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A Solution Needed For The Airline Industry
Malaysia Perspective | 22 January 2013


Before budget airlines appeared, travellers had to pay much more for the air tickets than now. With the sharp drop in air ticket prices, people can now take two trips with the same amount of money they paid for one trip in the past. Everyone can fly now, and going overseas is no longer a novelty. This situation ties in nicely with the Malaysian carrier AirAsia’s (SYM: 5099, main board – trade and services) slogan “Everyone can fly”. AirAsia had identified the human urge to travel long before its inception as the first budget airline in Southeast Asia. This operating model not only brought huge wealth to the company, but it also spurred the growth of an entire budget-airline industry in Asia, thus giving more choices for consumers.

Even though AirAsia and Malaysia Airlines (SYM: 3786, main board – Trade and services) differ in their brand positioning, both face the biggest challenge of price competition. With competitions intensifying, both carriers will suffer if they engage each other blindly in a price war. Apart from homing in on their respective passenger bases, both companies can enhance their competitive edges by improving service qualities, cabin comfort and providing more attractive destinations and routes. Towards this end, Malaysia Airlines received its first Airbus A380 in June last year, while AirAsia recently announced its ambitious decision to purchase 100 Airbus A320 planes.

In addition, there had been a flurry of mergers and reorganisation exercises within the aviation industry, with each player seeking to reduce costs and increase revenue by expanding in scale and sharing market resources. In contrast to this situation, the plan for a shares swap between MAS and AirAsia fell through in May last year. Undaunted, both parties went ahead to set up two joint ventures to handle purchasing, maintenance and other services for both companies. MAS chalked up a staggering net loss of RM 2.5 billion in 2011, yet it managed to return to profitability by September in the third quarter of FY2012. Despite still bleeding to the tune of RM 483,957,000 over the first nine months, it was still a vast improvement over the previous period’s net loss of RM 1,246,604,000. On the other hand, AirAsia posted a net profit of RM 1,527,930,000 over the first nine months of 2012, which represented a 2.56 times rise in earnings.

Looking at the accounts, the way ahead for MAS is very challenging, yet industry insiders remain optimistic that MAS is moving on the right track, as they believe there is still room for development and growth in the aviation industry in Malaysia. With the new LCC terminal (KLIA 2) expected to begin operations in June, we should see an increase in both the number of airlines and flights passing through Malaysia. Not to miss out on the opportunity that this development presents, Malindo Airways is set to enter Malaysia this year. With its entry into the fray, budget air travel will face unprecedented competitions. However, AirAsia and Firefly seem to remain unfazed, expressing that they are confident to hold on to their competitive edges. Market participants have pointed out that a price war between various budget airlines is inevitable, with Malindo promising to offer even lower ticket prices.

AirAsia founder and Group CEO, Tan Sri Fernandes said that AirAsia will be focusing on the markets in Malaysia, Thailand and Indonesia in the next three years, with annual earnings from each market set to increase to RM 1 billion. In anticipation of the open airspace agreement between ASEAN countries set to be implemented in 2015, AirAsia has put in place a number of measures to stabilise the company, such as relocating AirAsia Thailand to the more cost- and fuel-effective Don Muang International Airport. This may be AirAsia’s strategy to meet the new challenges in the airline business – by setting their sights farther and higher. On the other hand, MAS’ earnings will be squeezed as low-cost airlines continue to provide affordable tickets. However, the national carrier remains cautiously optimistic in this battle for air supremacy. With the aviation sector being regarded a critical centre of growth in Malaysia, MAS will continue to improve on its branding, services and image to target the high-end market.

MAS recently announced that it will embark on a capital restructuring exercise and is expected to receive about RM 8 billion of credit reserves to be used to reduce its overall losses. Earlier on, MAS also proposed to issue new shares to raise RM 3.1 billion ringgit, whereby 3 new shares at the offer price of 60 sen per share will be offered for every 2 shares. The shares issuance exercise is expected to be completed in the second quarter of this year. The market has forecasted that MAS’s net debt ratio of 5.4 times as of December 31, 2011 is expected to return to a healthy level of 1.6 times; thus, it will be easier for MAS to obtain financing and to be able to pay out a dividend when it becomes profitable. However, market participants also pointed out that until MAS completes its new shares issue exercise, it’s shares may face some sell-off turbulence ahead.

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