Is There Hope for MAS/MAG?

Loss-making Malaysia Aviation Group Bhd (MAG) — the parent company of national carrier Malaysia Airlines Bhd, FlyFirefly Sdn Bhd and MASwings Sdn Bhd — is sticking to its break-even target in 2023. This is despite managing to deliver a profit in the fourth quarter of 2022. Breaking even will mark a significant milestone in the aviation group’s Long Term Business Plan 2.0.

Its group CEO Captain Izham Ismail believes an inflection point is just around the corner. Two years after MAG successfully emerged from a restructuring involving RM15 billion of debt owed to 75 creditors, the group is expected to report higher revenue and a narrower net loss in the recently ended FY2022. This is largely due to resurgence in air travel resulting from the reopening of borders.

Source: https://www.wikidata.org

Based on preliminary unaudited results for FY2022, MAG posted earnings before interest, taxes, depreciation and amortisation (Ebitda) of more than RM1 billion, a 116% increase over the previous year. The group turned Ebitda positive of RM433 million in FY2021, from a loss or negative Ebitda of RM1.76 billion in FY2020.

The group expects revenue for FY2022 to triple to more than RM10 billion from RM3.96 billion in FY2021 as it adds more capacity and extends coverage. It is also poised to report an unaudited net profit of about RM600 million for 4QFY2022. This would be its first profitable quarter since it underwent a full reset in 2015. Sovereign wealth fund Khazanah Nasional Bhd took Malaysia Airlines private in 2014.

MAG’s operations have remained cash-flow positive in the past 450 days. The group has not draw down the remaining RM2.3 billion of new capital committed by its shareholder Khazanah. In February 2021, the sovereign wealth fund committed to inject a total of RM3.6 billion into MAG to fund the latter’s business until 2025 as part of the debt restructuring deal.

As fuel and other goods get more expensive, analysts have grown more concerned that more consumers could put off discretionary spending, such as travel. In view of this, 2023 offers no respite for the airline industry.

However, the higher airfares and additional revenue from increased capacity weren’t enough to offset headwinds. The group’s profit and loss statement remained in negative territory in 2022. It posted a net loss of RM1.65 billion for FY2021, a significant improvement from the previous year’s net loss of RM4.1 billion, when it was dealing with the effects of travel restrictions and a slowdown in the global economy. The weakening of the ringgit against the US dollar had put pressure on carriers like Malaysia Airlines, with about 50% to 60% of its costs are in US dollars. In 2022, the ringgit lost as much as 14% against the greenback at the peak of the dollar strength in November.

MAG stopped fuel hedging in 2021 and 2022, and instead turned to fuel surcharges to cushion against the increased costs. But for 2023, it is looking to resume its fuel hedging programme.

Meanwhile, aviation consultancy Endau Analytics says 2023 will remain a tough year for Malaysia-based airlines given the “higher jet fuel prices and interest rates, which could be compounded by natural disasters brought about by climate change and new geopolitical conflicts that have far-reaching consequences for the global food chain”. Maybank Investment Bank Research, however, expects airfares to ease a tad as airlines reinstate capacity

Despite the lingering macroeconomic headwinds, China’s reopening on Jan 8 has given the region’s travel industry some hope and optimism. In the three years since China closed its borders, Malaysia Airlines had redeployed its capacity to Doha, Haneda and Bangladesh. In 2019, China accounted for 17% of Malaysia Airlines’ total capacity. Its current capacity into and out of China is running at less than 2% of 2019’s capacity. Under a route rationalisation exercise in 1Q2023, Malaysia Airlines will suspend its Kuala Lumpur-Brisbane direct flights in March, freeing up capacity. It plans to redeploy the aircraft to China. Network-wide, capacity deployed to date has reached 85% of 2019 levels. In 2023, the group’s capacity is to reach 94%.

The group is due to take delivery of 25 Boeing 737 MAX jets from June this year. In August 2022, it acquired 20 new Airbus A330-900 (A330neos), of which 10 were purchased directly from the manufacturer on a sale-and-leaseback arrangement with Avolon. The other 10 aircraft were leased directly from the aircraft leasing company. MAG currently operates a fleet of 100 aircraft, comprising six A350s, twenty-one A330-200s/300s, forty-seven 737-800s, seventeen ATRs, six Twin Otters and three A330 freighters. MAG recently disposed of all six of its A380 superjumbos, grounded by Covid-19 in March 2020, back to Airbus.

What remains to be done is service! What used to be top-notch crew and service, it has now become less than satisfactory. Product quality, service, pricing are key ingredients to match the top airlines in the world like Emirates and Qatar. If they can do that, why can’t we? So, I do hope they will re-focus on the essentials to get their turnaround story real!

Reference:

Cover story: Race to profitability, Kang Siew Li, The Edge Malaysia, 26 Jan 2023