MAS, AirAsia shares diverge after tie-up

KUALA LUMPUR: Amidst a small rebound in local equities which saw the FBM KLCI registering a 0.57% gain after three days in the red, shares in both Malaysian Airline System Bhd (MAS) and Air-Asia Bhd saw active trading after a two-day suspension as investors reacted to the share swap exercise between the two companies’ shareholders.

However, the two stocks pursued different paths. MAS rose to a three-month high of RM1.72 after gaining 12 sen or 7.5% from its previous closing price, while AirAsia shed 41 sen or 10.3% to close at RM3.54, merely a week after it reached an all-time high of RM4.14.

AirAsia was the most actively traded stock with 90.6 million shares changing hands while MAS was the third most active, with 57.3 million shares done.

The lopsided share price performance contradicted official views that the deal would be equally beneficial for both companies. Officials from Khazanah Nasional Bhd and Tune Air Sdn Bhd had earlier strenuously emphasised that no party would be “worse off” in the exercise.

“The pricing of both stocks will adjust by end of the week. At this stage, investors are overly caught up with news of the arrangement and they instead need to question if either airline stand to win in the long term,” an analyst told The Edge Financial Daily yesterday.

Though excitement over the exercise may continue, both companies may see a moderation in their share prices soon after the initial adjustment.

“As we receive more clarifications on the matter, I expect the shares (of the two companies) to resume their natural path. Both AirAsia and MAS are due to announce their 2QFY11 results and while AirAsia is expected to report decent figures, MAS’ performance could remain discouraging,” the analyst said.

Another analyst opined that investors may have gravitated from AirAsia to MAS, as AirAsia CEO Tan Sri Tony Fernandes charts a weightier presence on the latter.

“The selldown on AirAsia could have been driven by concerns that Fernandes will own more interest in MAS than AirAsia,” said an analyst from MIDF Research.

Under the comprehensive collaboration framework (CCF), Khazanah, which has a 69.5% stake in MAS, will take up a 10% stake in AirAsia through Tune Air, while the latter will acquire 20.5% of MAS.

There are concerns that AirAsia may lose its focus, as more attention is paid towards getting things back in order for MAS.

“With Tony now having a larger interest in MAS (in terms of shareholding), he has a strong incentive to turn it around, and add value to his and Khazanah’s investment in the national carrier,” another analyst added.

Khazanah will remain the single largest shareholder in MAS with a 49% stake. Part of the deal involves having MAS and AirAsia serve separate business segments, and effectively compete for different consumers.

MAS will focus on becoming a premium airline and transform its turboprop unit Firefly into a full-service carrier. AirAsia, on the other hand, will retain its focus as a regional low-cost carrier (LCC) while its subsidiary AirAsia X will remain a medium- to long-haul LCC.

This may prove advantageous for AirAsia rather than MAS, according to one analyst.

“With its location, Malaysia is best as a centre for LCCs and the government does impose some restrictions on foreign LCCs. With Firefly removed, AirAsia will be the only local LCC and they have a lot to gain from being in this sole position,” she told The Edge Financial Daily.

However, segmenting the two airlines does serve the deal’s core purpose, which is cut costs.

“We believe the distinct differentiation among the airlines will reduce the current competition, and encourage more cooperation and rationalisation of routes and frequencies,” said Affin Investment Bank in a report.

Khazanah has said that MAS and AirAsia currently overlap on 57 routes — or 70% of their combined capacity based on some estimates — proving that both airlines stand to gain from the cooperation.

“We believe there is a surplus in capacity on selected routes. (With the deal) there will be a clear demarcation of clientele and the business overlap will be reduced to nothing,” said Maybank IB Research.

Maybank earlier said both airlines can save as much as RM300 million to RM400 million annually.

The two airlines will aim to cut costs from collaborating in areas such as repair and maintenance, ground handling, training and cargo, as well as savings realised from aircraft purchasing, for which it will have better bargaining strength.

