Research houses downgrade MAS

Several research houses have downgraded their recommendations on Malaysia Airlines (MAS) to "sell" after the carrier posted larger-than-expected losses for the second quarter ended June 30 on higher fuel costs.

"Capacity rationalisation will be undertaken in the near term to stop the bleeding but we expect limited results as jet fuel cost has remained stubbornly high," said ECM Libra Investment Research in its Results Review.

"We are slashing significantly our forecast earnings for 2011 and 2012 to reflect the expected poor performance to come," said MIDF Research in its Equity Beat today.

ECM Libra said fuel cost increased 40.7 percent year-on-year in the second quarter and MAS was not able to have it covered by traffic growth of 11.7 per cent.

"What surprise us was the minimal 1.2 per cent year-on-year increase in revenue yield to 24.2 sen which suggests lack of pricing power and/or predatory pricing to compete with low-cost carriers," it said.

It noted MAS' plan to maximise revenue via dual pricing and proactive flight planning and a change of focus over the medium term to the long-haul premium business while rationalising regional routes.

However, ECM Libra said it was not sanguine on MAS' new strategy due to lack of detailed implementation plans, continued intense competition by Singapore Airlines and impending establishment of new Pan Asian airline by Qantas.

It said estimating MAS' earnings would be like shooting in the dark.

"Nevertheless, at the risk of being too conservative, we are cutting financial year 2011 to 2013 estimates aggressively by 28 to 56 per cent by assuming minimal capacity growth on MAS," it said.

Meanwhile, MIDF Research said it was surprised that MAS was now looking at cutting capacity in Asean "as we understand that had been one of its strategy for growth".

"However, management allayed our concern by indicating that it will be suspending the Asean non-profitable route. We believe this will alleviate the fuel cost burden in the short term."

At the same time, MAS also planned to set up a regional full service carrier.

However, MIDF Research said, this would be in the long term and would not have an immediate impact to earnings. -- Bernama