Brahim’s expected to be affected by Malaysia Airlines restructuring

PETALING JAYA: Brahim’s Holdings Bhd’s new term business is expected to be affected once Malaysia Airlines’ (MAS) migrates its operations to a new company (Newco) by July next year.

According to AllianceDBS Research, when MAS migrates its business to the Newco, the ailing airline company is expected to renegotiate its supply contracts, including the catering contract with Brahim’s subsidiary, Brahim’s Airline Catering Sdn Bhd (BAC),

“There is unlikely to be compensation for any breach of supply contracts because there will be limited equity capital left in the old company once the selective capital repayment is completed.

“We also expect renewed emphasis on revenue yield management, which will put an end to its current aggressive promotional fares. These measures will hurt BAC’s sales volumes,” said the research house in a note yesterday.

It expects earnings to contract by 22% and 11% in Brahim’s 2014 and 2015 financial years ending Dec 31 respectively. The research house however projects earnings to grow by 15% in 2016. Brahim’s sources up to 75% of its sales from MAS’ inflight meals.

AllianceDBS also noted that regional flights typically consume less meals vis-à-vis long-haul flights, while the focus on yield management would lead to higher fares and lower load factor/passenger traffic going forward.

“BAC is unlikely to be able to secure new contracts from other airlines to fill the void left by MAS, especially not in the near-term. While passengers could theoretically switch to other airlines which could in turn ramp-up capacity to gain market share, we believe this is unlikely to happen.”

According to the research house, the strong passenger traffic in 2013 was mainly driven by MAS’ aggressive fare promotion. But this had led to industry-wide yield compression, which had in turn dragged airlines’ profitability.

“As such, we expect the other airlines to take the opportunity (arising from MAS restructuring) to lift fares again to more sustainable levels. Also, the other airlines will feel less need to cut fares given MAS’ renewed focus on yield management.

“However, the anticipated higher industry-wide airfares would make travel more expensive and reduce passenger traffic, and consequently, demand for BAC’s in-flight meals.”

All of these factors, said AllianceDBS, would not bode well for Brahim’s.

“Adding salt to the injury, Brahim’s has to service a large term loan which it took in 2013 when it acquired 34.3% effective stake in BAC.

“The group has since refinanced the loan with a lower-cost term loan, but we estimate the annual interest expense still amounts to RM11mil per annum.

“This financial leverage will weigh on Brahim’s bottomline should the in-flight catering business slow down substantially.”