KUALA LUMPUR: Maybank Investment Bank Research is maintaining its negative outlook on the aviation sector after the US Federal Aviation Administration (FAA) downgraded Malaysia to Category 2 on safety concerns.
The research house said on Tuesday the immediate impact is Malaysia’s carriers cannot open new routes to the US and existing flights can continue but will be closely monitored.
“The longer-term impact will be far-reaching. Some of the possible impacts are: (1) the public perception of the safety of Malaysia’s carriers turns negative; (2) Malaysian pilots and engineers are not employable outside Malaysia; (3) a loss of MRO business; (4) insurance premiums soar; and (5) aircraft leasing rates increase.
“We are Negative on the sector and this news further underpins our view, ” it said.
Maybank Research said the market would take this FAA downgrade news negatively; expect downward pressure on carrier share prices.
“We think AAX will be worst off as it is the only local carrier that has scheduled services to the US (Honolulu). Although AAGB and MAHB are not directly implicated, some investors might be uncomfortable with the negative safety perception and selldown the shares, ” it said.
The research house explained that FAA conducted a surprise audit on Civil Aviation Authority Malaysia (CAAM) in April 2019 and concluded that there are enough reasons to downgrade the country rating to Category 2.
This is the first time in Malaysia’s history that it has been dropped from the top-tier safety status.
This could potentially cause a knock-on effect as other regional aviation administrators might take heed of the FAA revised rating and decide to impose restrictions on Malaysian carriers as well.
“Can this be remedied swiftly? The honest answer is “No”. Central to the FAA audit finding is that there is a lack of manpower.
“The time required to train a qualified staff is long. The government will have to disburse significant resources to address the shortcomings as CAAM does not even have sufficient revenues to cover its operating cost.
“Furthermore, a follow-up audit will be determined and scheduled by the US FAA, not by Malaysia. We think it will take two years at best to get back the Category 1 status, ” said Maybank Research.
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