Malaysia Airlines (MAS) comes out with business plan that focuses on cost cuts and initiatives to “sweat” the airline's assets to maximise revenues - CEO Ahmad Jauhari Yahya

Malaysia Airlines (MAS) has come up with yet another business plan that focuses on more cost cuts and initiatives to “sweat” the airline's assets to maximise revenues. In addition, the airline's expected return to profitability has been postponed from next year to 2014.

The plan, which MAS group CEO Ahmad Jauhari Yahya refers to as the “renewed business Labels plan”, was announced yesterday but had few details.

However, a major proposed change that did emerge apart from pushing back the projected return to profitability by a year is that the latest plan does not involve housing the regional operations in a new entity. This will ease the staff unhappiness over the proposed separation of the regional and long-haul operations as outlined in the December 2011 business plan.

This latest plan was necessary for MAS to chart its future direction because the previous plan was crafted for both MAS and AirAsia Bhd to work together following a share swap between their owners. The deal has since collapsed.

At a press conference after a MAS AGM yesterday, Jauhari said the airline's aim was to push up revenue per seat km by 10% from 18.5 sen as at end of last year, and trim cost per available seat km by 20% or about 5 sen from 24.8 sen.

To do that, several “initiatives would need to be executed in the next six months to a year via optimising all the assets, implementing structural cost reductions for sustainability and leveraging on work efficiency”.

“We just have to sweat our assets more as under the previous network utilisation plan, the usage was low of our narrow and wide body aircraft. We also plan to make changes to the work practices to be more efficient and to drive productivity levels up,” Jauhari said.

Capacity cuts are not on the cards but MAS chairman Tan Sri Md Nor Yusof said that to grow revenues, there would be a need to realign capacity to match opportunities especially that within the six-hour flying radius.

MAS would focus on growing its business in the region as this is where the growth is, and Md Nor added that “we have the right mix of aircraft types that will enable us to build a better orientation towards capitalising on the region, particularly for the short-haul routes”.

Jauhari added that to “sweat” the assets, the B737 aircraft's flying hours would be extended from the current nine to 11, and MAS will look into frequency increases for some of its destinations. He, however, did not elaborate.

“The adding of the A380 (the new Airbus plane) would further help boost our fleet efficiency,'' he said. However, he said the A380 would only be used for the London sector and not for the KL-Sydney route as the aircraft was too big for the Sydney sector.

He also said the airline had appointed Duncan Bureau as head of sales and the airline had to rev up sales to bring in revenues because there was a mismatch in its cost and sales due to the airline spending more than what it made. The airline reported its worst net loss of RM2.5bil for 2011.

“We give ourselves up to 2014 basically to return to profitability, a change from our earlier target by 2013,” Jauhari said.

On cost cuts, Jauhari added that every aspect of cost, be it aircraft usage, procurement, maintenance, etc, will be looked into as part of the three-year initiative to bring cost down.

MAS has a staff base of 20,477 as per its 2011 annual report. When asked if there would be job cuts, he declined to address it, saying it was a sensitive matter but manpower costs would be dealt with.

Asked if there were plans to revive Firefly's jet operations, he said Firefly would concentrate on turboprops and maximise on point-to-point traffic.

To a question if MAS would set up low-cost airline or revive Firefly's jet operations for that purpose, he said “we are not closing our doors to (setting up a) new LCC model but we are not looking at it now. Our immediate focus is revenue growth.”

To a question if AirAsia will be using MAS maintenance, repair and overhaul (MRO) services following the collapse of the share swap agreement, Jauhari said that “we are ready to serve any customer.”

At the AGM yesterday, all the directors seeking election were voted in but Tan Sri Wan Azmi Wan Hamzah did not seek re-election as director.

Source: www.thestar.com.my

Malaysia Airlines (MAS) offers attractive flight rates, economy class round-trip airfares offered for travel from Kuala Lumpur to Asean destinations are to Medan (RM408), Phuket (RM478), Jakarta (RM538) and Ho Chi Minh City (RM598), business class travel round-trip airfares start from as low as RM808 to Medan, RM1,308 to Phuket and Singapore as well as RM1,658 to Bangkok

Malaysia Airlines (MAS) is currently offering attractive all-inclusive international travel airfares with reductions of up to 47 per cent off the current lowest economy class fares and 50 per cent off the lowest business class fares for Malaysian travellers.

In a statement today, the national carrier said these offers, to selected destinations in Asean, Australia, New Zealand, Japan, China, India, and Maldives were available till June 18, 2012 and valid for travel till Aug 31, 2012.

Its regional senior vice president for Malaysia & Asean, Muzammil Mohamad, said the offers were among the best and MAS has made these affordable for travel on some of its selected flights to and from Malaysia.

Among the attractive economy class round-trip airfares offered for travel from Kuala Lumpur to Asean destinations are to Medan (RM408), Phuket (RM478), Jakarta (RM538) and Ho Chi Minh City (RM598).

Business class travel round-trip airfares start from as low as RM808 to Medan, RM1,308 to Phuket and Singapore as well as RM1,658 to Bangkok.

Economy class return travels to other selected destinations are also very affordable starting with RM798 to Hong Kong, RM1048 to Beijing, RM1118 to Chennai and RM1598 to Perth.

Similar attractive fares are also offered for business class travel, like RM2,408 to Chennai, RM2,998 to Guangzhou and Xiamen, RM3,098 to Beijing, Hong Kong and Bangalore, RM4,908 to Male/Maldives and RM5,098 to Perth.

Customers commencing their travel from Penang and Johor Baharu enjoy the same airfares, while MAS offers a 50 per cent discount on other Peninsular Malaysia domestic sectors to and from Kuala Lumpur connecting with the international destinations.

In the case of Sabah and Sarawak, a standard one-way rate of RM240 is added to the economy class fare offers.

Likewise, business class airfares are common-rated for journeys from Penang and Johor Baharu while 50 per cent discount on business class fares applies to sectors from other parts of Malaysia to/from Kuala Lumpur.

