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Capacity cuts expected at Malaysia Airlines

KUALA LUMPUR, Jan 19 – Ambank Research expects Malaysia Airlines (MAS) to cut capacity based on a recent announcement by Singapore Airlines (SIA) that it would be eliminating more than 200 flights due to the weakening demand for air travel.

“Given that SIA, which has been reporting relatively consistent performance, is now cutting back on capacity, and taking into account MAS’s even worse core operational performance, we would expect something similar to occur at MAS,” says Ambank.

Ambank notes that in November last year, MAS reported a 19 per cent decline in revenue-passenger-kilometre (RPK), a 17 per cent decline in raw passenger traffic and a 5 per cent fall in load factor.

The corresponding statistics for SIA in December on a year-on-year basis was 4 per cent fall in RPK, 8 per cent decline in raw passenger traffic and a 3 per cent fall in load factor.

“On a worse-case scenario basis, we would expect MAS yields to decline substantially. To put things in perspective, SIA’s yields have only risen by 8 per cent in the third quarter year on year but MAS increased 11 per cent despite rapidly falling passenger numbers and we do not think this is sustainable,” says Ambank.

“We also note that if oil prices were to remain at US$100 per barrel levels, our projections imply a net loss of RM284 million for the 2009 financial year instead of RM369 million net profit if oil prices are at US$70 per barrel.”

Ambank maintains a sell rating on MAS with a fair value of RM2.32 per share. “We think the current valuation is excessive given exceptionally sharp traffic contractions compared with regional peers for long-haul routes and stiff competition from Air Asia on domestic and regional routes.”