Published October 23, 2009

Analysts upgrade MAS on recovery hopes

Passenger traffic expected to grow, newer fleet offers better pricing power

By S JAYASANKARAN
IN KUALA LUMPUR

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ANALYSTS have begun rerating Malaysian Airline System (MAS) to a buy in yet another bet on stocks that are considered a proxy to economic recovery.

The Malaysian national carrier has been a laggard compared to its regional peers, almost all of whom saw their shares moving up two months ago.

But that might be due to the widespread notion that MAS's balance sheet for the year to end-December, 2009 could be drenched in red ink: most analysts think the airline could lose over RM900 million (S$370 million).

Going forward, however, is a global recovery that some economists think will give Malaysia at least 3 per cent growth in gross domestic product.

Analysts consider air travel to be highly correlated with economic growth which is why the rerating has begun. Passenger growth at the KL International Airport, for instance, has been 1.5 times GDP growth over the last five years on average. On that basis, AmResearch estimates passenger traffic at the airport to grow by at least 5 per cent next year.

Improving load factors are expected to stabilise yields and MAS's management itself said yields had appeared to stabilise in the third quarter. This has a great effect on its balance sheet. According to AmResearch, every one per cent change in load factor will increase earnings by 30 per cent while a one sen increase in yield boosts MAS's balance sheet by as much as 93 per cent.

Analysts also seem to think that MAS's traffic recovered faster that its peers (Singapore Airlines, Qantas and Cathay Pacific, for instance) primarily because the national carrier was less dependent on premium traffic which was hard hit by the recession.

The three airlines derive almost 40 per cent revenue from premium traffic compared to 15 per cent for MAS. In addition, MAS has a relatively large domestic market.

Even so, MAS suffers from some image problems chief of which is the fact that it has one of the oldest fleets in the region.

But that is changing. Beginning in the fourth quarter of next year, the national carrier will take delivery of a new generation of Boeing 737-800s in numbers sufficient to account for half the carrier's fleet.

That will transform the airline into one of the youngest fleets in the business, a move that will allow it better pricing power.

All these factors suggest a turnaround in MAS's profit and loss account. AmResearch agrees, revising the airline's 2010 net profit estimate to a profit of RM354 million from a loss position of RM267 previously.