Firms whose fates are linked to MAS

  • Business
  • Saturday, 09 Aug 2014

Brahim's Airline Catering staff dishing in the meals into trays before it is put in the chiller.

WITH the turnaround of Malaysia Airlines (MAS) set to get underway, the implications on the national carrier will be enormous. Going by what Khazanah Nasional Bhd – the majority shareholder and offerer to take the company private – has alluded to, nothing short of a complete overhaul of MAS is expected.

Khazanah has hinted that all aspects of MAS need to be revamped, from its operations to business model to its finances, regulatory environment and human capital.

“Nothing less will be required in order to revive our national airline to be profitable as a commercial entity and to serve its function as a critical national development entity,” said Khazanah in a statement.

With such an exhaustive to-do list, all eyes will gravitate towards how the impending changes in MAS will have an impact on not just its own operations, but also of the companies that rely and compete with it.

Brahim’s Holdings Bhd, which sources up to 75% of its sales from MAS inflight meals, for instance, will be on the radar of investors. Although the company has a 25-year contract with MAS, it will bear watching if terms of its deal with MAS would change.

As at the end of last year, catering costs amounted to 1.8% of MAS’ overall expenditure, a figure that does not look imposing. However, when a comprehensive restructuring is involved, every little bit counts.

The other issue on the demand for inflight catering will also be incumbent on the number of flights MAS flies. Should MAS undertake a route rationalisation, then Brahim’s will have to bear a hit. Given that its margins from inflight services are among the highest in its business, then whatever capacity cuts could exacerbate the impact on its accounts.

To mitigate the risks associated with its dependence on MAS, Brahim’s has been inking deals with other foreign airlines, and now caters inflight meals to more than 30 airlines.

It has been reported that Brahim’s signed up six new airlines last year and is targeting three more foreign airlines after signing up Lufthansa earlier this year.

While the inflight catering business will remain its mainstay, Brahim’s has been busy looking for opportunities to expand its other businesses.

Cuts in the number of flights will also impact Petronas Dagangan Bhd. The fuel retailer currently controls about 77.6% of Malaysia’s jet fuel market, with the KL International Airport (KLIA) as its main customer and MAS, arguably, its biggest customer.

Although Petronas Dagangan could make up the drop in demand for jet fuel from the reduction in flights operated by MAS by supplying fuel to airlines that could increase flights, the question is whether it would be a direct swap in terms of demand.

Petronas Dagangan’s share price has been hit in recent months because of concerns over its earnings, as operating expenses have risen strongly. Coupled with lower dividends, any drop in revenue from its jet fuel business will be another unwanted development for the company.

Petronas Dagangan, though, is looking at expanding its sales at international airports, where it currently provides jet fuel at Heathrow in London, Hong Kong and Denpasar, Batam and Pekan Baru in Indonesia.

Any reduction of flights could also see Malaysia Airports Holdings Bhd (MAHB) getting hit, as the consequence would be a reduction in revenue it collects from the national carrier and the passengers it carries.

As it stands, passenger movement at KLIA was down 4.5% in June this year compared with the same period last year, with the bigger decline of 5.4% seen in international traffic compared with a drop of 1.5% for domestic travel. This was likely caused by the MH370 disaster, with the July figure likely showing the impact of MH17 on passenger movement.

For the six months to June, the number of passengers travelling through KLIA was up 9.2%.

But the issue will likely be temporary, as the slack in supply is often taken up by competitors. There will be a transition period though before the number of passengers lost through any route rationalisation by MAS are filled by other airlines.

One analyst points out that overall passenger movement at airports managed by MAHB have tended to rise despite previous route cuts by MAS.

The prime beneficiary of any cuts in flight routes will be AirAsia Bhd and AirAsia X Bhd. Analysts say that previous cuts that saw a drop in passengers carried by MAS have seen a correlation with an increase in the number of people flying on AirAsia.

AirAsia too is increasing its capacity with the delivery of new planes and the period of turmoil within MAS linked to its turnaround will be capitalised by the low-cost carrier.

Analysts say that MAS would need to contain its cash burnrate, as the culling of unprofitable routes would certainly figure in its plans. With Malaysia still key to AirAsia, lost routes to nearby destinations would be plugged by AirAsia and longer destinations by AirAsia X.

Related stories:

Taking the knife to MAS

Big cut in human resources likely at MAS

Timeline of the key events over the last 5 years

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