MAS’ second route, capacity cuts will widely impact sector

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The impact of the upcoming second wave should be more pronounced with frequency reductions on several regional routes and termination of two routes such as Kuala Lumpur to Brisbane and Male.

The impact of the upcoming second wave should be more pronounced with frequency reductions on several regional routes and termination of two routes such as Kuala Lumpur to Brisbane and Male.

KUCHING: Analysts opine Malaysia Airlines’s (MAS) second wave of route and capacity cuts is expected to make a more prominent impact on the overall aviation industry.

Maybank Investment Bank Bhd (Maybank IB Research) said the first wave of route cuts was immaterial and has no noticeable impact on other domestic airlines such as AirAsia Bhd (AirAsia) and Malindo Air, as these are thin routes with only a handful of players.

However, the research firm pointed out that the impact of the upcoming second wave should be more pronounced with frequency reductions on several regional routes and termination of two routes such as Kuala Lumpur to Brisbane and Male.

“The airline industry is a very competitive industry. Any changes in the number of flights will quickly shift the supply-demand dynamics and greatly impact on overall load factor and yields.

“There is a fine equilibrium and it will quickly shift whenever any of the variables have been altered,” the research team said in a note yesterday.

As such, it said the second wave of route cuts, which is directed more towards the regional and Australian routes will be a shift in market equilibrium as these routes intersect with AirAsia, AirAsia X Bhd (AirAsia X) and Malindo Air’s portfolios directly.

It believed load factor and yields are likely to rise for the three carriers, and the quantum of impact will vary according to how big and how well served the route is.

Maybank IB Research also expect more route cuts to be announced in the coming months due to the vast headcount cut at MAS. Of note, MAS needs roughly 45 to 55 employees per flight.

“We believe MAS will have to announce even more route cuts and capacity reduction due to its extensive headcount reduction which involves 6,000 employees by end-August 2015.

“This will benefit the industry to weed out excess capacity, cut wastages, boost load factor and reverse the declining yield trend,” the research team opined.

The biggest beneficiary to this possible upcoming cut is AirAsia as it has the most route overlap with MAS, Maybank IB Research said. This is followed by Malindo Air, AirAsia X, and to a lesser extend Cebu Pacific.

On the flip side, Malaysia Airports Holdings Bhd (MAHB) might bear the brunt of this route and capacity cut as it will reduce its traffic volume.

The research team noted, “These developments by MAS are not positive for MAHB, but nonetheless it is expected.

“Our base forecast for MAHB has largely prized in the risk of capacity cuts by MAS and therefore we retain our earnings forecasts and ‘hold’ recommendation.”

All in, Maybank IB Research said, “We think the next two months (July to August) will be packed with announcements by MAS.

“MAS has to provide two to three months forward notice before it can terminate routes in order to manage its customers’ booking schedule and therefore this is the applicable window time.

“This material newsflow could potentially provide a re-rating to the sector, in our view.”