These offers are available at www.malaysiaairlines.com, MAS' 24-hour toll-free number 1 300 88 3000, MH Buddy in MAS Facebook, its ticket offices and appointed agents throughout Malaysia. -- Bernama

Source: www.btimes.com.my

Malaysia Airlines (MAS) announces code-share arrangement with Japan Airlines (JAL)

Malaysia Airlines (MAS) is targeting to complete code-sharing arrangements with four more oneworld member airlines, a day after announcing the signing of similar agreement with another member of the global alliance, Japan Airlines (JAL).

To date, MAS has signed 23 code-sharing agreements with various airlines and is looking at signing more as a strategy to extend its reach without having to mount its own flights.

The national carrier is now in discussion to have code-sharing arrangement with oneworld members, namely American Airlines, British Airways, Qantas and Finnair.

"Discussion with Finland's Finnair is closing and the code-sharing agreement may be concluded by year-end," MAS senior vice-president of international affairs Germal Singh Khera told Malaysian reporters here.

MAS announced the agreement with JAL at a press conference held on the sidelines of the two-day International Air Transport Association (IATA) annual general meeting, which started here yesterday.

A code-share agreement is an aviation business arrangement where two or more airlines share the same flight. A seat can be purchased on one airline but is actually operated by a cooperating airline under a different flight number or code.

Under the code-share, which will commence on July 1, JAL will begin marketing MAS flights between Malaysia and Japan, as well as five other domestic points and seven regional destinations such as Bangalore, Chennai, Hyderabad and Mumbai.

Conversely, MAS will place its flight indicator MH on JAL-operated flights connecting Tokyo (Narita) and Fukuoka, Nagoya and Sapporo in Japan, as well as to nine international cities including Hong Kong, Taipei, Seoul, Guam, Honolulu and across the Pacific to Boston, Chicago and New York.

Covering up to 347 weekly flights of 51 sectors, the selling of the MAS-JAL code-share service will begin today. The code-share on the Malaysia-Japan trunk route covers MAS' 11 times weekly Kuala Lumpur-Tokyo return flights and the six times weekly Kuala Lumpur-Osaka return flights as well as JAL's daily Tokyo-Kuala Lumpur return flights.

"The code-share between Malaysia and Japan will offer the travelling public in both countries more choices of flight. It will offer flexibility to passengers as under the code-share, the frequency of flights is effectively increased," Germal said.

MAS head of commercial Dr Hugh Dunleavy, who represented the national carrier in exchanging aircraft models with JAL's chairman Masaru Onishi as a symbolic gesture of the code-share, said it is on track to become a full member of oneworld by year-end.

"As much as we want to sign code-share agreements with more oneworld members, our focus now is to ensure that we become a full member of the alliance by year-end," he said.

Meanwhile, in a statement released here, MAS group chief executive officer (CEO) Ahmad Jauhari Yahya said the partnership with JAL provides the national carrier the opportunity to expand its reach without having to mount its own flights to cities in Japan and beyond in North Asia and the US.

"This code-share is expected to greatly contribute towards increased tourist arrivals into Malaysia. As one of the most affordable tourist destinations in the Asia Pacific region, we are confident that more tourists from other parts of Japan will take the opportunity to use this code-share and visit Malaysia."

Earlier, when opening the meeting, IATA director- general and Tony Tyler said the global airline industry profits for 2012 are projected to be US$3 billion (RM9.5 billion), unchanged from the last update in March.

While the recent fall in oil prices, stronger-than-expected growth in passenger traffic and a bottoming out of the freight market are driving improvements in the outlook, these are being offset by the deepening European sovereign debt crisis, he said.

Source: www.btimes.com.my

MAS : Week 18 (30 April-4 May) Stock Picks Commentary

Stock Picks #3

Malaysian Airline System Berhad (MAS)

Week high : RM 1.34 (Up 12 sen – 9.8%)

On 2 May, Khazanah Nasional Bhd and Tune Air, the major shareholders of Malaysian Airline System Bhd (MAS) and AirAsia Bhd respectively announced that they had agreed to terminate their share swap agreement.

Instead, MAS and AirAsia has entered into a memorandum of understanding on possible set up of a Joint Venture to provide aircraft component maintenance support and repair services, improve value for money and to increase competitiveness and benefits to customers through procurement synergies

The Reason?

MAS’s reason for the termination was due to intense pressure from its 15,000 member employees’ union that opposed the share swap deal citing concerns over potential job losses following the tie-up. The union also said that the tie-up would benefit AirAsia more than MAS.

It is also noteworthy to know that MAS stock price has dropped 29 percent as of April 30 since the share swap deal was agreed in August last year indicating negative market reaction towards the share swap deal.

An interview with AirAsia CEO Tony Fernandes on 5 May saw him defending allegations of him benefiting AirAsia during his stint at MAS, includes killing off Firefly, having MAS to sponsor his QPR football team and unfair advantageous competitive position from having seen inner workings of MAS. 

Tan Sri Tony Fernandes and Datuk Kamarudin Meranun have subsequently resigned as directors from MAS board on 2 May.

Therefore, the market reacted positively when the share swap deal was announced terminated on 2 May. MAS will no longer be restricted to focusing on full-service operations after this deal, which it had earlier agreed to cede the low-cost market to AirAsia as part of the share swap.

Even so, analysts are cautious over MAS fundamentals and financial performance. MAS reported a massive RM 2.6 billion net loss for its previous financial year 2011, Hwang DBS Research believes MAS net gearing could surpass its current 4.4 times as MAS seeks funding for scheduled delivery of RM3.5bil aircraft by its 2013 financial year.

MAS stock rose 11.5% (18 sen) since 2 May to week’s highest RM 1.34 on 3 May and closed at RM 1.24 at the end of this week.

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MAS net gearing could surpass its current 4.4 times as MAS seeks funding for scheduled delivery of RM3.5bil aircraft by its 2013 financial year - Kenanga and HwangDBS Analysts

With the unravelling of the Malaysia Airlines (MAS) and AirAsia Bhd share swap exercise, analysts said that competition in the aviation industry would intensify again.

AirAsia opened 13 sen lower to RM3.20 before bouncing back up to an intraday high of RM3.65 by 10.28am.

