Saturday, March 24, 2012

Which "Cash call" route will MAS go for this time?

Airline is a very brutal industry. Almost every country has at least an airline for itself, some countries just too many. Hence, competition is fierce especially with some airlines either state-owned or at least subsidized. For example, how do you compete against a state-owned Qatar Airways for a country that can afford to host a (football) World Cup with less than a million population. Another example is UAE - another small country with two large state-owned airlines in Emirates Air in Dubai and Etihad Airways in Abu Dhabi. Airlines in essence sometimes becomes national pride for very rich countries.

Then, the other tough thing is national service. It is almost very common for non-profitable routes created due to country's bilateral arrangement - one example is the Johannesburg's route was in existence due to Malaysia's bilateral relationship with South Africa. In my guess, it is probably a much non-profitable route, otherwise why would MAS terminates it. 

(There are many more national service cases, which I do not want to talk about as can be sickening.)

Supply duopoly and cartel
Against so much tough competition, you would want to look for your ability to squeeze your suppliers. the airline business, how do you squeeze your only 2 major airplane suppliers - Boeing and Airbus. Another high costs component, fuel - and we already know what OPEC as well as speculation can do to fuel prices.

Union and manpower costs
Another major costs for airlines - manpower costs, with most airlines having very strong union (MAS included) and for their top brackets wage earners - the pilots (high costs)! Ever wonder why Micheal O'Leary (CEO for the very profitable Ryanair) suggested for airplanes to be piloted by only one pilot for its planes rather than the current practice of more than one - I don't think its a joke but is more of a message on costs.

Hence, in essence airline companies that are not nimble would be tough to manoeuvre as they are facing headwinds from all angles. These are exactly what MAS encounters, not to include competitions from low costs airlines which are growing in numbers and getting more popular.
In US and many other parts of the world, bankruptcy is quite common for an airline company. This is what is faced by American Airlines (AA) which filed a Chapter 11 late last year (similar to bankruptcy protection in Malaysia).

Recently, MAS reported very bad numbers for FY2011 - for a period even before gas fuel prices goes sky high - to USD133 / barrel (latest numbers by IATA). Hence, from those bad numbers reported by MAS, in a battle among the FEEBLES, I took out latest numbers from AA to compare.

Comparison between MAS and American Airlines numbers

MAS' liquidity is worse than AA's!

For any company that faces concerned liquidity position, two most important ratios are studied - working capital and acid test. In both comparisons, MAS registered much poorer liquidity ratios than AA. Working Capital and Acid Test ratios for MAS was 38.6% and 33.4% respectively against AA which registered 60% for working capital and 50.3% for Acid Test.

The only thing MAS shows better numbers than AA in its balance sheet is Shareholders Equity. Now, for sure, MAS liquidity is very stretched. This is why in their statement from the 4th Quarter 2011 results, they mentioned that they are in the midst of looking for additional funds to shore up its balance sheet (read below).

The question now is to raise from who and how? Bonds, preference shares, bank loans (err...which bank would loan la - they only want the arrangement fee - CIMB again?)? Who is to participate if the company is to be continuously in the red for a long stretch. There is a mention of rights issue. Will the minority shareholders participate? Together with Tune Air (yet to be approved), the government (through Khazanah and EPF) controls 80% or more of MAS. Will Tune participate if the share swap is approved? And Will the government rescue MAS again?

If all is well with one of the few questions above solved, one question remains - how is it that MAS can be valued at RM4.5 billion (price: RM1.35), FOR A COMPANY THAT DESPERATELY NEEDS CASH INJECTION! (For comparison, AA is now valued at less than USD150 million! - and Quek Leng Chan probably lost quite a bit of money there)

Minorities, this is the time to sell fast as there is probably going to be a cash call and the participation is not going to be worth it. In any case, it is not worth the price now - Or do you still believe that the government is your Santa Claus?


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