MAS puts its faith in Boeing’s B737-800 as fleet workhorse

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KUCHING: Malaysian Airlines System Bhd (MAS) to refurbish its existing fleet of aircraft with cutting-edge fuel-efficient vessels as part of its new operations overhaul and commitment to the environment.CIMB Investment Bank Bhd (CIMB Investment) expected MAS’s replacement of old aircraft with new to transform its cost efficiency radically and lower its break even load factor and/or yield.

It added that profitability was expected to take a major step up which could be achieved in a few ways.

Per flight costs could be reduced because newer aircraft incorporated better technology and parts warranties were in force for the first three to five months of an aircraft’s life, highlighted the research house.

Besides, CIMB Investment stated that per seat costs might be lowered as a result of a potential increase in the number of seats which the replacement aircraft could accommodate due to improvements in seat design and technology.

Additionally, the introduction of longer-range narrow-body aircraft could better match capacity to demand on specific routes which did not have the traffic volume to fill up a larger plane, it suggested.

It stated these planes could also open up new business opportunities and might allow MAS to launch flights to destinations previously considered uneconomic due to relatively low traffic volume.

MAS currently employed 37 B737-400s for short-range domestic and regional routes which were on average 16 years old and they would be replaced by the B737-800 planes comprising 35 firm orders and another 20 options, the research house divulged.

On the other hand, it added MAS had 14 A330-200/300 planes with an average age of 14 years and 17 B777-200s with an average of 10 years for its medium-range segment for flights.

For long-haul flights of more than eight hours, MAS was currently utilising the B747-400 planes which were on average 12 years old but it was only operating 10 out of 13 leased units from Penerbangan Malaysia Bhd (PMB) as the remainder had been subleased to third parties, the research house noted.

CIMB Investment expected MAS to phase out all the 10 B747-400s in favour of the six new A380 orders.

In other developments, the research house assumed MAS would replace its old aircraft largely on a one-for-one basis as opposed to adding the new planes for expansion.

However, even under this one-for-one assumption seat capacity should grow as the new planes were likely to have more seats than the legacy aircraft, it highlighted.

The research firm revealed that they expected half of the short-haul fleet to comprise of the new B737-800s and the average age of this segment to fall  from over 14 years in 2009 to just under 10 years in 2012 and even further to below five years in 2013.

It added the medium-range fleet would see a combination of B777s and A330s with the latter aircraft making up some 26 per cent of the segment and an average of below 10 years by 2012, down from 11 years at the end of the last year.

CIMB Investment expected MAS to decommission all of its B747-400 fleet by 2012 with the arrival of five A380s in 2011 and the sixth and final one in 2012 for the long-haul segment.

Thus, the long-haul fleet would be 100 per cent new by 2012 with an average age of less than one year compared with 11 years at the end of 2009, it revealed.

The research house saw this as a very important factor as it believed the demise of the fuel-guzzling B747-400s would make a big difference to the profitability of the routes to Europe and Australia.

To recap, it expected 43 per cent of MAS’s fleet to be made up of new planes by 2012 and 64 per cent by 2013 and the average age to fall from 12.5 years at the end of 2009 to nine years by 2012 and a further six years by 2013.

CIMB Investment noted that the new B737-800 was about 20 per cent more efficient than MAS’s 15-year old B737-400 on a total cash operating basis including major savings on fuel consumption and maintenance.

It added the efficiency gap might be even larger on a per-seat operating cost basis as the B737-400s currently had a total of 144 seats comprising 16 first and 128 economy class seats.

On the other hand, Qantas’s B737-800s had a total of 168 seats comprising 12 business and 156 economy class seats, the research house noted.

It mentioned seat capacity would increase by 16.7 per cent if MAS adopted a similar seat profile for its fleet of new B737-800s.

Thus, 20 per cent cost savings on total cash operating costs plus a 16.7 per cent increase in seat capacity meant that per-seat costs could fall as much as 33 per cent as each legacy B737-400 was replaced with the new generation B737-800, highlighted the research firm.

It added the costs of ownership and / or leasing would consume some of the per-seat operating cost savings as MAS had stated its goal of owning one-third of its fleet, leasing one-third and either owning or leasing the final one-third depending on the availability of attractive financing options and its own balance sheet strength.

Residual per-seat costs might still fall by a ballpark 15 to 20 per cent after deducting additional costs comprising more expensive leases from the B737-800s and ownership-related costs such as depreciation and interest expense charges, the research house mentioned.

It stated that MAS revealed each A330 new-for-old replacement could generate operating cost savings of RM20 million per annum.

MAS might also choose to increase the seating capacity of the new A330-300s in order to generate additional per-seat cost savings on its new aircraft as new seat technology offered thinner padding on the backrest allowing airlines to squeeze more seat rows into the aircraft without impinging on customer legroom and comfort, CIMB Investment said.

It noted the current configuration of 282 seats for the B777-200 was an inefficient use of space relative to its peers as a similar plane at Cathay and Emirates was filled with around 19 – 23 per cent more seats while Thai Airways had 10 per cent more seats.

The A380 might be 15 to 20 per cent cheaper in terms of per-seat costs than the B747-400 although its per-flight costs were more expensive translated as 7 per cent more in terms of per kilometre fuel consumption, the research house pointed out.

It added that based on the seating configuration of peers like Qantas, SIA and Emirates the A380 had 25 to 36 per cent more seats than MAS’s existing B747-400.

Meanwhile, the airline also agreed to acquire the ownership rights to four legacy Boeing aircraft previously leased from PMB and agreed to buy over the ownership to the six A380s on order, reported the research firm.

CIMB Investment suggested the carrier estimated that the move to ownership of the six A380s and the four legacy Boeing aircraft would provide lease expense savings of RM71.2 million in 2010, RM156.3 million in 2011 and RM421.4 million in 2012.

It added the cash accretion was expected to be RM174.1 million in 2010, RM301.5 million in 2011 and RM728.3 million in 2012 and these savings were calculated on the basis of the difference between the costs of owning versus leasing and increased over time because the A380s were delivered in 2011 to 2012.

MAS was expected to own 22.5 per cent of its fleet and lease the remaining if all of the new aircraft deliveries were used to replace existing fleet on a one-for-one basis by 2012, pointed out the research firm.

It mentioned the ownership ratio would rise to 32.5 per cent in 2013.

CIMB Investment stated the end of calendar year 2010 (CY10) target price (TP) of RM3.00 was based on six times calendar year 2012 (CY12) core earnings per share (EPS) and financial year 2010 (FY10) reported net profit forecast had been raised from a loss of RM3.7 million to a profit of RM347.8 million.