This article first appeared in Corporate, The Edge Malaysia Weekly, on May 16 - 22, 2016.
MALAYSIA Airlines Bhd reported a small profit of RM14 million in the first quarter ended March 31, 2016 (1QFY2016), signalling that its turnaround efforts might be working, but the national carrier does not expect to turn a profit for the full year ending Dec 31, 2016 (FY2016). Rather, it sees itself posting a smaller-than-budgeted loss. Last year, the airline’s loss was more than RM450 million.
“We saw a good first quarter (1QFY2016), with net income after taxes before exceptional items positive. However, we expect a weaker second quarter, owing to softer demand during Ramadan. The group is expected to record a loss for the whole fiscal year of 2016 but, from today's perspective, [it would be] smaller than budgeted,” the airlines says in an email reply to The Edge.
The RM14 million was the airline’s first quarterly profit since the quarter ended Dec 31, 2012. At the group level, Malaysia Airlines posted a profit of RM51 million before exceptional costs, which were related to “bonuses paid last month and some other restructuring charges”.
The loss-making airline still aims to break even by 2018 under a five-year turnaround plan that saw sole shareholder Khazanah Nasional Bhd injecting RM6 billion into the group. The airline shed a third of its workforce, cut unprofitable routes, renegotiated existing supply contracts and reduced capacity by 30% in FY2015.
In an internal circular to staff last week, outgoing CEO Christoph Mueller said the airline’s revenue for 1QFY2016 dropped 22% year on year on the back of the capacity contraction in FY2015. “Revenue on the passenger airline side is behind budget (by 1%), but is compensated by better revenue generation in other areas,” he added.
He also noted that the airline’s operating costs fell 32.9% y-o-y in 1QFY2016. “It is evident that through the route rationalisation exercise, our focus on unit cost control as well as our efforts on revenue quality have put us on the right track.” He also expects further improvements at the group level from the phase out of two Boeing 747-400 freighters and the substitution of existing operating and financial leases with new ones at its in-house leasing company.
He also pointed out that passenger revenue in China and other Northern Asian markets “is recovering” following the twin tragedies of MH370 and MH17 in 2014. “[The] more aggressive sales promotions are working and our business class load factors are recovering. We took out a lot of overcapacity in certain markets and as a consequence, our average revenue per passenger has improved by more than 20%.”
Still, Malaysia Airlines’ business in its home market remains under a cloud, Mueller said, as consumers are reluctant to spend. “(But) this is the time to demonstrate the superiority of our full-service product. If you add up all the hidden charges of our low-cost competitors, Malaysia Airlines is (still) the airline to go to,” he added.
In the circular, Mueller warned that a small hike in fuel prices and a less favourable exchange rate could change the airline’s course towards a smaller loss overnight.
The airline needs to follow through on the implementation of the turnaround plan. “The biggest task ahead is to show endurance and perseverance in the implementation of our project portfolio. Many of the previous turnaround programmes failed because the first green shoots saw a slowdown with no follow through,” he added.
Public Investment Bank Research analyst Nur Farah Syifaa’ Mohamad Fu’ad says it is important that Malaysia Airlines does not repeat its mistake of lowering airfares to compete directly with the low-cost carriers (LCCs).
“Malaysia Airlines can no longer compare itself with the LCCs. To sustain good revenue quality, it has to be rational in terms of its pricing,” she tells The Edge.
Maybank Investment Bank aviation analyst Mohshin Aziz also does not expect the national carrier to become profitable this year, saying that the second and third quarters are usually the low season for the airline.
An analyst, who declines to be named, says if jet fuel prices remain at the current levels, the airline is likely to see more improvements this year. “Overall, it is a good job done by the new management (in 1QFY2016). If fuel prices continue to be conducive and Malaysia Airlines is able to implement the rationalisation plan smoothly, everything should be fine.”
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