Airlines battle it out to make more money

PHOTO: Airlines battle it out to make more money

It seems as though the airline industry is perpetually struggling to make money, even in good times.

For the investors, it is a big turn-off.

Heavy losses at Malaysia Airlines (MAS) has already buried the counter at its all time low, while sentiment towards AirAsia Bhd, not too long ago a darling among money managers, is shaky after it recorded lacklustre third quarter earnings.

The low cost carrier's (LCC) long haul unit AirAsia X Bhd, which went public in July, is also under pressure and was traded yesterday at RM1.05 - below its initial public offer (IPO) price of RM1.25.

But even at these levels, few investors are willing to dig into their pockets and pick up airline stocks.

A quick check on Bloomberg showed that 13 research houses that tracked MAS rated the counter as a "sell", while one analyst believed that the stock is worth a "hold". This is a sharp contrast to AirAsia, which continue to command a lot of support from the market.

"We believe yield pressure will persist in 2014 as MAS is intent on defending its market share," CIMB Research said.

As the air fare war rages on, the focus is on MAS.

The national carrier had recently assume an unfamiliar role as the aggressive player in the market that is already notoriously competitive.

MAS strategy to cut ticket prices as it addded to its capacity this year had helped the airline record impressive passenger traffic growth, making it one of the fastest-growing airlines in the region.

MAS is flying more passenger so far this year than it did for the whole of 2012.

The record breaking growth, however, came at an expensive cost. MAS sank deeper into the red in the third quarter ended Sept 30 that swelled losses over a nine-month period to a staggering RM830mil.

Few expect MAS to turn around in 2014.

Crowded sky

For one, competition in the industry will continue to be intense. And it is not confined to any local rivalry.

Across the region, full service airlines and LCCs are expanding their fleet and seat capacity at record pace, making South-East Asia one of the fastest growing aviation markets in the world.

The arrival of Lion Air group's Malindo Air in March this year shattered the firm MAS-AirAsia duopoly grip on the domestic air travel market. Its hybrid business model and low cost fares had given both MAS and AirAsia a run for their money.

The MAS team led by CEO Ahmad Jauhari Yahya responded by slashing fares to protect market share and fill up seats amid growing capacity as the airline replace older jets with more efficient new generation aircraft.

It seems that AirAsia was initially caught unaware.

In an interview with StarBiz on Nov 8, its co-founder and executive chairman Datuk Kamarudin Meranun admitted that the AirAsia had taken its competition for granted and the airline is now force to "hit back aggressively".

AirAsia saw a 77.5 per cent drop in net profit to RM35.5mil in the third quarter.

It was estimated that LCCs made up more than 50 per cent of capacity in South-East Asia's four largest domestic markets - Indonesia, Malaysia, the Philippines and Thailand. The low-cost airlines also account for about half the capacity in the intra-South-East Asia international market.

Capacity growth in the region was also driven by rapid expansion by full service carriers, as they seek to capitalise on the growing demand for air travel.

According to the Centre of Aviation, South-East Asia's international market has grown by about 20 per cent over the last 18 months from about 4.7 million weekly seats in April 2012 to 5.6 million weekly seats in October.

Except for Brunei, all countries in the region have seen double-digit seat capacity growth.

Airline chiefs, including Ahmad Jauhari, had said that carriers across the region are aggressively expanding their network and capacity ahead of the full implementation of the ASEAN Open Sky policy in 2015.

Analysts are now expecting the cut-throat situation in the industry to prevail well into next year. "We now expect MAS will only be profitable in 2015 at best," Maybank IB Research said.

Pricing strategy

ASEAN comprise a market of over 600 million people with a combined annual gross domestic product of US$2.1 trillion. Its solid economic growth, a rising middle class, aviation deregulation and aggressive tourism marketing are fuelling what has been an unprecedented growth for the airline industry in this region.

But intense competition makes it difficult for airlines, including MAS to achieve higher yields.

MAS certainly has a deep pocket and in a much better position to ride out this current turbulent. A RM3bil cash boost from a rights issue in June this year provided the company with a cash pile of RM5.4bil as of end of September.

"We believe that MAS cannot win the capacity war without burning a huge hole in shareholders' pockets," CIMB Research said.

But what are the other options available for MAS? Cutting down on flight time would reduce capacity, but that won't amount to much in terms of lowering cost.

About 35 per cent to 40 per cent of MAS's total costs are fixed in nature.

Analysts said its aggressive pricing strategy is not sustainable and will only pay off if travellers are willing to fork out more to fly with MAS in the future. Winning back premium customers is a key component of the new MAS business plan.

The carrier has a lot going for it, with a fleet with new aircraft, membership in a global alliance and an award winning cabin crew. The Visit Malaysia Year 2014 campaign may help draw more tourists.

The challenge for Ahmad Jauhari and his team would be translating all the hard work in 2013 into higher yields in 2014. If they can do that, than maybe it has the chance of winning back the investors.