Malaysia Aviation Group is on track to break even in 2023, but faces fuel and forex headwinds

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MALAYSIA Aviation Group Bhd (MAG), which reduced its net loss for 2021 by 60% year-on-year, remains on track to break even in 2023 under its long-term business plan term 2021-2025 (LTBP 2.0). However, Group CEO Captain Izham Ismail warns of headwinds from fuel and currency (forex) volatility, which could affect the target.

MAG, whose wholly owned subsidiaries include Malaysia Airlines Bhd (MAB), MAB Kargo Sdn Bhd (MABkargo), FlyFirefly Sdn Bhd and MASwings Sdn Bhd, reported a net loss of RM1.65 billion for the year ended December 31, 2021 (FY2021), a significant improvement from the previous year’s net loss of RM4.1 billion when it faced the effects of a slowing global economy and travel restrictions.

Izham, who is also group managing director and CEO of national carrier MAB, says the net loss for the 2021 financial year exceeded its internal estimates for a net loss of RM1.94 billion, as it benefited from the results of ‘a debt restructuring exercise which saw the group’s liabilities reduced by over RM15 billion and reduction of RM10 billion in debt. A capital injection of RM3.6 billion from its majority shareholder Khazanah Nasional Bhd also gave the group a boost in the arm.

The group achieved positive earnings before interest, tax, depreciation and amortization (Ebitda) at RM433 million in financial year 2021, compared to negative Ebitda of RM1.76 billion in financial year 2020.

The leaner MAG maintains its full-year 2022 target of halving net loss with hopes of breaking even by 2023.

“We maintain the objective. However, this is subject to the fluctuation of fuel price and forex, which has [a] significant impact on group spending,” Izham says in an email response to questions from The Edge.

He says that in the 2021 financial year, the aviation group was experiencing an average daily operating cash burn of RM1.2 million. “MAG turned the corner and was cash positive in 4Q2021 and we [have been] in a cash neutral position year to date through March 2022.”

In addition to the successful restructuring, he attributes the positive Ebitda recorded in fiscal 2021 to the strong performance of freight revenues and tight cost management.

Despite a decline in passenger traffic and a reduction in MAG’s capacity of 62% and 70% respectively in 2021 due to continued travel restrictions, the group has managed to earn more money from its air cargo segment considering strong global demand, which has led to an increase in the use of freighters and cargo holds via passenger-cargo flights. MABkargo’s revenue jumped 52% year-on-year to a record RM3 billion in fiscal 2021 from RM1.98 billion in fiscal 2020, with returns growing on average by 12%.

Izham also credits the cash flow improvements to MAB going to market responsibly with its “active return, passive load factor” strategy, adding that it is “working well”. MAB outperformed passenger revenue by 57% last year.

A successful restructuring propelled its full-service counterpart Philippine Airlines to post a profit for the first time since 2016, with its parent company PAL Holdings Inc reporting a net profit of PHP59.1 billion for the 2021 financial year, compared to a loss net of PHP 71.8 billion in the previous fiscal year. year.

Low-cost airlines such as financially troubled Capital A Bhd, formerly AirAsia Group Bhd, are also eyeing a return to profitability next year, in line with the recovery in travel demand. Based on Bloomberg consensus estimates of all analysts tracking Capital A’s earnings, its net loss of RM3.12 billion for fiscal 2021 is expected to narrow to RM1.5 billion and 9.9 million. RM respectively for the financial years 2022 and 2023 before generating a net profit of RM 120.5. million in fiscal year 2024.

Multiple risks could derail the airline’s recovery

“We remain optimistic about the future of MAG [and] cautiously optimistic about the environment. Returning to positive cash flow is a crucial step on the road to recovery for airlines. Restructuring [that MAG] undertaking in 2021 has given us the opportunity to comprehensively repair our balance sheet and address legacy issues spanning decades,” says Izham.

“Lower operating costs thanks to cost reduction initiatives across the group and lower rental costs after the successful restructuring have further contributed to the improved performance in 2021,” he adds. .

Izham notes that since the government announced the reopening of Malaysia’s borders from April 1, MAG has seen a positive response from travelers keen to resume their travels.

“Since the announcement, ticket sales have shown substantial growth of over 100%.

“We are currently looking at very encouraging advance bookings on MAB, with over 80% fill on most flights. Top destinations are Kuching, Kota Kinabalu, Sandakan, Tawau, Kota Baru and London. We are increasing our capacity in preparation for the opening of borders to international destinations as we expect international travel demand to increase in the coming weeks,” he said, adding that the airline expects to restore over 70% capacity at pre-pandemic levels this year.

Still, he warns that while the drivers of national economic activity are strengthening, the group faces headwinds from high fuel prices and overcapacity. “This will put enormous pressure on our financial performance, as we must carefully balance increasing capacity and profitability.”

According to him, fuel prices at current levels of $110-130 a barrel represent 40-45% of the group’s total operational costs, an increase of about 35-40% from a year ago. Price data from energy information provider Platts shows the price of jet fuel was US$174.40 a barrel on April 29, up 149.4% from a year ago.

Rising fuel prices have forced airlines such as MAG, Capital A and Batik Air – formerly Malindo Air – to reintroduce fuel surcharges on passengers and air cargo since March.

MAG also faces headwinds from fluctuating exchange rates, as the bulk of its spending, 47%, is in US dollars; thus, a weaker ringgit will have a negative impact on the group’s financial performance, Izham says.

The ringgit weakened against the US dollar to 4.36 on April 25 – the lowest since May 2020 – and continues to hover at that level.

As the International Air Transport Association (IATA) announced last week, March passenger traffic demonstrated that the recovery in air travel is continuing. “The impacts of the conflict in Ukraine on air travel demand were quite limited overall, while the Omicron-related effects continued to be largely confined to Asian domestic markets,” he said.

Asia-Pacific airlines recorded a 197.1% increase in traffic in March, measured in revenue passenger-kilometres, compared to the same month in 2021. This is an increase from the gain of 146.5% recorded in February this year compared to February 2021.

“Continue to assess opportunities for MABkargo”

Regarding the progress made in the search for a strategic investor for MABkargo, Izham indicates that the group continues to evaluate opportunities for strategic partnerships for its various activities. Last year, MAG hired Standard Chartered Bank to explore strategic options, including a possible stake sale to strategic investors for MAG’s wholly-owned air cargo unit.

“Announcements will be made as and when,” he adds.

Last October, Bloomberg, citing people familiar with the matter, reported that MAG was considering selling a minority stake in its air cargo unit to a strategic partner.

Izham told The Edge in a December 2021 interview that the establishment of strategic partnerships is aligned with the five strategic pillars of the LTBP 2.0 group: becoming a premium carrier in Asia-Pacific, winning back the domestic market and growing. ASEAN, deepen commercial partnerships, diversify its stream revenues, and make digital the cornerstone of its business.

MABkargo provides belly space capacity on the MAB passenger fleet as well as dedicated cargo space with three Airbus A330-200 freighters. MABkargo’s latest filing with the Companies Commission Malaysia shows its net profit jumped 94% to RM351.12 million in FY2020 from RM180.54 million in FY2019 , while revenue grew 56% year-on-year to RM1.98 billion from RM1.27 billion.

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