Making the right MH moves

Malaysia Airlines in this current form would be forty this October. It had gone a long way from the six B37-200s and six Focker Friendship F27s as the results of separation from Malaysia-Singapore Airlines (MSA). Now that the share swap reversal is firmly left in the pages of history, Malaysia Airlines management have made positive steps towards the airline’s business turnaround.

For starters, the reversal of the share swap had undoubtably provided the sense of psychological relief and ‘lifted’ morale of the mostly very loyal employees. It was the major murmur in almost all of the 20,000 odd staffs and many folds other retirees. It was an unnecessary business decision that would have prolonged enough to escalate into a major political backlash, at least for BN’s chances of getting back Selangor.

The recent first quarter results were a much welcomed surprise, it no doubt put a spring in the step of many of the national carrier’s executives, fatigued after so many months of bad news. In short, losses narrowed as result of cutting unprofitable routes, fuel expense decreased by 1% mainly from better capacity management.

The longing and much awaited A380-800s has finally arrived after almost four years late delivery. The first of these state of the art planes that have begun flying on some routes puts Malaysia Airlines back into serious competition with its premium rivals, SIA and Cathay. By August, the lucrative KUL-LHR route would be served by this type on daily basis.

Malaysia Airlines A380-800, starting service to London Heathrow 1 July 2012

In the past, we have argued about not having the right product to remain competitive in the 5 star premium airlines’ market. Malaysia Airlines’ A380-800s have been customised to offer a premium flying experience comparable if not better than others in the region. It is first class and business class cabins have fully flat beds, and wider seats in economy. All these, coupled with Malaysia Airlines staff’s world renowned and award winning service, will give premium passengers a ride that they would want to return to time and again.

Over on the business side of things, Malaysia Airlines has also slashed several of its most unprofitable routes to focus on maximizing revenue on routes that are more lucrative. These include long-haul flights to Dubaii, Johannesburg, Buenos Aires, Rome and other low-yielding routes.

A cost saving program, Malaysia Airlines has also given its staff the option of a 2-year Voluntary Leave Programme. This is a scheme similar to what SIA recently offered its pilots, and it is hoped that it would allow the airline to control its operating costs without reducing too much staff. The upside is that the influential MAS union, MASEU, has given its support for the VPL.

The 25 years contract of Brahim-LSG Sky Chef would be renegotiated

More on business side of things. Malaysia Airlines is also actively reviewing its vendor contracts and renegotiating them when necessary. One of the more glaring contracts awarded during PM ‘Flip-Flop’ Tun Abdullah Ahmad Badawi’s time is the one about then MAS Catering. They have recently renegotiated the 25-year contract with LSG Sky Chefs, a contract that many observers thought unusual for its length, and financially onerous, considering the state of the national carrier.

On 1 June 2012, Malaysia Airlines has appointed former Westjet Arilines EVP for Strategy Dr Hugh Dunleavy as the airline’s Director of Commercial. He is also the candidate the eight unions and associations of Malaysia Airlines had recommended to take over as commercial director. The position is important for Malaysia Airlines as it requires the planning of routes to chart the airline’s path back to profitability. He comes with 30 years of experience, having worked with WestJet Airlines, Lufthansa Systems, Star Alliance, Air Canada and at PROS (passenger revenue optimisation systems) Revenue Management.

Good news for some. Unpopular personalities in and out of the company, acting commercial director Shane Nollan and Danny Yusoff are no longer in Malaysia Airlines. Malaysia Airlines could have been spared from the months of banter because of these two. Now, CEO Ahmad Jauhari Ismail could freely chart its path and bring on board really credible ‘airliners’.

Firefly B737-400

On a positive node, the growingly popular Malaysia AIrlines’ answer in the low cost carrier segment, Firefly, is back with the jet service. It will introduce weekly scheduled charter service between Kuala Lumpur and Christmas Island in Australia from July 7, utilizing its B737-400 aircraft, which has a seating capacity of 162.

The injection of fund via RM 9 billion Sukuk will give the turnaround plan stronger legs to carry out what everyone has admitted as a monumental task. The terms and space of this sukuk would allow a lot of room for the turnaround plan to manouvre. This is the much awaited investment that Malaysia Airlines needed to move forward. Malaysia Airlines need to replace some of the older fleets with newer aircrafts and inadvertently infuse new products for the national carrier market repositioning.

