MAS could cut 25% of capacity in 2015

PETALING JAYA: Malaysian Airlines System Bhd is expected to cut as much as 25% of the capacity of its network in 2015, which would spell bad news for Malaysia Airports Holdings Bhd (MAHB) as 2.2 million seats vanish from its airports, all of which are international passengers that provide the highest revenue per passenger.
Maybank Investment Bank Research analyst Moshin Aziz estimates MAS, which had indicated plans to focus on regional routes within the sphere of Asia and Australia, to terminate up to six international routes namely Paris, Amsterdam, Frankfurt, Istanbul, Dubai and Kunming.
He also reckons that MAS to further cut or reduce another routes – Sydney, Melbourne, Darwin, Brisbane, Kochi and Osaka – as part of its restructuring plan.
"We estimate as many as 18-19 aircraft will need to be taken out of the fleet due to these route cuts alone. For MAHB, this is bad news as 2.2 million seats will vanish from its airports, all of which are international passengers that provide the highest revenue per pax," he said in his report last Thursday.
However, he said this could be partially but not completely be off-set by higher frequencies by the other non-Malaysian carriers into KLIA.
Moshin said the routes cut will shift the market equilibrium and support higher load factor and yields. However, industry traffic growth will soften to a low single-digit for the next 12-18 months.
"This is positive for the airlines as profits will grow appreciably. However, this will be negative for MAHB as traffic growth will slow down relative to its historical growth rates," he said.
Moshin pointed out that the aviation industry's international sector capacity are still at historical highs with no noticeable capacity cut.
On the other hand, MAS has already started to cut capacity for the domestic sector after it reversed its growth plans with a 9.7% reduction in July this year compared from a year ago.
"We believe the domestic sector will continue to incur capacity reduction of a similar quantum for the next 6-9 months, based on management statements to the press," he said.
Moshin believes that MAS will undertake the massive capacity cuts after Chinese New Year which falls on Feb 9, 2015.
"The third and fourth quarter and the CNY are peak periods for MAS and it would have sold a significant amount of inventory already. Therefore, it is very punitive to make flight cancellations during this period due to costly rerouting of existing customers and not to mention the reputational damage," he said.
Despite the initial market optimism regarding MAS' restructuring, Moshin does not think that it will bring a significant positive impact on the aviation industry in the second half of 2014 (2H14) as the industry is still saddled with overcapacity on the long-haul sectors.
"We forecast the industry will endure further yield decline in 2H14, albeit at much less compared to 1H14. The exception to this is AirAsia, we forecast 4.4% year-on-year yield growth in 2H14 as it is purely focused on the short-haul sector.
"The reversal of fortunes for the airline industry will likely happen at the end of Q1'15 or Q2'15 at best," he added.
Moshin expect industry yields which declined by 4.2% in 2014, to recover in 2015.
"Going into 2015, yields should recover as MAS will cut significant capacity and filter the excess in the system. Furthermore, demand is expected to remain robust thanks to sustained gross domestic product (GDP) growth of 5%.
He reckoned that MAS will enjoy the highest year-on-year yield growth in the industry next year and assuming the said routes are terminated, this will reduce MAS' average stage length by 13%-15% in 2015.
Moshin said this alone will support yield growth of about 13% as shorter flights have a higher yield.
In addition, he said, the capacity cuts on existing routes will also help to elevate the yields even more. "Overall, we forecast MAS yields will grow by 15-20% in 2015," he said.
Mohshin also forecast's AirAsia's yield to grow between 5%-7% in 2015, driven by higher average fare and growth in ancillary income.
"MAS has cut capacity in the domestic sector since July 2014, and this will swiftly support higher yields for AirAsia whereby domestic sector makes up about 60% of budget airliners business.
For the long haul budget carrier, AirAsia X, he has forecast yield to expand by 10%-13% in 2015, driven by stabilization and maturing routes.
"AirAsia X will be a beneficiary of MAS' restructuring, especially for its Australian and Chinese routes," he noted.