‘load-active’ strategy.

The research arm of TA Securities Holdings Sdn Bhd (TA Securities) in a report following the airline’s first quarter (1Q) results yesterday said that while MAS’ management has not revealed its restructuring plans yet, disposing its earnings generating assets should not be a solution to stop the airline’s bleeding financial performance.

“In our opinion, the load-active strategy has put the airline into financial difficulties as MAS simply does not have the cost advantage to compete with rivals AirAsia Bhd (AirAsia) group and Malindo Airways (Malindo) due to the relatively high operating leverage,” it opined.

As such, the research firm suggested, “We believe MAS should downshift its operations by optimising the fleet counts and scale back its domestic and international operations, especially those routes in the Southeast Asia as AirAsia and other low cost carriers (LCCs) have increased their grip on the market share given their cost
advantage.

“At the same time, a voluntary separation scheme with fair compensation may help to alleviate the overstaff problem.

“The full service airline should just continue to focus on the niche segment, targeting premium customers and business travelers, with differentiated services and comfort levels.”

Meanwhile, following MAS’ weak start in 2014, the airline could see its 2Q and 3Q affected more significantly by the MH370 incident.

Hong Leong Investment Bank Bhd’s research firm (HLIB Research) in a separate report, said: “We concur with MAS view on the uphill battle after MH370 incident, which has marred its brand image considerably, while facing stiff competitions from domestic and regional
airlines.

“We expect larger losses in next quarter given potentially lower yields and load factor, as well as higher operating costs (such as marketing, advertising and distribution).”

Concurring this view, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) said, “We are more worried about the operational performance of MAS from 2Q14 onwards following the drastic 6.3 percentage points decline in the international passenger load factor in March.

“The airline had lost much of its forward ticket sales since it withdrew itself from the popular Matta fair, which is a vital ticket sale channel.

“China-originated passengers declined the most in March, with certain China routes experiencing cancellation rate as high as 60 per cent.”

It further opined that MAS could see more challenging business turnaround ahead. “We believe that the management has been distracted from its business turnaround effort during the search operation for MH370.

“Although much of the losses caused by MH370 will be covered by insurance, other expenses such as accommodation as well as logistics costs provided for the lost passengers’ family was borne by MAS. The cost of intangibles, such as reputation, would be significant as well,” it commented.

Of note, MAS recorded a net loss of RM443 million for 1Q14 as yield continued to be under pressure amid intense industry competition and the adoption of the ‘load active, yield passive strategy’ of which analysts have viewed as unsustainable.

All in, MIDF Research said, with remaining cash balance of RM3.4 billion, it viewed that there is a possibility of another round of cash call within the next 24 months unless MAS undertakes a major restructuring exercise such as spinning-off some of its subsidiaries and cut back some capacity to avoid further losses.

“Hence, we reiterate our ‘sell’ stance on MAS with a revised target price of RM0.18 per share, premised on lower 0.9-fold FY14-price to book value (previously one fold FY14-book value),” it noted.

Similarly, HLIB Research and TA Securities maintained a ‘sell’ recommendation on MAS, and pegged its target price at RM0.15 and RM0.13 per share, respectively, on concerns over hidden costs that might be associated with the missing flight as well as the substantial cost involved in MH370 search operations.

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