Strategy to persist in 2014
MAS has been embarking on an expansion spree this year in order to improve its fleet and personnel utilisation. This came at the expense of yields, which MAS seemed unperturbed by as the carrier seeks to earn every incremental dollar it can from its fixed cost base.
We adjust our FY13-15 forecasts by -4% to 6% for housekeeping matters. We see continued losses at MAS at least for the next three years, with losses potentially widening even further in 2014 on the back of a weaker ringgit, which serves as a key de-rating catalyst. Our target price is based on an unchanged CY14 P/BV of 1x. Maintain Underperform.
Revenue the priority, not yield
MAS expanded capacity by a stunning 19% yoy in 2Q13, with international and domestic capacity rising by a fairly similar quantum. MAS will not remove capacity from the domestic and international sectors going forward, and will continue to compete heavily in the face of expansion by Malindo and AirAsia/AAX. This is the strategy taken by Managing Director Ahmad Jauhari (AJ) and his Head of Commercial Dr. Hugh Dunleavy, as the airline seeks to remain relevant. The plan is to maximise revenue, not yield, and the national carrier is willing to tolerate lower yields to achieve higher fleet and staff utilisation. MAS had not been able to reduce its pilot and cabin crew headcount when it downsized its international capacity in 2012, resulting in excess labour. Rather than allowing the staff to sit idle, MAS might as well begin to use them to fly its new planes.
Slower expansion in 2014
The pace of capacity expansion in 2014 will slow, providing slight consolation. Capacity growth in 2013 was driven by increases in fleet utilisation (from 10+ hours/day in 1H12 to 12 hours/day in 1H13), but by mid-2013, utilisation has already reached levels that are considered optimum. Capacity will hence continue to grow at double-digit levels in 2H13, but growth will then slow in 2014 given the higher base in 2013. We estimate MAS‟s domestic and international capacity growth to be in the range of 5-8% yoy for 2014.
Strategy to remain in 2014
AJ‟s three-year contract will expire in September 2014, while Dr. Dunleavy‟s will expire in January 2015. We believe that MAS's current strategy will remain unchanged until at least their contracts expire.
Publish date: 26/09/13