By Chan Quan Min
Industry analysts this morning were soundly disappointed at Malaysia Airlines’ latest third-quarter financial results with all major research houses downgrading the stock to a ‘sell’ rating.
Yesterday, the national carrier posted dismal third-quarter results contrary to analysts’ predictions last week of the airline finally breaking even this time around.
AmResearch, RHB Research and MayBank IB Research this morning downgraded their calls on the national airline’s stock to ‘sell’. Alliance Research and CIMB Research, meanwhile, reiterated their ‘sell’ or ‘underperform’ calls on the stock.
Between the five bank-backed research houses mentioned above, the average target price for the stock was a miserable 25.4 sen, or 7 sen below the current share price of 32.5 sen at market close today.
During today’s trading session, Malaysia Airlines fell 2 sen or 5.8% to a two-month low.
Worryingly, the airline’s latest results announcement has led to analysts’ concerns over the airline losing even more ground in its constant struggle with poor yields.
Passenger yield, a measure of average ticket prices, tumbled during the third-quarter, down 17% year-on-year (y-o-y) according to Maybank IB Research calculations.
“And worse, management guides for weak yields to persist into 2014,” added Mohshin Aziz of Maybank IB Research.
“We are disappointed that MAS is unable to turn a profit while enjoying its highest load factor ever.”
Malaysia Airlines reported load factor at a record high during the third quarter of close to 85%.
But to no avail, the airline’s ‘load active, yield passive’ strategy was not able to translate into actual revenue gains leading Maybank IB Research’s Mohshin to reckon many of Malaysia Airlines’ problems are self-inflicted.
“At the heart of it, we think many of MAS’ problems are the direct cause of its aggressive capacity expansion. In Q3, capacity grew by 4.1% y-o-y, accounting for 36% of the total industry growth.
“This new capacity has necessitated deep discounts, and explains why we saw published fares that were reminiscent of ticket prices 10 years ago,” Mohshin said, delivering an ominous prognosis.
“Sell, things are not improving as fast as required. MAS’ turnaround is now in question. And we don’t think it will be profitable in 2014, possible in 2015.”
Malaysia Airlines’ current turnaround has so far struggled to lift the carrier out of unprofitability with the carrier close to registering three years in the red.
The current group CEO, Ahmad Jauhari Yahya, at the helm of the airline for two years now, has been tasked with the current turnaround effort, the third such turnaround attempt in the airline’s recent history.
Yields remain far below regional competitors
Malaysia Airlines yield decline, by as much as 17% y-o-y in the third-quarter was due largely to intense competition in the domestic aviation market.
“The domestic passenger business was hit particularly hard by systemic overcapacity, with yields down 29% and RASK (revenue per available seat-kilometre) down 21% y-o-y,” said CIMB Research analyst Raymond Yap.
In comparison, Yap noted, Malaysia Airlines did better on the international front, with RASK higher and load factor up 11 percentage points, more than able to offset a 7.5% drop in international sector yields.
Malaysia Airline was not alone in seeing plunging yields. Singapore Airlines too saw its yields fall to near four-year lows, according to a Reuters report last week.
The report found Singapore Airlines was sacrificing yields to defend market share from competition, not unlike Malaysia Airlines.
Singapore Airlines reported passenger yield falling 3.5% to 11 Singapore cents (28.1 sen) in the third-quarter of the calendar year.
However, Singapore Airlines’ yield numbers compare well with Malaysia Airlines estimated third-quarter yield of 23.2 sen.
Thai Airways, also doing poorly, posted last week its second consecutive quarter in the red with a 5% drop in yield to 2.57 Thai baht (25.9 sen).
What is important is not the significantly lower yields faced by Malaysia Airlines compared to its regional competition but the inability of the airline to recover from the 2009 region-wide plunge in yields brought on by the global financial crisis.
Between a peak in reported yields reached in 2008, and a trough in 2009, Malaysia Airlines yields matched that of Singapore Airlines.
Since then they have diverged quite significantly, with Singapore Airlines flying in higher airspace than Malaysia Airlines.
Currently Malaysia Airlines’ yields are well below that of Singapore Airlines’ yields, by about a sixth.
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