Engaging the unions

Malaysia Airlines Network Expansion plans by GrpCEO Ahmad Jauhari

Khazanah boss said to have met the MAS union’s top officials recently

MAS Employees Union (Maseu) was conspicuously absent when Malaysia Airlines (MAS) CEO Ahmad Jauhari Yahya on Wednesday showed he now has the support from the many of the airline’s unions to take it towards profitability path.

Why Maseu top officials did not show up when seven others did is not known though it has been reported that Maseu no longer has confidence in the leadership of Ahmad Jauhari. Instead the union had written to the Prime Minister suggesting its own candidate for the job.

Khazanah Nasional Bhd managing director Tan Sri Azman Mokhtar is said to have called the top people from Maseu for a chat in his office the following day. What transpired at the meeting is not clear. What is obvious is that Khazanah, the shareholder, is keen to find out the grouses of those at Maseu.

Maseu is the biggest union at the airline which claims to have about 15,000 members of the 20,000 MAS work force.

Khazanah, the Government’s investment arm, is the largest shareholder in MAS with 69.37% equity stake.

“Engaging with the unions actively should have been something that the top team at MAS should have done two years ago. You cannot be high handed and just discount the unions as they will then just make known their grouses in the public domain. There has to be engagement and seriousness to iron out issues though it is still not too late to do so,” says someone in the know.

Another expert adds that “recognition is key as one, two or ten persons cannot steer the ship, it requires everyone’s support and, perhaps, Khazanah’s move to meet Maseu was to harmonise the situation so that the journey towards profitability and there is no spanner in the works.”

It was reported that Ahmad Jauhari did do just that on Wednesday. He said that “although MAS’ management and the unions have their differences,” he was in communication with the union’s leaders. “We prefer to resolve issues with them internally.”

MAS was thrusted into the limelight last week as some felt privatising MAS would be a better option then letting it continue to bleed. The share price of the airline was depressed at 30 sen a share and any move to takeover MAS would have cost nearly RM4bil to buy Khazanah’s 69.37% stake.

Talk of a sale saw MAS share price rise to 40 sen a share before the Government scuttled any thought of privatisation and MAS’ share price quickly retreated back to the 30 sen range. Its shares closed at 32.5 sen yesterday.

He adds that “the other seven unions may be small in terms of union members compared with MAS and while they have thrown their weight behind Ahmad Jauhari.

Profitability tunnel

Despite the internal labour issues, what the investing public is interested in is profits, MAS turned in another quarter of losses for three months ended June this year though it outperformed one of the world’s largest carriers, Singapore Airlines in loads for the month of June.

It record its highest load factor at 84% while during the three months its load averaged 80%. But its yields are still down. Its second-quarter yields continued on a downtrend, falling to 22.1 sen from 24.2 sen (-9%) in the previous correspnding quarter from intense competition and MAS is said to be dumping fares.

MAS reported RM176mil in net losses for the second quarter, half of what reported a year ago (RM349mil). The losses have narrowed though the figure of RM176mil excludes the forex loss of RM68.3mil but includes the fair value gain on derivatives of RM5.6mil. Revenue was up at RM3.7bil against RM3.3bil previously.

For the first six months of the year it posted a net loss of RM500.5mil, which is a 4% year-on-year improvement, writes an analyst.

Positive signs

HwangDBSVickers Research says: “We increased our net loss forecast for 2013 following the losses in the second quarter. Although there were some positive signs from the second-quarter results, the operating environment remains challenging. Competition from regional and domestic carriers will likely continue to exert downward pressure on yields.

As Malindo Air takes delivery of more aircraft, competition could intensify and result in further pressure on ticket prices.”

RHB Research adds: “We are revising our earnings model as we had previously been too bullish on the group’s EBITDA (earnings before interest, taxation, depreciation and amortisation) although earnings had been in line. We are now revising higher our available service kilometer and load factor forecasts, in line with MAS’ strategy in boosting load factor under the current challenging operating environment. Our forecasts are revised lower to a RM367mil loss (from RM248mil) for the financial year 2013 (FY13) and a net profit of RM120mil (from RM164mil) for FY14.

“The key risks include the drastic compression of airfares, drop in load factors, and volatility in jet fuel price and foreign currencies,’’ it adds.

Though Ahmad Jauhari has said MAS will return to profitability by end-2014, internally, he is looking at profits in first quarter FY14. It is pretty ambitious target but he believes he can pull it off as he is banking on the lapse of old aircraft leases sooner rather than later though. The last lease will only lapse in October. These leases were said to be unfavourable to MAS and the old aircraft cost a lot in fuel cost, and service and maintenance. Since MAS is getting a new fleet, which is more fuel efficient, he is banking on that to help him drive profits.

But the sceptics are not so sure whether the first-quarter FY14 profit timeline Jauhari spoke about is achievable. They rather stick to the FY14 full-year targets.

After a massive financial restructuring last year which included a cash call, the airline now has cash balances of RM5.5bil, and its net gearing ratio is reduced to 1.3 times.

MAS turned profitable in the second quarter after reporting a marginal RM8mil in operating profit versus a RM102mil loss a year ago. The flicker of profit gives hop but sustaining that will be tough amid a challenging operating environment where competition remains heated.

While MAS is confident it will return to the black by FY14, CIMB Research in a note expects MAS to continue registering losses for at least the next three years, with losses potentially widening even further next year on the back of a weaker ringgit.


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