Some perceive MAS has more to gain from the cost cutting efforts, seeing how AirAsia is already running on a lean cost structure.

For 1QFY11, AirAsia’s cost per available seat kilometre (CASK) was 6.7 sen compared to MAS’ 15.6 sen.

“We think MAS will have bigger cost savings compared to AirAsia. If the synergies planned are executed effectively, we expect MAS to save at least 20% to 30% annually,” said an analyst

Moreover, the deal will also see both airlines evaluating new routes currently served by neither of them. Any financial impact, however, is unlikely to show in the immediate term.

Maybank foresees a long-term positive impact for MAS and upgraded the stock to “buy” from “hold”, and raised its fair value to RM2.70 from RM1.60. It maintained its “hold” recommendation on AirAsia pending updates from management.

“We are positive on this tie-up and both companies will have it good,” said Maybank. While Maybank and Affin opine that it is a “win-win” deal for both airlines, others seem less certain.

“There are significant problems in MAS that the agreement with AirAsia may do little to change. MAS is still severely overstaffed and have been slow to renew their fleet. They are latecomers to the game and have allowed themselves to be surpassed by Emirates and Singapore Airlines. There are still many things that are broken there, and the extent to which this new deal will fix things is still unknown,” said an industry observer.

The entry of Fernandes — who bought AirAsia for RM1 and turned it into an RM11 billion company in 10 years — will be a catalyst for MAS to restructure. The need to restructure was heightened after the national carrier saw a disastrous 1QFY11, where it registered a net loss of RM242.3 million compared to a net profit of RM310 million the year before.

AirAsia, on the other hand, saw net profit drop 23.3% year-on-year to RM171.93 million as it grappled with cost pressures despite enjoying strong passenger demand.

The two airlines may have shared a similar market, but operate on very different business models. It remains to be seen whether MAS will be able to benefit from the approaches and strategies AirAsia has relied on.

Additionally, it is crucial to note that the two airlines will remain rivals in some respect. “They are not combining, but competing in some cases and collaborating in some cases,” Khazanah managing director Tan Sri Azman Mokhtar had said on Tuesday.

The deal also ushered in new faces to MAS’ board. MAS managing director Tengku Datuk Seri Azmil Zahruddin Raja Abdul Aziz resigned on Tuesday to join Khazanah as executive director of investments.

Along with Fernandes, AirAsia deputy group CEO Datuk Kamaruddin Meranun, Symphony House Bhd CEO Azman Yahya, Tan Sri Wan Azmi Wan Hamzah of Land & General Bhd, IJM Corp Bhd CEO Tan Sri Krishnan Tan Boon Seng, Astro Malaysia CEO Datuk Rohana Rozhan and Axiata Bhd director David Lau Nai Pek are set to join an executive committee for MAS headed by its chairman Tan Sri Md Nor Yusof.

The effectiveness of this “A-Team” comprising reputed and experienced individuals may depend on the mobility they are given.

“It is naïve to think that the success in AirAsia can be emulated by simply roping in its best brains. It is hard to imagine that one will be given a free hand to run MAS in an entrepreneurial fashion,” said RHB Research.

RHB has a cautious outlook for the industry, given the current state of crude oil prices, which rose to a high of US$113 (RM339) per barrel in April and last traded at US$81.39, and the increased risk of a global recession.

The research house has not changed its earnings forecasts for either airline, and maintained a “neutral” recommendation for the sector.

The deal will also see both airlines issuing free warrants to shareholders, but of the other airline.

MAS shareholders will receive one AirAsia warrant for every 30 shares held, while AirAsia shareholders will be given one MAS warrant for every 10 shares held. The free warrants will have tenure of 2.5 years.

Unusual for corporate Malaysia, analysts welcomed the warrant exercise, which they say aligns the interests of minority shareholders with that of the major shareholders in having stakes in both companies.