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Malaysia Airline System (MAS): Missing MH370 Not Its Only Concern
Tradeable, Tradeable Ideas | 22 May 2014
By: Lim Si Jie
Articles (169) Profile
  1. MAS have been announcing consecutive loss making quarters for the last three years due to higher costs and stiff competition.
  2. MAS have been hit hard in terms of consumer confidence as well as potential revenue by the MH370 incident.
  3. Long term debt and lack of evidence to demonstrate management effectiveness are worrying signs to long term investors.

Malaysian Airlines Consecutive Loss Making Quarter
Malaysian Airline System Bhd (MAS) (MASM.KL) announced that its first-quarter net loss expanded by nearly two-thirds to RM443.4 million ($138 million) from RM278.8 million a year earlier.
MAS have been losing money for the last three years due to high costs and stiff competition from both regional and international competitors.

Money Cannot Buy Back Confidence
The disappearance of flight MH370 had a very negative impact on MAS both in terms of cost as well as confidence in the airlines.

When it comes to airlines, consumers are picky about two things: Price and Safety. Every traveller wants to look for cheap flights with good service. This is especially so for MAS since the service it provides is very price elastic. A small change in price can result in a large change in tickets sold.

A more important factor is the confidence in passenger safety. Would you want to fly a cheap flight with full service provided even if it means jeopardising your own safety? I know I wouldn’t. I’m sure our lives are worth more than that few hundreds of dollars.

During the aftermath of the MH370 incident, MAS slashed the prices of many of its flights in a bid to boost sales as well as to market themselves to regain consumer confidence.

However, the MH370 incident as well as the few incidents that involved other MAS flights have been deeply engrained in the minds of many consumers. This has caused the gradual erosion of consumers’ trust and confidence in MAS.

In terms of cost, sales in China slumped 60 percent in March in response to the loss of MH370 where the majority of passengers travelling on flight MH370 were Chinese. Given the growing demand for travel in China, MAS is losing out on a lot of current as well as potential revenue.

The airline had said that its passenger numbers for March dropped close to a monthly low in the wake of MH370′s disappearance. Since the plane vanished on March 8, the airline has cancelled close to 900 flights. Cancellations were mainly for China and Asian flights, and demand seems to have hit rock bottom.

More Than Just Additional Cost Problems
Since last year, MAS has adopted a strategy of lowering fares to try and bolster traffic. Yet it was hampered by a strong trade union that is reluctant to embrace new working practices. As a result, MAS has been struggling to slash costs and improve productivity.

MAS has a very high operating cost. In order to promote changes at the airline, MAS might need to relook its business model. But truth be told, relooking of its business model will not come anytime soon and it will certainly not be cost free.

Too Much Debt And Too Little Value
MAS’ long term debt currently stands at RM10.518 billion. MAS have a Long Term Debt To Equity (D/E) Ratio of 260.73. This figure is about slightly more than four times of the industry average D/E of 63.12. The mounting amount of debt is definitely a worrying sign for long term investors.

Table on management effectiveness ratios of MAS versus the industry
Table on management effectiveness ratios of MAS versus the industry

The relatively high LT D/E ratio is not the only thing that should worry a long term investor. Management effectiveness ratios for MAS are signalling a negative outlook on MAS. The five year average of ROA, ROI and ROE are all in the negative region.

#Bearish Until MAS Sorts Out Its Issues
Thus, I am bearish on the outlook of MAS until MAS is able to sort out both its internal as well as external issues that has been bugging them for a long time.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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