It closed the day up 27 sen to RM3.60 on volume of 13.76 million shares. AirAsia's various call warrants also dominated the volumes list for the day, all finishing the day between 40% and 50% higher.

Meanwhile, MAS also soared, touching an intraday high of RM1.34 in early trading. The price started weakening before closing at RM1.24, up two sen on volume of 9.24 million shares from the previous trading day.

“Investors were at a loss and didn't know what to think of AirAsia initially. Perhaps after digesting the news and realising that AirAsia was no longer strained by MAS, they started buying up the shares,” said one dealer who tracked AirAsia.

OSK analyst Ahmad Maghfur Usman said that promotional and discount offerings on air fares would be more aggressive going forward as both airlines strived to expand market share though competition and the consumers were expected to benefit the most.

“We think the share swap reversal could boost the sentiment on AirAsia as foreign investors prefer the low cost carrier operator as a standalone business entity without any link to the Government. Investors will also be pleased by the fact that Tan Sri Tony Fernandes could now fully focus on being the group CEO of AirAsia,” added Ahmad.

Khazanah Nasional Bhd and Tune Air Sdn Bhd have reversed the share swap exercise which took place in August last year. The deal involved Khazanah exchanging a 20.5% stake in MAS for 10% in AirAsia. As part of the reversal, Fernandes and Datuk Kamarudin Meranun resigned from MAS' board while Datuk Mohamed Azman Yahya quit from AirAsia's board.

Although the share swap had been reversed, both airlines agreed to collaborate on specific areas with the signing of two memoranda of understanding (MoU) for joint maintenance services and the establishment of a special purpose vehicle. This would be 50%:35%:15% owned by MAS, AirAsia and AirAsia X respectively to extract procurement synergies such as fuel oil, aircraft components and parts.

“With the swap reversal, the collaboration would not be as strong as initially structured. However, both airlines could see benefits from areas under the MoUs. In particular, joint procurement of fuel oil could see cost savings, given the sizeable combined requirements of the two groups,” said an analyst from HwangDBS.

Meanwhile, Ahmad expects AirAsia to benefit from higher yields during the first four months of 2012, pointing out that since the collaboration was proposed, MAS was cutting capacity for both its domestic and international routes.

MAS was unlikely to reinstate Firefly's Sabah and Sarawak routes in the immediate term and AirAsia's yield momentum would continue, although at a moderating pace, he said. This was given the possible risk that MAS would discount its fares more aggressively moving forward to protect its market share.

It's however bad news for MAS.

A Kenanga analyst said that it would not be a smooth ride forthe national carrier. In terms of its business fundamentals, the analyst felt that the collaboration could be positive for MAS, but only in the longer term as it would take a while to feel the accumulated impact arising from potential cost savings.

“In the meantime, MAS is not travelling along a smooth path in terms of turning around amidst global economic uncertainties and high jet fuel prices, not to mention it also has to finance its RM3.5bil aircraft by its 2013 financial year,” said the Kenanga Research analyst.

Ahmad said that with MAS' union having resisted efforts by management to turnaround the national carrier by forming a collaboration with AirAsia, uncertainties remained over the commitment of its workforce towards adopting positive changes going forward.

“Our fundamental view on MAS remains unchanged. It is facing turbulent times amid an environment of high jet fuel prices and intensifying competition. The airline will need to compete with AirAsia once again,” said Ahmad.

Khazanah has released a statement announcing that the share swap, which was designed to align the interests of the major shareholders Khazanah and Tune Air, had become a distraction to management's efforts to turn around MAS. The cancellation of the share swap was sparked by strong resistance from the 20,000 employees of MAS' unionised workforce.

“We are concerned about MAS' stretched balance sheet. Net gearing could surpass its current 4.4 times as MAS seeks funding for scheduled delivery of aircraft. In our view, the operating environment for airlines remains challenging due to stubbornly high oil prices, which could dampen passenger travel demand,” said the HwangDBS analyst.

Source: www.thestar.com.my

MAS Chairman Tan Sri Md Nor Yusof re-visits business plan after departure of arch-competitor Boss, banking on new aricraft for cost savings and to issue RM 3 billion Islamic bonds as MAS is in dire need of funds

(MAS closing stock price yesterday (4.5.2012) was RM 1.24)

THE deal that was designed to save Malaysia Airlines (MAS) ended with more bitter than sweet memories for all those involved.

The fractious relationship, almost from the get go when the share swap agreement was inked eight months ago between Khazanah Nasional Bhd and Tune Air Sdn Bhd owned by Tan Sri Tony Fernandes and Datuk Kamarudin Meranun was met with growing resistance especially from the MAS Employees Union.

There was no denying that some elements in the original blueprint designed to save the national carrier were good, but the deep distrust that exists between the employees of MAS and AirAsia given their historical battles proved too big an obstacle to overcome.

Of course the unions and some politicians found the upcoming elections a boon to pressure the Government to reverse the share swap.

Whatever the reason, MAS is back seemingly at square one.

There are those who doubt if MAS will be able to pull itself from the rut it is in but there are others who are a lot more sanguine about its prospects.

Standard & Poor's senior aviation analyst Shukor Yusof believes the cancellation of the share swap agreement is the best thing for MAS as the share swap does not add value.

The unravelling was done on Monday and announced on Wednesday, a day after Labour Day.

Now that it is undone, the heat is not on AirAsia because it is on a steady growth path, but on MAS, which has structural and fundamental issues that has yet to be addressed for nearly a decade.

Analysts seem to have lost confidence in the carrier and despite a team being set up to engage with the employees and make things work, the odds aren't looking good for MAS, at least in the near to medium term.

It faces a possible downgrade by Skytrak, an important aviation measure for service standards. Investors are seen to be dumping the redeemable convertible preference shares for fear that MAS may have problem redeeming them this year.

But more critical is that it needs to spend RM6bil and only has RM958.81mil in cash at the end of last year. Going by what MAS group CEO Ahmad Jauhari Yahya (AJ as he likes to be called) said in his memo to staff recently, a copy made available to StarBizWeek, the burn rate of cash is RM5mil a day.

