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Managing director Datuk Seri Idris Jala said tough economic times presented opportunities for consolidation. Companies with huge financial muscle will have the flexibility to act should opportunities come knocking. Malaysia Airlines (MAS) is looking to acquire another airline with its surplus cash. As at Dec 31, 2008, MAS had a cashpile of RM3.57bil.

“People always ask why we keep so much cash. We are positioning ourselves so that when the chance comes, we will be ready to grab it. In the next two to three years, if the economic downturn persists, we won’t even have to go looking. Opportunity will present itself to us,” he told StarBiz after the launch of MAS’ Stimulus Package yesterday.

Jala said as early as two years ago, MAS had been doing studies on some 30 airlines. The two key criteria that MAS looked at were strategic fit and synergy value.

“When looking at the synergy value, 1+1 must be 3. If 1+1 is 2, then we won’t do it,” he said.

While 2008 had been especially tough for the airline industry with many companies having downsized, undergone restructuring and even gone bust, Jala said MAS was ready because it had been running this “marathon” over the last three years.

For 2009, MAS is aiming to save some RM700mil through continuous cost-cutting and efficiency measures. Over the last three years, MAS has reduced cost by a total of RM2.3bil.

“I am quite convinced that MAS has the stamina and is built to ride through the current times. We are doing everything we possibly can to counter this economic downturn,” Jala said.

“We have completed the structural changes that were needed for MAS. If you notice, other airlines are now only embarking on their cost-cutting and manpower measures. With these issues out of the way, MAS can focus solely on innovating and achieving its target of being a five-star value carrier.”
Datuk Idris Jala … is confident that MAS can ride through the current times.

The MAS Stimulus Package is an innovative array of nine deals, covering first, business and economy-class travel.

Jala especially sees potential in the “Kids Fly Free” and “Weekend Getaway” packages, as these segments are likely to create new revenue that the company never had before.

“I’ve always been hearing people saying that they get cheaper first-class tickets for their international flights. I feel that our flights are just as competitive. So I challenge these people now. If you can show me the proof (through a ticket that has been purchased within the last three months), then we will match that price,” he said.

Meanwhile, MAS confirmed that there were no more discussions with Qantas with respect to the maintenance, repair and overhaul joint venture since the memorandum of understanding expired recently.

MAS adopts a competitive hedge policy, where it hedges its fuel requirement based on what its competitors are also doing.

About 64% of its fuel requirement has been hedged at US$100 per barrel.

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Malaysia Airlines (MAS) (3786) may suffer the same fate as Hong Kong flagship carrier Cathay Pacific Airways, which reported last week its first annual loss in a decade on fuel hedging losses and weak demand because of the economic crisis. MAS’ top official said it could slip into the red this year owing to factors outside its control.

The national carrier has managed to hold up so far, although it saw net profit drop 71 per cent in financial year 2008, hurt by fuel hedging losses and slowing demand for travel and cargo.

The last time MAS made a net loss was in the three-month period ended June 30 2006, of RM177.1 million.
Idris, who took the helm in late 2005, turned MAS around in less than a year and has kept it profitable for 10 consecutive quarters.

Idris pointed out that MAS has the right strategy and people to keep it resilient in a challenging environment that has forced more than 30 airlines globally to fold.

Its ongoing cost-saving initiatives since 2006, amounting to RM2.3 billion, has helped the airline remain profitable despite reducing its fares.

Idris said that MAS still has more cost-savings to achieve as his team weeds out the “bad costs” squeezing the airline.

MAS remained profitable in its fiscal year ended December 31 2008, posting net profit of RM244 million on revenue of RM15.5 billion.

However, the outlook for the industry this year is bleak, with many airlines having their fuel bill partly locked through hedging into higher prices.

MAS is no different as it has hedged 64 per cent of its fuel requirements this year at US$100 (RM370) a barrel. Jet fuel currently hovers at half the price.

On top of potential hedging losses, MAS has to contend with weakening passenger traffic.

Last week, airport operator Malaysia Airports Holdings Bhd said it expected the 39 airports in the country to post flat passenger growth this year.

To cope with weakening demand, MAS may suspend some routes that are no longer commercially viable, as it has done for its service to Macau.

To a question, Idris said that MAS would only remove the fuel surcharge for its international routes if the majority of airlines did so.

“It is a real possibility that we can lose money, especially if 60 per cent (of events) does not work in our favour. But I can tell you this, we will do our very best to weather the storm,” said MAS managing director Datuk Seri Idris Jala, who is bent on beating the Centre for Asia Pacific Aviation’s prediction that all Asian airlines will report a loss this year.

“Our cost has significantly gone down and that is why we have managed to remain profitable.

“The problem faced by many (full-service) airlines now is that they are drop-ping fares but their cost structure is very high, so they end up losing money,” he told Business Times in an interview.

“It will be surprising to me, though, to see other airlines paying for fuel at US$100 per barrel, like MAS, abolish it. But, of course, there will be one or two airlines that will decide to do it for reasons known only to themselves,” he said.

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PENERBANGAN Malaysia Bhd, which leases aircraft to MAS, has issued RM1.5 billion (US$406.5 million) of 5-year Islamic notes to refinance its borrowings, the firm said today.

The issuance was larger than the RM1.2 billion initially planned and priced at 49 basis points above 5-year government bonds, Penerbangan said.

“The issue was significantly oversubscribed and attracted RM6.38 billion in book size from investors, representing a subscription rate of 4.25 times within the book building period,” Penerbangan said in a statement. – REUTERS

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