MAS hits turbulence after smooth flight


  • Business
  • Saturday, 18 Jan 2003

BY B.K. SIDHU

The year 1990 was Visit Malaysia Year. Planeloads of tourists were arriving and Malaysia Airlines (MAS), being the national carrier, was enjoying brisk business. 

Indeed, MAS was flying high along with other regional players such as Singapore Airlines, Qantas and Cathay Pacific in the early 1990s, with load factors at a healthy 70%. But the same cannot be said for its share price, which has yet to re-scale the heights reached on Jan 2, 1990. 

MAS was worth RM11.40 (price has since been adjusted to RM10.88) a share at the start of 1990. An investor who had bought one lot then would find his investment halved, even after factoring in dividend payouts of RM1,185 over the last 13 years. Minus the dividends the capital loss would be RM9,280. 

If the RM11,400 had been placed in fixed deposit for the last 13 years, the amount would have more than doubled today. 

During the 13-year period since 1990, MAS offered one rights issue, 1-for-1 at RM5, in 1992. For the past two years it did not pay dividends. 

In early 1990, the outlook for the airline industry was looking up. But in August Kuwait was attacked by Iraq and that changed the global scene, with the airline industry particularly hard hit. Jittery investors dumped airline stocks. 

Brent crude oil was selling at US$40 per barrel in September–October then and jet fuel prices were rising. Operating costs shot up as airlines had to use longer routes to bypass the war zone in the Middle East. 

But after the short-lived war, prospects brightened again; and 1993 was a good year with the super bull run, but the highest that the MAS share price could scale was RM9.40. 

In 1994, the government decided to privatise MAS though the sale of a block of shares to Tan Sri Tajudin Ramli. Naluri Bhd, the vehicle used by Tajudin, paid RM1.79bil or RM8 a share for a 29.09% stake in MAS. 

A year later, MAS decided to modernise its fleet and placed orders for 25 new aircraft worth RM10bil, to be paid for through borrowings. MAS was in a vulnerable position when the Asian financial crisis struck in 1997. 

Overall load factors plummeted to their lowest levels in 13 years at 60.8% for the financial year (FY) ended March 1, 1998. 

It was reported that by 2001, MAS was in dire straits. It had close to RM9bil in debt, and accumulated losses of RM2.6bil. 

Early that year, the government regained control of MAS, paying Naluri RM8 a share. This caused a stir in the marketplace as MAS shares then were worth less than RM4. 

Datuk Md Nor Yusof was given the task of turning the ailing airline company around. Months into working out a plan the airline industry fell into a tailspin with the terrorist attacks on the US on Sept 11, 2001. 

A rescue plan for MAS was being hammered out even as the global industry itself was seeking to take off again following the attacks. 

In July last year a complex reorganisation was announced. The government took over the assets (aircraft, properties and domestic operations) and liabilities of MAS. The national carrier would concentrate on international operations and manage the domestic operations for a fee. Today, MAS is 69%-owned by Penerbangan Nasional Bhd (PMB). 

What went wrong at MAS, which once prided itself on its “golden service”? 

It was simply a mismatch between earnings and expenditure. Earnings were mostly in ringgit, while expenditure (jet fuel, aircraft maintenance, and ground handling, among others) was in US dollars. The dollar went above RM4 in 1998 before it was pegged at RM3.80. 

When MAS made new aircraft orders in 1995, the costing was based on RM2.50 to US$1, but it ended up paying RM3.80 to US$1, or RM1.30 more. 

After four successive years in the red, MAS simply could not sustain the losses anymore; it became difficult to move forward. But one thing for sure, it did not default on interest payments or capital repayments. If the government had not come in it would have had to contend with a bigger problem. 

MAS slipped into the red for the first time since 1990 in FY1998. After five consecutive years of losses, it made a turnaround to net a modest profit of RM1mil for the second quarter ended Sept 30, 2002. 

But the MAS of today is a different corporate entity. It is asset light; there are no aircraft purchases or debts to drag it down. By end-March it would have over RM600mil in its coffers. It has reorganised its flight scheduling to concentrate on lucrative sectors and is also in the midst of upgrading its aircraft. 

As MAS managing director Md Nor put it: “If previously the emphasis was on quick visibility and presence around the world, it is now about developing and penetrating markets that provide high yields.” 

Yields. That is what MAS is after. For FY2002 the unit yield per international passenger kilometre was 17 sen, and for FY2003 it is expected to be about 17.7 sen. A one sen increase in yield brings in about RM300mil in revenue. 

There is a lot of value being created, but MAS is on a journey and its destination is still some distance away. For the share price to re-scale RM11.40, the long-term investor may have to wait a while. 

But one positive development in the offing is MAS’s return to the black by March this year when, after five consecutive years of losses, it expects to report RM94mil in pre-tax profit for FY2003. 

That would truly be a new beginning. 

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