MALAYSIA AVIATION (OVERWEIGHT)

News is rife that  the share swap agreement between MAS and AirAsia could be scuttled following demands by  the former’s strong  workers  union amid speculation that  the Government may set up a SPV to acquire shares from MAS’main shareholders. As such a politically-motivated move could  draw  even more public  criticism, we  think  this  is unlikely to materialize  and see  MAS’ union eventually realign its interest with  that of  management  in turning around  the airline.  We maintain our OVERWEIGHT call on the aviation sector, with AirAsia as our top pick, at a FV of RM4.57, and MAS  still  a SELL at an unchanged FV of RM0.90.

Resisting change. MAS’ union, which strongly opposed the proposed share swap, has brought its grievances directly to the Prime Minister to lobby  against the deal. It would appear that the union is  resisting  change and  has protested against  the new management. Staff morale is  low as uncertainties cloud their  job  security, with most MAS employees seeing job cuts as  the worst-case scenario given  the airline’s huge workforce of 20,000. At the very least, MAS may need to cut  employee benefits/compensations or freeze pay hikes.

SPV a  bailout in  disguise?  In the event the share swap  is abandoned  to meet the union’s  demands  (they have  threatened to vote against the federal government  in the upcoming general election), media reports speculated that the PM’s office may consider setting up a SPV to acquire shares from the main shareholders of MAS.  Such as politically-motivated  move will trigger a MGO for the remaining shares of MAS, which could then be viewed as a bailout using taxpayers’ money and consequently, draw more intense public criticism.

Chairman offers words of comfort. In a statement yesterday, MAS’ chairman Tan Sri Md Nor Yusof  said he has faith in the Management Team led by Group CEO, Ahmad Jauhari Yahya. The board  has  emphasized that the turnaround  of  MAS lies  in the collaborative agreement it has sealed with AirAsia,  in view of the potential to achieve synergy in many areas.  As  a  case in point,  MAS is in the process of setting up  JV companies  to collaborate with AirAsia in the areas of procurement, training and maintenance. But in the face of resistance from MAS employees, it remains to be seen when such collaboration would materialize. It has been 7 months since the share swap deal was sealed, and as we understand it, the only collaboration initiated so far is in the procurement of jet fuel. This would be the easiest to tackle as it does not require the full participation of employees.

Cut in workforce unlikely. MAS appears to have an over-sized workforce, which may be the main drag on overall productivity. The airline’s 20,000 employees is close to the much bigger  SIA’s 22,000  and is substantially more than AirAsia’s 5,172.  Trimming a bloated workforce  may be  akin to plucking  the  low hanging fruit, but we think management may be  unlikely  to  resort to this, although  a  cutback in incentives and commissions (in future, payouts will be driven by performance) could be in the offing. As depicted in Figure 1, MAS is positioned last in terms of revenue per employee for 2011 but just marginally comparable to Thai Airways on a per cost basis per employee among Asian airlines (see Figure 2). Note that Thai Airways is on the verge of turning around by…

Source: OSK188