The question asked is: Can MAS return to the black and change all the negative perceptions on the airline and how much time does it have given that crucial time has been lost over the past eight months?

Revisit the plan

All is not lost, says chairman Tan Sri Md Nor Yusof when he sat down with StarBizWeek on Thursday morning.

He says a lot has been achieved behind the scenes, including mopping up a lot of the mess.

“Plenty has been done and we are more focused on sales now,” adds Md Nor.

The first thing on the agenda is to re-visit the business plan to see if there is any need for a re-setting. That is key as earlier plans call for MAS to remain a full service premium carrier. AJ adds there is no need to craft a new business after the collapse of the share swap, only the need to tweak.

Md Nor was in MAS a decade ago but left to head the Securities Commission at the government's call. His return was just days before the Aug 9 share swap. A decade of restructuring and a new business plan but still the need to re-visit the plan?

“Massive work needs to be done and I believe the current set of people are unlikely to pull it through. As every corner you turn there are problems and the issue is structural and fundamental, be it financing, operations, an aging fleet, the product - all this needs to be revamped. It is going to be tough and I feel sorry for them but for how long more are they going to (do surface restructuring instead of deep restructuring and how long more will MAS remain in the red),'' says Shukor.

An industry expert adds that “Somewhere along the line, the losses will crop up if the root cause of the problem in MAS is not addressed. They have a fleeting chance to undo a lot of things now if they care about cleaning up the airline once and for all. Other global carriers which were in MAS' state of affairs have done it and are now flying high. You got to get to the root cause and fix it and cutting cost or reducing the number of employees are not the solution.''

Md Nor admits there are structural and fundamental issues.

“The liquidity crises facing MAS is chronic in nature. Its fundamental cause is structural but no one has sat down to look at that. That is why MAS is always on a financial drip from stakeholders. Even we know about it and yet we are not looking,” he says.

But things will change, he assures, and adds, that there will be no shortcuts and no quick fixes.

“We are immediately going to sit down and review everything and then look at how we can (turn everything around),” Md Nor says.

Radical changes perhaps, as that is also what AJ said in his recent memo to the staff.

Shukor adds that “redefining and tweaking the business plan does not excite me as I have heard it all and also all the business turnarounds. They have implemented the financial and operational engineering in the past and it had not worked. So if they are thinking there is a silver bullet, then it has to be a combination of many processes in order to overcome various issues they are facing now.''

“They had so many restructuring but not deep enough, will another make MAS a more efficient airline,'' CAPA Centre for Aviation analyst Brendan Sobie asks.

The emotional factor

MAS has also been accused of selecting a handful of outside talent in the strategy planning and for the running of the airline during the share swap period when there are a lot of untapped talent from within. So this time the re-visit of the plan involves the employees.

“We need to re-visit the business plan. This time it will be more inclusive in that we need to have staff engagement. We have asked them for ideas and we gave them a tough deadline by Friday. We believe there will be plenty of good ideas but what is needed is to focus on what to do first and therefore the wish list cannot be too long. Part of our problem thus far has been what is seen as priority,” Md Nor says.

Today the board is meeting to set the direction for the company. It would have input from the unions and head of units on what their wish list for the airline's strategy going forward. The unions and Md Nor met again yesterday.

AJ adds that “we have many experienced staff and they often talk about contributing. We are ready to listen to them now and even previously. The difference this time is that I believe without the distraction' caused by the share swap, our employees will be more focused on giving good workable ideas on improving processes, improving efficiency and productivity that can help MAS better its current position.”

The buy in from the employees to take the company forward is vital as it was the unions that had a hand in tearing up the share swap agreement.

Md Nor says there is no bad blood between management and the union. He understands the reasons why it did what it did.

“(The union) is an institution that is 65 years old and that means there is three generations claiming equity. We have to manage trans-generational challenges and laggards from the baby boomers to Gen Y. And all of them have ideas of what they want to do for MAS.”

Although the share swap is dismantled, the remnants of the tie-up lingers in a form of cooperation in several areas like training, engineering and others.

There are also a number of new employees that have been parachuted into key positions within MAS, and some had previously worked with AirAsia.

MAS Employees Union president Alias Aziz's stand is clear on that matter,

“We support anyone who can help MAS earn more revenue. We do not want those who cause the airline to lose money. We are not attacking individuals, we are concerned about performance. Thus far, the feedback from staff is that they want to work with the management to move MAS forward.”

The low cost factor?

Md Nor says there is also a need to re-look at the network and adds, the focus will be more regional as that is where the growth will be and by capitalising on Malaysia's central location in Asia.

Will they go back to the low cost game they gave up because of the share swap. Will they get there as most carriers in the region have low cost units to tap that end of the market?

“Can they still realise the benefits by just remaining in the premium market when much of the growth in this region is going to be in the low end of the market,'' said CAPA Centre for Aviation analyst Brendan Sobie.

Md Nor said that “we will not compete with a low cost model.''

He believes MAS can tap the regional market by being a premium carrier as this is a catchment area. Our middle class is growing significantly. So there is traffic.''

But Md Nor did say that Firefly would continue with its turboprop operations.

“We just have to re-configure what we want to do with the turboprops and fill the aircraft. Beyond that, Firefly can be re-branded. That is a consideration, and to explore if it can also fly beyond the 1.5 hours (range). All that will come under our regional network strategy.”

While it is limiting itself to a specific market, the long term solution to remain a premium players means it has to address a combination of factors, says an industry expert.

“It will need to renew its aging fleet, have better branding (re-look at the A380 branding), ensure the product is top class and make certain there is network breadth and scale. MAS will also need to invest in a reliable customer revenue management system to manage its premium passengers, be aggressive in marketing like the way AirAsia is or even better.

“This will allow MAS to get higher yielding passengers and MAS is still an amazing brand operating in Malaysia, which has the lowest cost structure than many other countries. It is in the middle of the Asia Pacific region that has huge intra- and inter-regional traffic and growth. There is no other way and cutting routes and sacking staff is not going to solve their problems,” the expert said.

Financing option

While the analysis is that the current structure is flawed and the business model seems weak without the low cost component, MAS is also in dire need of funds. This is notwithstanding that there has been about RM3bil-RM4bil cash injection the past few years.

