By Stephanie Jacob
Malaysia Airlines Bhd’s best options towards recovery appears to be through a downsizing of its workforce and by cutting capacity, said RHB Research in a company update note.
It noted that the national carrier had three obvious options in determining its restructuring plans. The first would be to restructure under current conditions which will encompass spinning off profitable divisions to raise cash, downsizing its workforce and cutting capacity. The other two options are to either file for bankruptcy or via privatisation – both of which are less than optimal, opined RHB Research.
It said that in its current state, MAS should go for low hanging fruit and ideally that would be a combination of cutting capacity and reducing the size of its workforce. The research house added that by its estimates, a 19% downsizing ot MAS’ workforce and a 10% capacity cut could trim the the carrier’s losses by as much as RM349 million in financial year 2015 (FY15).
Despite the fact that MAS’ unit costs have improved, the airline still has a long way to go before it is on par with other full-service carriers, said RHB Research. With fuel costs being largely outside its control, the more realistic area to address would be the size of its workforce with the view of optimising productivity.
RHB Research said that the most obvious move would be to look at reducing its staff levels, which is sizeable when compared to other full service carriers. In FY13, MAS’ employed 19, 577 people at a cost of’ RM2.4 billion.
The last time MAS lowered its headcount was in 2006 via a mutual separation scheme (MSS) which was offered to 2,622 employees. By reducing about 18% of its workforce and by cutting its capacity by 7%, MAS saw a significant improvement in productivity of 13.4%(in terms of tonnage handled per staff).
Despite the fact another round of MSS will likely result in the need to fork out a large one-off sum for staff compensation, RHB Research believes that it could be effective in helping the airline achieve sustainable recovery.
Even with no capacity cuts, an 8% workforce reduction could translate into a 15% improvement in staff productivity and result in RM356.7 million in savings from staff costs in FY15. Although compensation costs will likely be substantial, in two years, the savings will likely be enough to have recovered the initial compensation costs of the downsize, detailed the report.
Capacity cuts also need to take place, with RHB Research suggesting that MAS should rationalise its routes by about 10%.
The report said that the last time MAS cut capacity in 2012 by 7.1% year-on-year (y-o-y), it was able to raise total yields by 2.7% y-o-y, based on available tonnage per kilometer (ATK). The rationalisation carried out by MAS should target frequency levels, as well as re-focus capacity building on higher yield routes where competition is less pronounced.
The report also emphasised that capacity cuts and optimising productivity must be done in tandem or it will not produce sustainable recovery.
RHB Research noted that MAS’ share price has reacted positively to the recent news reports suggesting a restructuring plan might be tabled to the government soon, and said that more news or information on the restructuring plans will maintain this optimism .
However without a firm plan in place, it is holding back on tweaking its own projections, as it remains concerned over the airlines’ near term issues and the lack of a solid strategy for sustainable recovery in place.
RHB Research has upgraded MAS to ‘neutral’ at a fair value call of 19 sen on the airline, which is premised on 1x price-to-book value (PBV) of its FY14 forecasted book value per share.
Going forward, the research house said that it estimated MAS could trade at as high as 1.2x FY14 PBV, which is the median PBV of all airlines listed globally. Should this happen, then MAS could see its counter increasing by around 14% to 23 sen in the near term.
At 4pm on Bursa, MAS was trading down by half a sen at 19.5 sen.
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