Now that A380-800s finally had arrived and soon would start to replace the 23 years old B747-400s, the fleet of 17 B777-200s are also 15 years old. These now aging fleets require replacements too as Malaysia Airlines’ destinations in Europe, Australia, West Asia and East Asia needed the capability and capacity of these aircrafts, as the market is still strong.

The market talking is about Malaysia Airlines intrinsic value:

Monday June 11, 2012

What is MAS’s intrinsic value?

PETALING JAYA: While the share-swap agreement between Malaysia Airlines (MAS) and AirAsia Bhd may have been unwound, there is still the likelihood that a controlling interest in the national flag carrier could be sold in the future due to the ongoing divestment programme by the Government, said industry observers.

“Not to be ruled out is a divestment of Khazanah (National Bhd) stake in the future, in the same vein that it so with other companies in its stable,” said a party familiar with the situation. Khazanah, which holds close to 70% of MAS, has successfully sold down its stakes in Time dotCom Bhd,Pos Malaysia Bhd and Proton Holdings Bhd.

A crucial question though is this: Assuming MAS is to be put up for sale, what would the likely price tag be? The value placed on the carrier may or may not be the same as its market value, which at the current price of RM1.12 per share stands at about RM3.7bil.

MAS’ intrinsic or actual value was likely to be obtained based on the perception of the company’s true value, said analysts and investment bankers.

OSK Research Sdn Bhd analyst Ahmad Maghfur Usman uses the enterprise value (EV) to earnings before interest, taxes, depreciation, and amortisation (EBITDA) method to come up with how much MAS is worth. This method takes into account a company’s debt that its acquirer will have to assume, unlike some other conventional valuation methods.

OSK now values MAS at RM1.38 or some RM4.6bil that is premised on 7.5 times MAS’ EV/EBITDA for financial year 2014 (FY14).

MIDF Research uses the same method but recently adjusted its target price to RM1.16 from RM1.35 previously to incorporate the execution risk for loss-making MAS’ business turnaround plan.

Its valuation is based on FY12 earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs (EBITDAR) by pegging it to 5.9 times EV/EBITDAR, which is the average of its regional peers.

Meanwhile, Maybank Investment Bank uses the price/earnings ratio method, which measures the company’s current share price compared with its per share earnings.

The research house values MAS at 97 sen or some RM3.2bil, implying a projected price/earnings ratio for FY13 of 10 times, the mid-level valuation of the aviation cycle.

Maybank IB, however, is understood to be in the midst of preparing a lengthier and more in-depth report on MAS which will seek to paint a more “real” value of the company.

In order to do this, it is understood that the analysts are likely to break down the different units under the airline such as its maintenance, repair and overhaul sector and its cargo operations, which are doing relatively well, and analyse their real values should these units be spun-off to buyers.

“It’s the international flight routes operation that is truly killing the airline … with the inclusion of this operation, the value of the airline gets massively depressed.

“So, it’s important to separate it from the other units that are doing okay to find out the airline’s true potential,” said an industry observer.

MAS reported its fifth consecutive quarter of net loss of RM171mil for the first quarter ended March 31 amid a RM199mil foreign exchange gain.

When stripped of the non-cash items, MAS’ core net loss for the quarter stood at RM347mil.

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These snapshots of market valuation on Malaysia Airlines is rather fair. Then again, when these new investments are being slotted in and new products being introduced, Malaysia Airlines is expected to be able to expand their captive market. Then that would be the right time to value the national carrier.

The physical fundamental of Malaysia Airlines is strong. The assets, plants and equipments are ready and the workforce is matured. Probably retraining is required before they could be reassigned, to suit the optimum productivity for the airline. The brand is good and more importantly, there are high potential for the brand to reach out beyond its existing market, sectors and segments.

Moving forward also requires market confidence on the management. This is important to give the extra motivation for the staff to bring Malaysia Airlines to its glory days. It is all about the factors of production working in tandem. The national carrier is a national project. Regardless what hard happened in the past. Its time the nation should come together and follow it through.

*Updated 1600hrs

- bigdogdotcom