MAS is caught in a vicious cycle, says Md Nor as what the airline earns is not enough to cover its expenses and the cost to maintain its fleet is pricey because it is aging.

The good thing is that “we are breaking that cycle as by end 2013 we will have 26 next generation aircraft and 50 by 2014. That would mean lower maintenance cost and our compounded annual growth rate ratio will rise, hopefully we are on a good start,” Md Nor says.

As at end of last year, MAS has about RM1bil cash but with the cash burn rate at RM5mil a day and with 100 takeoffs daily, the cash can be depleted in three to four quarters if nothing is done soon.

Whatever, MAS needs fresh injection of funds and a cash call is not on the cards for now, those in the know claim.

In its audited accounts submitted to Bursa Malaysia recently, MAS said it had secured a RM1bil short term advance from a local financial institution. It is like a bridging loan till it gets the financing for the aircraft sorted. MAS is taking delivery of its first A380 soon and will use the aircraft for its KL-London route beginning July.

For now, MAS deputy CEO and head of group finance and aircraft finance and management Mohd Rashdan Yusof is working on an innovative financing package to address all the financing needs, but he will not discuss this with StarBizWeek at this juncture because it is not complete.

However, those in the know claim it is indeed comprehensive, there is demand for the instruments from local institutional investors and it will be an asset backed type of facility which could be issued in two weeks time.

AJ says MAS will issue a RM3bil Islamic bonds and Md Nor adds that “there is ample liquidity in the domestic market, why go overseas to get aircraft financing.”

Md Nor adds that “whatever the instrument, the rightful owners of the aircraft will still be MAS.”

But financing is only one part of total problem that is on Md Nor's or AJ's mind. Both are now thinking of conservation and they know they cannot spend like “rich kids.”

“We need money and we need to conserve spending and spend only on income generating activities and not for the feel good factor things,” says Md Nor.

To break away from the vicious cycle, Md Nor says that will mean “the focus has to be on generating revenue.”

Previously, MAS looked at cutting cost but arguments have been made that the fat in MAS is still aplenty.

Md Nor says the “cost structure is not bloated but we need to push up our sales, that is very urgent. We have to reduce our CASK (cost of available seat-kilometer) and raise the RASK (revenue of available seat-kilometre). We have to fill up the seats. Now our average load factor is 70% and we want to push it to 80%, we are getting the numbers, but we still have to push harder.”

If Md Nor and AJ are really keen to get to the bottom of the problem, then cost cuts alone is not the solution and Md Nor says “we have to look at all the cost levers and go beyond blaming rising jet fuel prices as the cause of all our problems. The rise in fuel cost is a given in the industry and it affects all players, he adds.

“The reality is that we need better inventory management, particularly since our fleet is ageing, We are spending too much maintaining old aircraft as there are just too many repairs and naturally the operating cost goes up. We have to zoom into all areas, strip and check one by one,” he says, adding that, don't even get into the fuel hedging business.”

MAS feels that once the newer aircraft arrives, its maintenance bills will fall. But the cost to service the debt taken for the new aircraft, though, will inch upwards.

Still the pessimists feel that a 25%-30% cut in staff strength is necessary to bring down the cost as MAS is seen to have too many employees and the productivity level is low. The comparison often made is that with AirAsia, which is essentially a low cost carrier and an unfair comparison. Any comparison should be with Singapore Airlines. MAS has 20,600 employees.

Md Nor is not talking about cuts but to get everyone motivated, having proper work scheduling systems to keep productivity levels up and reducing the need for after hours work.

“It is about a mindset and inertia issue. We need to address all this issues so that the overall productivity level is up ... it is not something impossible,'' he adds.

There is hope

Despite all the negativity, there is still hope and Md Nor is adamant things will change.

What he and AJ needs is probably another 18 months.

What will help is the next generation aircraft it will take delivery of. That will put MAS on par with some of the regional airlines and reduce its cost. And getting the unions and employees engaged will hopefully get productivity levels and morale up.

The other plus factor is its entry into oneworld as that will help bring in passengers.

As Md Nor put it, “there is hope, it is about how we reshape ourselves and how fast we can do that to tap the opportunities,”

“This is probably the last chance for MAS to prove its worth and the tax payers are not going to be happy if more money is pumped into the airline as there cannot be another bailout,” says an observer.

Source: www.thestar.com.my

AirAsia CEO Tony Fernandes defends himself on allegations of him benefiting AirAsia during his stint at MAS, includes killing off Firefly, sponsoring his QPR football team and unfair advantageous competitive position from having seen inner workings of MAS

His detractors say his dominance in MAS, after the share swap agreement was inked last August, was too much of a culture shock to MAS. The deal has also been seen as one that was more beneficial to Fernandes and AirAsia. And then there were also concerns of it transgressing competition laws But Fernandes' proponents say he was probably the only hope of saving MAS.

Fernandes himself admits to being nave about how the whole share-swap-inspired tie-up had been so negatively perceived by the public. Neither did he expect the amount of resistance to change from MAS.

In his defence, Fernandes enthuses that the deal didn't favour AirAsia over MAS. He strenuously also denies another allegation: now that both parties are walking away from the share swap, is Fernandes and AirAsia in an unfairly advantageous competitive position now that they have seen the inner workings of MAS?

“What operational secrets do I need to learn from MAS? Conversely, we have shared many aspects of our business plans with MAS' management, so they know just as much about us as we know about them,” he tells StarBizWeek in a recent interview.

The conspiracy theorists also have it that Fernandes was making inroads into controlling the Malaysian airspace with the MAS deal by having MAS under his wings, so to speak.

Conceptually though, it is hard to knock the rationale for the deal. With increasing competition in the global airline space, MAS and AirAsia should collaborate where possible. This is a mantra that Fernandes had been preaching for a long time and he had on many occasions expressed his displeasure at MAS wanting to take AirAsia head on, explaining that such a strategy was wasteful from a national perspective.

