MAS is looking like a turn around

From the Sun Daily:

It said more than 4,000 contracts have been identified under a comprehensive review of MAS' contracts and that the process to replace contracts that meet the market-based requirements of newco began end-February 2015, days after the MAS Act came into effect, while discussions are underway on selected contracts that have been identified for renegotiation.

I am looking at the MAS situation with the service act and am thinking two things.

MAS or now known as MAB is looking like a turn around.  Likely it has unparalleled flexibility it never had before to do what necessary to become a stand alone entity.  Looks like Khazanah boss is quite strong and a stand up investor for Malaysia.  It also seems no hanky panky will be going on with this turn around which is extremely commendable.

The second item deals with is one company bigger than the nation?  The MAS act makes MAS shareholders the beneficiary in not having to become a bankrupt entity.  It gives bankruptcy powers without having to declare bankruptcy.

I think this is a double edged sword.  Share holders will undoubtedly be happy.  Bond holders as well because they don't have to take a hair cut in their bond holdings.  But, it sets somewhat a dangerous precedent with unknown consequences.  It raises the question what other entities will the government make a special law for.  I think a lot of government suppliers are going to start panicking.  As for now though, this precedent is very beneficial for government entities.

Air Asia X woes

From the Edge:

KUALA LUMPUR: AirAsia X Bhd (AAX) ( Financial Dashboard), the loss-making long-haul affiliate of low-cost carrier AirAsia Bhd ( Financial Dashboard), plans to raise RM500 million via a rights issue and a private placement to shore up its balance sheets, according to a source close to the matter.

The proposed rights issue is expected to be discussed and approved in a board meeting that will be held today. 

The meeting will be chaired by AirAsia (fundamental: 1.3; valuation: 1.8) founder and group chief executive officer (CEO) Tan Sri Tony Fernandes, who is due to return from the 2015 annual meeting of the World Economic Forum in Davos, Switzerland.

Air Asia X just laid a doozy on its shareholders.  Considering the marketcap of 1.5 billion, 500 million amounts to diluting their shareholders by a third.

Overestimating capacity in the industry is a no-no, as I mentioned in an earlier post.  Only those really hardy investors would wait. But its growth trajectory may have plateaued as demand is falling short of the airline's lofty expectations.  If that is the case then the shares intrinsic value is worth a lot less than what people were expecting.

Air Industry turbulence

Air disaster's have a way of changing the lookout of an airline.  From the Edge:

KUALA LUMPUR: Low-cost carrier AirAsia Bhd, whose share price dropped by as much as 12.9% yesterday on news that one of its planes had gone missing on its way to Singapore from Surabaya, Indonesia, may experience some weakness in the near term, said aviation analysts.

As at press time, the Indonesia AirAsia plane had yet to be found, which disappeared after its pilot failed to get permission to fly higher to avoid the bad weather on Sunday. The plane, an Airbus 320-200, was carrying 162 passengers and crew. 

Malaysia hasn't had a very good year in the aviation industry.  A concentration of air disasters in one country has never been seen before in history and is unprecedented.

Will Air Asia be alright?  I think they will be but they will suffer.  It goes without saying that this disaster will thoroughly trash the stock.  For one, Air Asia Indonesia faces two sources of customer drain, the risk adverse which won't fly with an airline that has had disasters and the prospect of a nation angry at them (Indonesia).

It may not even be right, but that's probably what is going to happen.  While Air Asia is dominant in Asia, it is not the only alternative in the low cost carrier industry.  People will jump to other airlines no matter how illogical or petty their grievance is.

The air disaster will do major damage to Air Asia's brand name. The one advantage Air Asia has is its brand name and if that brand is tarred, the chances to do well in the future drop drastically.  Everyone of their competitors are probably chomping at the bit at this moment

Air Asia Technical Analysis

Air Asia has received a lot of press lately as a company that would have a lot to gain as oil price trades in the 50s.  Personally, I think the stock has a lot going for itself.  The domestic low cost airline is a mature industry with clear and predictable volumes compared to the volatile demand Air Asia X is facing.  If they have an under capacity problem, it shouldn't be that severe and should easily be solved.  Finally, a weakening Ringgit does wonders for the tourist industry and should help contribute to Air Asia's bottom line.

But I do have a caveat.  The airline hardly pays a dividend.  At roughly 1.5% it's not a lot to go on.  So I wouldn't hold my breath on the company.  Airlines are notoriously bad on returns to shareholders.




Technically speaking, two uptrend lines have been violated pretty hard, so there probably will be a lot of resistance.  Maybe I'd prefer a buy lower at RM1.8 a share given the risk profile of this counter.   The price appears to be muddling around at the moment.

Air Asia X, whats going on?

