- It was reported by newswires last night that Malaysian
Airlines System (MAS) is scrapping plans to set up a new regional premium
carrier. Coincidentally or not, the move comes hot on the heels of Qantas’
decision to hold back plans to set up an ASEAN-based regional premium carrier.
- To recap, Qantas last year announced plans to set up a
carrier based in ASEAN. The plan came amid worsening operations in Australia;
Qantas was looking at a lower cost base for its operations and wanted to tap on
the growth in Asian travel. Qantas was previously considering setting up its
new airline either in Malaysia or Singapore. In March 2012, however, talks with
MAS fell through, reportedly due to disagreements on capital investments and
stake size.
- On the bright side, we believe the creation of a new
airline would probably have required heavy investments in re-branding MAS’s
short-haul services and would have increased the risk to its brand visibility
compared to maintaining the current short-haul business under MAS’s existing
brand name, which has been around for decades long.
- However, the decision to scrap the premium regional
airline plan also seems to suggest that MAS is facing strong resistance from
its employees, particularly in regard to new terms and conditions attached to
proposed changes. Reports have it that earlier plans to set up a regional
premium carrier would have required MAS’s staff assigned to its shorthaul
operations to sign a new contract with the new carrier under new terms and conditions,
which among others, would have involved up to 30% pay cuts, a rigid performance-based
reward system and entailed weaker influence of staff unions.
- While it is difficult to ascertain how MAS plans to move
its short-haul business going forward, we believe MAS giving in to its union’s
requests seem to suggest difficulties in implementing changes. We see this as a
risk to its turnaround plan – staff cost
is the second largest chunk of opex (14% of cost), while staff productivity is
poor, relative to regional peers. We maintain our HOLD rating on MAS with an
unchanged fair value of RM1.25/share. Given that our earnings forecast does not
incorporate any upside from the regional premium airline, we make no changes to
our projections.
Source: AmeSecurities
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