But then there was also the QPR thing, which stoked the flame for those unhappy with Fernandes' involvement. Just about a month after the share swap agreement, MAS and and Air Asia signed a jersey deal with then recently-promoted Queens Park Rangers (QPR). Both signed a two-year sponsorship allowing the MAS logo to adorn the QPR jersey on home games while the AirAsia logo was to be used on the team's away games. Note that Fernandes had then only recently acquired his 66% ownership in QPR. The sponsorship deal naturally cooked up a storm of protest.

Fernandes, unsurprisingly, retains the view that the deal was a great one for MAS' branding and believes that it led to more sales for the national carrier's KL-London route. While declining to reveal the exact price for MAS' sponsorship deal, he says its closer to 10% of the 18 million pounds per year that was widely speculated.

The sponsorship amount, Fernandes points out, is less than what QPR pays for buying a single football player, emphasizing the view that QPR didn't gain enormously from the MAS sponsorship deal.

When pressed further on questions as to the benefits AirAsia was to get out of the share swap deal with MAS, Fernandes posed the question back to StarBizWeek. “Tell me how exactly?” he asked. What about favourable route rights for AirAsia? Fernandes said that AirAsia had already fought and won all the major battles, especially route rights, before they entered into the share swap with MAS. What about AirAsia X getting its Sydney route?

“If you think Kamarudin and I had invested RM1bil into MAS (via Tune Air's giving up its 10% in AirAsia for a 20.5% stake in MAS) for a Sydney route, which incidentally AirasiaX had deserved, then I will shut up from now on,” quips Fernandes.

Another concern was that Fernandes was looking to kill off Firefly. His retort: “But that's an airline with 8 planes. We have 100. We are not worried about Firefly. We have been fighting with the big boys.”

And as far as any allegations of transgressions of competition law is concerned, Fernandes view is that AirAsia only really competes with the customer, who has a choice of not flying if fares are too expensive. And taking the opportunity to delve in competition, Fernandes laid out this fact: Before AirAsia existed 10 years ago, “anyone could charge anything.”

“I'm sad that the swap is being unwound only because I feel (Datuk) Kamarudin (Meranun) and myself could have made a much bigger difference. But the collaboration is being strengthened. And that's a good thing,” says Fernandes.

Excerpts from the interview:

Did you feel the tie up favoured AirAsia more than it did MAS?

No, that's a ridiculous scenario. That's one of the frustrations of being in Malaysia. People tend to look at things as someone winning and someone losing in a tie up. The deal favoured both. Every day there's increased competition in the global airline space, it seems silly and wasteful for these two companies to compete.

Why did AirAsiaX close certain routes after the deal with MAS?

The closure had nothing to do with MAS. That model didn't work for AirAsia X, it didn't make economic sense. There were not enough seats on the Airbus A340s for the prices we charge. We will look at London and Europe when the Airbus A350s come out, which have 349 seats with 2 engines so it will be more economical. These are some of the myths that have been propagated, that we closed those routes down for MAS to benefit. But we did it because the routes were just not making us any money.

You said you are leaving the tie-up with MAS with unfinished business. Where does this leave AirAsia?

Yes, I feel I have tremendous energy now, and revitalised. We've got Japan coming up and Philippines has just started and we're listing Thailand. I have more energy and focus on these things now. I think Indonesia and Thailand can double their growth. Then there are three or four more new countries that will be announced in the next 12 months that will keep me occupied. So the future for AirAsia is phenomenal. Our first quarter growth is unbelievable in this economic climate. Our margins are pretty good despite oil prices being where they are.

Tell us about the whole QPR sponsorship saga.

Firstly, the figure (that MAS is speculated to have paid) is not 18 million pounds a year. That's far from accurate.

So what's a more accurate figure?

I'm not at liberty to say. But it is closer to only 10% of what was speculated. MAS has had phenomenal branding from that. If there's one thing AirAsia has been good at it has been branding. We've built a brand from nothing to one that's known throughout the world and we did it using a lot of sports. Lets look at things in perspective. 

One QPR player costs more than the advertising paid by MAS. It's not like the shareholders of QPR benefited immensely from this. In any case, AirAsia had wanted to do it all in the first place. And there were two other sponsors. 

But we went with MAS in the spirit of collaboration, we were all in a euphoria. I never expected the negativity that has been surrounding this transaction. I thought it would be welcomed universally. I can put my hand on my heart and say that MAS got great value in that sponsorship deal and it shows in their London load factor.

But can you tell if the London load factor was a direct result of the QPR branding deal?

You can never tell exactly but you can say that the deal certainly gave it a much higher profile. This whole transaction has been distracted by noise. If I was MAS (management) I would have activated this sponsorship deal more. It is wrong to say that the QPR sponsorship was a waste of money. You have to brand to get the topline. 

Why are so many airlines branding football clubs? The question then is why don't pick a top team but if picked say Manchester United, you would paying closer to 20 million pounds. The detractors have won in creating so much noise that it has distracted MAS' management from effectively putting in a good business model. 

It is silly to say that MAS can't afford the QPR sponsorship. If you don't fix the brand how are you ever going to fix the top line? How did AirAsia grow from 200,000 passengers to 33 million in ten years? 

We grew by sponsoring sports and continue to do so. No Malaysian company has done this or built a brand like this. It came out of hard work and a lot of investment. This is where the negativity in Malaysia frustrates me sometimes. 

It took us seven long years to get the Kuala Lumpur-Singapore route. We had nasty battles with MAS. So if an idea is mooted that lets not fight against each other but work together, then I'm all for that. I am an idealist. But sometimes my ideas don't' make sense and sometimes they don't work, as in this case.

Do you think you were nave about the whole thing?

Yes I was, as to the public perception of the deal and the resistance to change.

But when you entered into the deal, surely you must have had a sense that AirAsia or yourself would benefit form the deal?

Yes of course we would have benefited. Collaboration rather than slugging it out against each other would benefit both airlines in this globalised world. So we thought both our share prices would rise. But we now have a scenario in which both airlines can prosper because we are still collaborating and sticking to our respective strengths.

