KUCHING: Malaysia’s first hybrid airline, Malindo Airways Sdn Bhd (Malindo Airways) is expected to affect the financial performance of aviation juggernauts Malaysia Airline Holdings Bhd (Malaysia Airlines) and AirAsia Bhd (AirAsia) when it commences operations on March 22, 2013.
To recap, Malindo Airways successfully received its air operator certificate (AOC) and will be starting flights from Kuala Lumpur to Kuching and Kota Kinabalu by end-March.
According to analysts from RHB Research Institute Sdn Bhd (RHB Research), Ahmad Maghfur Usman and Jerry Lee, “The group will kickstart operations with two aircraft by flying to Kuching four times daily and Kota Kinabalu three times daily from Kuala Lumpur.”
With more aircraft deliveries coming in, the airline had targeted to operate 10 aircraft by the end of this year with planned destinations from Kuala Lumpur to Miri, Sandakan, Bintulu and Sibu.
“Currently, Malindo Airways is promoting a one-way promotional air fare as low as RM38 to Kuching from KL and RM68 to Kota Kinabalu. This is much cheaper than the RM79 and RM89 AirAsia is offering respectively,” they noted, adding that Malaysia’s flag carrier offered all-in fares for the similar routes at RM159.
The analysts noted that Malindo’s strategy of competing in the local landscape by offering full service at the low-cost pricing was reminiscent of that of Firefly Sdn Bhd, which were loss-making despite churning high loads.
However, they predicted that Malindo would operate at high cost base during the initial start-up period but “it’s only a matter of time” that the airline would stop offering low fares in the longer term.
Comparing Malindo Airways with AirAsia and Malaysia Airlines, the RHB Research analysts noted that AirAsia flies 14 times daily on the KL-KK route while Malaysia Airlines flies 11 times daily. On the other hand, the KL-Kuching route saw AirAsia and Malaysia Airlines fly 14 times and seven times daily respectively.
“Assumming a consistent schedule throughout the year for the two operating airlines on both routes, this would represent 15 per cent of AirAsia’s total available seat kilometres (ASK) and six per cent of Malaysia Airlines’.”
On a profitability level, for AirAsia, assuming an average yield of 26 sen per revenue passenger kilometre (RPK), a load factor of 70 per cent and a cost, of 11.58 sen per ASK, the analyst believed that both routes would fetch a total revenue of RM873 million and earnings before interest, tax, depreciation, amortisation and restructuring or rent costs (EBITDAR) of RM319.7 million in financial year 2013 (FY13).
He noted that the figures would account for 16 per cent and 18 per cent of AirAsia’s FY13 revenue and EBITDAR respectively – possibly representing one of the biggest route earnings contributors.
“The downside, assuming a worst bearish case scenario – seeing a 30 per cent yield compression from these routes with loads weakening to 60 per cent, this would represent a huge downside risk in EBITDAR, which would drop to RM22 million.”
Thus, the analysts estimated a base scenario would see yields from these two routes compressing by 15 per cent and loads at 67 per cent given Malindo’s small fleet size, which would see its EBITDAR from these two routes dropping to RM185 million.
For the case of the flagship carrier, Malaysia Airlines, the analysts deemed it ‘a little bit tricky’ to provide an accurate estimate due to the fact that it expected its cost of available set-kilometres (CASK) to improve sharply in the midst of its turnaround.
“We understand that all of Malaysia Airline’s routes are profitable except for Sandakan. With Malaysia Airlines’ generating higher yields due to its premium offerings and at lower capacity we reckon that profitability levels on the EBITDAR line will be similar to AirAsia.”
As such, the analyst forecast Malaysia Airlines to achieve an EBITDAR of RM2.826 billion in FY13.
Overall, the RHB Research analysts noted that while the year 2013 would see new challenges with Malindo’s entry set to take a hit on airlines yields, earnings outlook looked more promising this time around despite the disappointing results in FY12 on the back of higher staff and maintenance costs.