From the Edge:

KUALA LUMPUR: AirAsia X Bhd fell as much as 6.7% to emerge among the most actively traded stocks as investors reacted to a report by The Edge Financial Daily on the airlines financial constraints. The Edge Financial Daily, quoting sources, reported yesterday that the long-haul low-cost carrier faced difficulties in paying staff wages.

Describing the unprecedented payment issue as a temporary setback, the management of AirAsia X blamed the payment delay to the late arrival of incoming funds. It was also reported that Tan Sri Tony Fernandes, AirAsia Bhd co-founder and group chief executive officer, was planning to play a more active role in AirAsia X. 

AirAsia X reported some nasty losses.  I see a lot of finger pointing.  But what is really wrong?  Are they pricing wrongly, is their strategy not working?  It seems no one really knows.

I think the problem is really simple.  It actually starts from my own personal experience with the airline.  I flew on AirAsia X to Sydney and back to Kuala Lumpur from Melbourne.  The plane was quite full.  The experience I felt was decent, although the food was the worst I ever had on an airline.  No problem because it's also the cheapest flight I ever took to and from Australia.

The flight attendants are an upgrade over the regular AirAsia flight attendants.  But still not as professional as Singapore airlines.  Their business model is quite solid.

But there is one thing I felt mad about.  one:  the flight I had originally wanted to take was cancelled and I was moved to the following time slot.  The exact same thing happened for the flight back from Australia.  This not only disrupted my schedule, but also my relatives who were dropping me off at the airport.  But, I'm thinking it's usual for airlines to do this as my brother had the same problem with his Cathay Pacific flight to Malaysia.

After seeing the AirAsiaX losses, I didn't think the cancelled flight was a usual occurrence.  It's apparent that AirAsiaX had expanded too fast and too aggressively, adding capacity even though the demand was not yet there, hence the cancelled flights.

I don't have a strong conclusion, but perhaps the flight industry is due for some hard times.  I don't really see a way for AirAsiaX to claw its way out of this mess, especially if they have obligations to purchase new aircraft.  Deferring those obligations will cost a bomb.

MAHB to invest big in retail services

From the Business Times:

Malaysia Airports Holdings Bhd (MAHB) is planning a substantial investment to beef up its retail shopping and services to capture the higher revenue potential.

Its chairman, Tan Sri Dr Aris Othman, said a major renovation of its satellite building at the Kuala Lumpur International Airport (KLIA), is nearing completion.

According to Aris, MAHB will now focus on renovations to the main terminal building at the KLIA to enhance and modernise the retail facilities there.

"We realise we cannot rely on airport charges alone as it tends to remain stagnant or low, due to the competitiveness of many airports around the world," he said during the graduation ceremony of 194 airport security staff in Sepang today.
Aris said with the completion of the new low cost carrier terminal (LCCT) by the fourth quarter of 2011, a more enhanced shopping experience would be available.

Works on the new LCCT, he said, will commence next month and the total construction cost is RM2 billion.

He also said there would be no compromise in terms of airport security, despite the economic slowdown.

I actually think the new LCCT terminal will be a huge earnings boost for MAHB. The current LCCT seems built as cheaply as possible wihtout much regards to profit strategy. With the volume of passengers going through the LCCT, the profit potential of the airport is brought down by lack of retail space. The new LCCT should solve this problem and be a huge profit opportunity for MAHB.

Credit given to MAS for working within their means

From The Edge Malaysia:

KUALA LUMPUR: MALAYSIAN AIRLINE SYSTEM BHD [] (MAS) recorded RM2 billion in savings in the past three years and is targeting to reduce costs by another RM700 million this year.

MAS managing director and chief executive officer Tengku Datuk Azmil Zahruddin said on Oct 2 the national carrier would continue to pursue structure cost reduction.

"There is a lot more room for cost savings," he said at a briefing in Kelang Jaya as he update the media on the progress of MAS's business transformation plan.

Azmil explained that a 62-year-old legacy carrier inherited a lot but the aggressive cost savings measures was to get rid of "bad costs such as those that don't add value or give poor returns".

"A significant portion of our savings is returned to customers in the form of lower fares and better services," he explained. "We will continue to invest in good costs," he added, such as inflight food, safety and regulatory requirements and to generate third party revenue.

He said MASkargo aims to return to profitability next year while MAS Aerospace Engineering aimed to achieve revenue targets of RM1 billion by 2010 and RM3 billion by 2013.

On its fleet renewal, he said it would take delivery of 35 firm B737-800 planes with delivery starting in the fourth quarter of 2010. It has another 20 plans on option.

"These planes will be deployed in Malaysia, Asean, South Asia and China," he said.

To MAS' credit, they've not been grabbing shareholder's money like AirAsia recently. Their cost cutting method seems effective and looks to be continuing under the new ceo, Zahruddin. He seems to be picking up exactly where Idris Jala left off. No doubt as a full service carrier, MAS is hurting compared to AirAsia as consumers trade down; but credit is given to MAS for working within their means.