WHAT surprises me is that Malaysia Airlines’ (MAS) share price only dropped 2 sen to 19 sen yesterday, about a 10% drop after the airline revealed the extent of the financial damage to its business caused by MH370.
The action, though, was furious as attempts to defend the share price was futile in the face of an onslaught of selling. To hold the stock’s price when the company has 16.7 billion shares and the outlook bleaker than it has ever been means there could be more pain in the future.
The possibility is that losses will be worse in the second quarter, which is traditionally the weakest period for the company. The full impact of MH370 will also be felt from that quarter onwards.
What stock watchers, investors and employees of MAS will watch for from now is the plan to right the company. To put it bluntly, there is so much wrong at MAS which has never been fixed.
What I am alluding to is the various proposals in the past to rectify the airlines’ problems. We have all seen different rescue attempts crafted to right what is wrong, but the hard fact is that they have all failed. Maybe things would have been worse without those attempts, but the truth is none of them have worked.
So why should stakeholders of MAS be hopeful that it can be different this time?
Previous attempts to restructure MAS I suppose was done within certain constraints. Efforts to improve the operations of the airlines had been undertaken but what stood out was the balance sheet shuffling that took place.
Assets were either transferred or sold, in the case of the MAS building in downtown KL. And now talk is swirling that the airline’s engineering division is in the crosshair for some form of intervention from management.
Like the catering business MAS disposed of, doing the same with its engineering business will likely not solve anything. In fact, the cash raised from the sale of assets will be whittled away if the airline does not tackle its fundamental problem.
Selling assets will raise money or free up cashflow but the one thing that MAS has been grappling with, and accentuated by the expected losses, is the operations of the airlines.
The latest financial results showed that management has been actively doing what it can to bring down costs, but with yields falling, it was always going to wade upstream against strong currents.
The opportunity is there now for MAS to take the big leap. Political will appears to be there after Prime Minister Datuk Seri Najib Tun Razak said the Government is willing to look at all angles after the huge first quarter loss.
Urgency to act is surely apparent as the airline is burning through its cash pretty fast and analysts feel the company will exhaust its cash by next year.
Although the Government says it will not bail-out MAS, the fact is that it’s a government-owned company and one that many feel will not be allowed to fail. Nearly RM17bil in fresh capital raised either through bonds issuances or rights issues has been pumped into the airline since 1998. And what has all that money got to show up to now?
It’s time to take off the gloves. It’s common knowledge that MAS’ supply chain is not in the pink of health, and some will argue it’s rotten to the core. People have commented that the airline is overpaying for a number of its supplies and services, and one wonders why has that been allowed to continue?
Is it because of vested interest in the form of politics or employees? Whoever is going through the contracts and the supply chain needs to hold one big red pen to point out what is being paid above and beyond what is fair value.
That is where action needs to focus on. Tackle the cost structure that is dragging the airline down. The quick fix will be on staff salaries but that is only the tip of it. If MAS staff cost as a percentage of total revenue is not the problem, then people who work for the airline shouldn’t be the ones paying for the legacy problems of structural inefficiencies within the supply chain of the company.
Furthermore, morale in the airline will be low and what MAS needs to do is to make sure that the mood and image of its airline is progressive amid the negativity from MH370.
Then MAS has to find a way to remain as a full service airline in the crowd of low-cost carriers. There is always room for such an airline in Malaysia, and being part of the One World Alliance will help MAS find its wings again.
If they do get the plan of action right, then expect the reverse of trading action to happen. MAS, although it has a lot to lose, could be the penny stock with the greatest potential on Bursa Malaysia.