We went into the deal without doing a due diligence and did it because we thought of “Team Malaysia”. We are idealists. It has been hurtful being victimised in the media as we have been from this deal. We did this deal as Malaysians first and profits second. If personal wealth came first, we would have done a thourough due diligence. But we still beleive that collaborating is much better for both partiesin this tough globalised world

But with the share swap, wasn't it going to be easier for AirAsia to do what it wanted to do?

Lets take a step back. What has AirAsia not got now? All the battles were done and all the route rights we wanted had been won before we entered into this transaction.

What about the Sydney route?

Sydney is AirAsiaX. If you think Kamarudin and I invested RM1bil into MAS for a Sydney route, which AirasiaX deserved, then I will shut up from now on.

What about Firefly?

Firefly has eight planes. We have 100. We are not worried about Firefly. We have fought SIA, Lion Air, Thai Airways and even the subsidised MAS. We put in RM1bil into MAS. Could that really be for say the Sydney route or to kill off Firefly?

Did you see there being any downside to you or AirAsia in going into the share swap agreement?

No, because I'm an optimist. Everyone thought it was a great idea. Up to that point, so many people had said to me, “Why don't you get into MAS and fix it. So I thought everyone would support this, from a country perspective. This was to be Team Malaysia.

Were considerations of the Competition Act looked into when this deal was structured?

In the Competition Act, ultimately the consumer decides, right? Firstly, there was no AirAsia ten years ago and so theoretically, people could charge whatever they wanted, as there wasn't any real competition. Competition in terms of international routes, there's plenty of it. 

At AirAsia, we survive on low fares. Our competition is really the consumer. If we charge too much, consumers have a choice of not flying. And AirAsia survives on volume. It does not suit our model to charge high rates simply to make more money. Our model is we want to stimulate the average Joe into flying.

Another related issue to competition, having gone into the MAS board and been part of its management, haven't you seen the inner workings of MAS, which could put you in an advantageous position to compete with MAS?

But honestly, what operational secrets do I need to learn from MAS?

What about the AirAsia personnel who had joined MAS after the share swap. Will they stay?

It's a free market. They can choose to stay or leave as they please.

Collaboration without equity participation. Would it be as meaningful?

Equity interest was an idea from the financial guys. But it still can work without equity. We are in a far, far better place than before. Collaboration with or without equity is critical in a very competitive global place.

Source: www.thestar.com.my

Air Asia CEO Tony Fernandes gives up attempt to turnaround MAS, citing a few negative detractors with selfish attitude who made the most noise

Here is an excerpt on what Tony Fernandez, CEO of AirAsia has to say after the share swap deal between AirAsia and MAS was terminated.

“FOR the few negative detractors who made the most noise, I wonder what their solution is for MAS.

I have seen no alternatives put forward by those people. The selfish attitude of a few has to end at MAS.

It is those few who are stopping the true turnaround and I feel sorry for the 20,000 staff who are great people and deserve to be No. 1.

The beauty of the last eight months is that I can now see the beauty of what we have built at AirAsia, which is an amazing culture of can do'.

There is no negativity, no selfish staff, no side deals.

Just an amazing culture of can do' and the willingness to be the best.

The future for AirAsia is amazing.

I am so excited and I now know and that is what I had felt for a long time is that our secret weapon is our amazing people and our amazing culture.”

Source: www.thestar.com.my

Market positive on termination of MAS and AirAsia share swap deal

(MAS closing stock price today (3.5.2012) was RM 1.24)

(AIRASIA closing stock price today (3.5.2012) was RM 3.60)

AirAsia Bhd and Malaysian Airline System Bhd. (MAS), the nation’s two biggest carriers, surged in Kuala Lumpur trading after saying they will boost collaboration in areas including procurement, even as they end an equity tie-up.

AirAsia, the region’s biggest discount carrier, jumped 8.1 percent to close at 3.60 ringgit, the most since August 2010 and largest gainer on the benchmark FTSE Bursa Malaysia KLCI Index. Malaysian Air climbed as much as 9.8 percent, the most in about four months, before ending up 1.6 percent at 1.24 ringgit.

The two airlines said yesterday that they plan to cooperate in areas including maintenance and purchasing as rising fuel costs dent industry earnings. The carriers will push ahead with the plan even after their parents announced plans to unwind a less than nine-month-old share swap that had triggered opposition from Malaysian Air’s largest union.

“Both airlines could see benefits from areas under the memorandums of understanding,” Wong Ming Tek, a Hwang-DBS Vickers Research Sdn. Analyst, wrote in a report today. “In particular, joint procurement of fuel oil could see cost savings.”

To reverse the share swap, Khazanah Nasional Bhd., Malaysia’s state-investment fund, will exchange back its 10 percent stake in AirAsia for the 20.5 percent of Malaysian Air owned by the budget carrier’s biggest shareholder, it said in a statement yesterday. The shares Khazanah will get are worth about $29 million less than the ones it will give up, based on April 30 market prices. There won’t be any cash adjustment.

Union Opposition

The deal will raise Khazanah’s stake in Malaysian Air to about 69 percent. The fund said it will seek a waiver from stock-exchange rules so it doesn’t have to offer to buy the rest of the carrier.

The 15,000-member Malaysia Airlines Employees’ Union had opposed the share swap, saying it benefited AirAsia more. The group met Prime Minister Najib Razak at least three times to discuss concerns over potential job losses following the tie-up, according to Alias Aziz, the labor group’s president.

“The cross-holding of shares has become a distraction to management’s efforts to turnaround MAS and win stakeholders’ support for collaboration,” Khazanah Managing Director Azman Mokhtar said in the statement. “With this reset, we hope and believe that it will give all parties renewed impetus to refocus and move forward together.”

Directors Resign

Tony Fernandes, chief executive officer of AirAsia, and his deputy Kamarudin Meranun both quit as directors of Malaysian Air, which is based in Subang outside Kuala Lumpur. The two are shareholders in AirAsia’s parent, Tune Air Sdn.

“Investors will be pleased by the fact that Tony Fernandes could now fully focus on being group CEO of AirAsia,” Ahmad Maghfur Usman, an analyst at OSK Holdings Bhd., said in a report today.

