AmResearch: MAS may cut flight capacity further

AMRESEARCH Sdn Bhd expects Malaysia Airlines (MAS) (3786) to follow in the footsteps of rival Singapore Airlines (SIA) and cut its flight capacity further, due to a weakening demand for air travel.

Last week, SIA announced that it will cancel more than 200 flights before the end of the year, especially in the premium segment of the market.

"On a worst-case scenario, we would expect MAS' yields to decline substantially," AmResearch said in a note to clients yesterday.

SIA's yields have only risen by 8 per cent year-on-year as of the third quarter of 2008, while MAS has increased by some 11 per cent despite rapidly falling passenger numbers.
The local research firm estimates that if oil remains at previous US$100 (RM357) per barrel levels, its projections would imply a net loss of RM284 million for financial year 2009 instead of a RM369 million net profit now for MAS.

"We should bear in mind that MAS would have a similar cost structure as SIA. Hence, any unit cost pressures seen at SIA, should also rightfully be seen at MAS as well," AmResearch said.

It also expects MAS to cut flights, because of comparatively large declines in revenue passenger kilometre (RPK) and average-seat-kilometre (ASK) with SIA.

AmResearch said MAS was especially worse off than SIA because despite trimming its ASK since January 200 up till now, it has not been able to match the fall in RPK.

As of November 2008, MAS reported a 12 per cent decline in ASK, but RPK has fallen much faster at a 19 per cent year-on-year decline.

SIA recorded a less severe 4 per cent year-on-year decline in RPK for the month of December, despite a 1 per cent growth in ASK due to the arrival of new aircraft.

AmResearch said even though MAS has already managed to reduce 6.4 per cent ASK by the end of financial year 2008, it has performed much worse than its regional peers, including SIA.

"We think MAS' current valuation of 15 times is excessive, given exceptionally sharp traffic contractions compared with regional peers especially on long-haul routes and stiff competition from AirAsia, for domestic and Asean sectors," AmResearch said.

It maintains a "sell" rating on MAS, with a fair value of RM2.32.