Analysts see MAS ‘zero fare’ strategy as positive move

ANALYSTS believe that Malaysia Airlines' move to offer zero or low fares on unsold domestic seats is a positive one, with minimal cost increase expected.

"Despite the slight drop forecasted in domestic yields and higher fuel costs, the additional revenue from the higher load factor should more than offset the higher costs," OSK Research Sdn Bhd associate director Chris Eng said in a research report yesterday.

The additional RM0 fare passengers will increase the fuel consumed due to additional weight on the planes and some processing fees.

However, given that these are domestic flights, the in-service costs will be minimal. The limitation that tickets can only be booked online also means that incentive costs to sales agents and other ticket handling costs are minimised.

Eng has raised his core net profit forecast for MAS by three per cent, 3.4 per cent and 2.8 per cent for the financial years 2008, 2009 and 2010.

Yesterday, MAS announced that it would be offering zero fares for 30 per cent of its domestic flights, under its Everyday Low Fares programme.

"As MAS' load factors still lag its regional peers, the move could be construed as being low-risk," Asseambanker research analyst Vincent Khoo said in his research report.

MAS averages at 70 per cent load factor for domestic flights.

Khoo said the programme will shift some passengers onto the internet and reduce distribution costs and gain new business by attracting price-sensitive consumers who prefer MAS' fulls service offering.

The Everyday Low Fares strategy will also maximise revenue by selling the flown but unsold seats at below average selling prices.

"By removing the flexibility to reschedule or cancel, MAS is essentially targeting a new segment of passengers that were previously not looking at full service carriers," Eng said.

Earnings will not be cannibalised from this move since 95 per cent of MAS' passengers either do not book via the Internet or change their travel dates within 30 days of their flights.

"Given these similarities to low cost carriers regular offerings, we expect LCCs to bear the brunt of any market share loss," Khoo said.

Meanwhile, at a press conference held yesterday, MAS group managing director Datuk Seri Idris Jala said there were no immediate plans to offer low fares on its international flights because of the good load factor it was experiencing there.

"The issue here is when times are tough only airlines that know how to manage their business are winners and we want to make sure that MAS is one of those airlines that are winners," Idris said.