The two stakes were both worth about $360 million when the swap was agreed to in August. Malaysian Air had since dropped 29 percent as of April 30, while AirAsia, the region’s biggest discount carrier, had fallen 6 percent.

“We can now have a clear focus on developing the Asean and Asian low-cost carrier market which has enormous growth potential,” Fernandes said in a statement. “The collaboration efforts will set us in good stead for the future.”

Stake Values

Malaysian Air will no longer be restricted to focusing on full-service operations after this deal, according to a statement. The carrier had earlier agreed to cede the low-cost market to AirAsia as part of the share swap.

“Under the old arrangement, AirAsia was seen as benefiting more as MAS agreed to convert its low-cost carrier business to premium services,” said Ang Kok Heng, who oversees about 1.3 billion ringgit ($430 million) as chief investment officer at Phillip Capital Management Sdn. The new arrangement will benefit the two carriers equally as they will be cooperating on an operational level, he said.

Malaysian Air is now considering fundraising options, it said in a statement, following reports that it may sell 3 billion ringgit of bonds.

‘Quite Critical’

The carrier’s condition is “quite critical,” Chairman Md Nor Yusof said in a March 16 statement, after the airline posted a net loss of 2.5 billion ringgit for last year. That was more than twice the 1.21 billion ringgit average of 15 analyst estimates compiled by Bloomberg.

The airline expects another full-year loss in 2012 though will strive to break even, Chief Executive Officer Ahmad Jauhari told reporters on Feb. 29. It plans to save 302 million ringgit this year by paring flights to cities including Johannesburg and Buenos Aires, he said.

“Recovery is our main focus along with initiatives to strengthen the balance sheet and operations through improved productivity, increasing revenue and lowering costs,” he said in a separate statement yesterday. “These efforts will translate into improved financial results.”

Source: www.bloomberg.com

MAS and AirAsia may set up joint-venture after share swap deal terminated

(MAS closing stock price before announcement (30.4.2012) was RM 1.22)

(AIRASIA closing stock price before announcement (30.4.2012) was RM 3.33) 

Khazanah Nasional Bhd and Tune Air, the major shareholders of Malaysian Airline System Bhd (MAS) and AirAsia Bhd respectively had on Wednesday agreed to terminate their share swap agreement.

Following the termination of the agreement, Khazanah will take back the 685.14 million MAS shares representing a 20.50% stake in MAS held by Tune Air, according to announcements made by MAS and AirAsia to Bursa Malaysia.

Similarly, Tune Air will take back 277.65 million ordinary shares of 10 sen each in AirAsia held by Khazanah, representing approximately 9.99% equity interest in AirAsia.

Following the termination of share swap, the boards of MAS and AirAsia had agreed to mutually terminate the proposed warrants exchange and the warrants exchange agreement on Oct 21, 2011.

With the latest development, the respective focus areas of MAS, AirAsia and AirAsia X Sdn Bhd as stated in the earlier collaboration agreement would cease.

The earlier focus areas were that MAS would focus on being a full-service premium carrier; AirAsia to focus on being a regional low-cost carrier (LCC); and AAX to focus on being a medium-to-long haul LCC.

Now, the airlines had entered into a supplemental collaboration agreement to explore areas of mutual-need to realise savings and boost efficiencies.

This would see both MAS and AirAsia jointly exploring the setting up of a joint-venture company by MAS, AirAsia and AirAsia X to provide aircraft component maintenance support and repair services.

They would also establish the broad set of business principles for the three parties to set up a special purposed vehicle (SPV) to improve value for money and to increase competitiveness and benefits to customers through procurement synergies

The shareholding of the SPV would see MAS holdings a 50% stake, AirAsia 35% and AAX 15%.

The SPV will provide services to MAS, AirAsia and AAX primarily comprising strategic sourcing services involving the design, strategy and conduct of procurement processes directed at achieving overall efficiencies and improved value for money for identified goods and services.

Meanwhile, the major shareholders of AirAsia, Tan Sri Tony Fernandes and Datuk Kamarudin Meranun have resigned as directors from MAS board.

MAS said that their resignations were pursuant to the letters of resignation as directors dated April 30 which it had it received on Wednesday.

Khazanah's representative on AirAsia board, Datuk Mohamed Azman Yahya had also resigned from AirAsia board.

Source: www.thestar.com.my

OSK Research maintains 'Sell' call on MAS despite recommending a "buy" on Malaysia Airlines' (MAS) redeemable convertible preference shares (RCPS) for short-term gain

(MAS opening stock price today (26.4.2012) was RM 1.23)

OSK Research Sdn Bhd is recommending a "buy" on Malaysia Airlines' (MAS) redeemable convertible preference shares (RCPS) for short-term gain.

The RCPS are currently trading at 93.5 sen to a RM1 redemption at maturity on October 30 2012.

Despite concerns on whether MAS will be able to honour the redemption, OSK Research considers the possibility to be low as a default by MAS will tarnish its credibility and impact the overall Malaysian capital market.

The RCPS issue was priced at RM1 each with a conversion period of four years, at a conversion price of RM3.09, starting from one year after the issue date.

It was to have paid a dividend (out of post-taxation profits) of 3 sen per year and MAS has so far paid such dividends only twice, due to its volatile earnings.

"We are of the view that RCPS shareholders will still see their rights to a RM1 redemption being honoured by MAS, which implies an immediate upside gain of 6.9 per cent (14 per cent annualised) upon maturity," OSK Research said.

However, the research house maintains its sell call on MAS.

Its fair value remains at 90 sen, based on an enterprise value/earnings before interest tax depreciation and amortisation of eight times financial year 2013.

"Our greatest concern is how much cash burn to expect in the immediate term, given its onerous capital expenditure and the challenging environment amid stubbornly high jet fuel prices and sluggish demand," the firm said.

It sees the likelihood for the national-flagged carrier to call for another round of a rights issue increasing, as its credit facility dries up.

Furthermore, there are risks that its collaborative framework with AirAsia Bhd could be called off due to strong resistance from its unionised workforce.

If this happens, MAS will be negatively impacted over the longer run as more headwinds are expected from the intensification of competition ahead of the open sky policy.

Source: www.btimes.com.my