AA-MAS Deal: Rakyat are The Only Losers

This is a follow up on a previous post dubbed: http://aboiwealthpot.blogspot.com/2010/12/flying-above-rest-airasia.html. I once suspected (with numerical evidence) based on Dali's argument that MAS will require some form of bailout from the government like most govt initiated "national project" on the basic of debt servicing. This time they the govt really had it going with tax payers money on the run.

"Let me put some numbers into perspective. The cost of buying these new aircrafts will be approximately RM23bil spread over 5 years (RM4.5 bil/year), MAS has RM2bil in borrowings but only RM2.2bil of cash. For the last 5 years, MAS's profit minus loss after tax is -RM500mil. Now you tell me how to save MAS? Just die la, like Proton and most GLCs you are a national liability not an asset."

That was some time ago and what do we have now? An AirAsia-MAS deal in which everyone calls it shady. MAS’s lacklustre financial performance in recent quarters and if you ask me for the past decade had resulted in the share swap between MAS and AirAsia on August 9. GLC Khazanah takes on a 10% stake of AA in exchange for a 20.5% in our national airline. This essentially means Tony Fernandez (TF in short) is able to sit on the MAS board. TF is certainly happy as his local rival Firefly is now gone with the wind and will probably close shop sooner rather than later.

"Tan Sri Fernandes has admitted that one of the contributing factors for Tune Air agreeing to this deal is Firefly. Firely a low cost airline of MAS covering the domestic sector, was stealing its market share. Out of every three Firefly passengers, two were from AirAsia and one from MAS. 60% of AirAsia's revenue comes from the domestic market, so Firefly was a threat."

On Nov 3, Bursa Malaysia and the SC is probing this deal for a possible insider trading but this is a "wayang kulit" show laaa as explained by Sakmongkol (will be difficult to understand if you are attuned to Mahathir's political life): http://sakmongkol.blogspot.com/2011/11/when-rats-are-away-cats-come-out-to.html.

Anyway my story here is to tell folks that this very apparent 'shady deal' has ramifications for consumers. With budget domestic flight competition soon striped away, AA has virtual monopolisation. And as many would know by now, monopoly means no competition hence fares won't go cheaper from now on. In Malaysia you see similar monopolisation for example TMNet and Astro Binariang. The lack of competition will lead to inefficiency and eventual decline in the fortunes of a company when the competition comes, as it inevitably does. Some may argue that this deal is in response to the flight industry liberalisation in 2015 whereby Asean airlines will have unrestricted access to airports within the grouping. But how can you marry loss making MAS and profit making AA? Like a Hollywood love story in the making. Will Ananda Krishnan's daughter marry a Chow Kit drug addict? Highly unlikely. Again we just want to *SAVE FACE* by helping the ailing national carrier.

Maggie Wu Ya Xin 吴亚馨 is a model from Taiwan (born 8 Oct 1983).

I do not favour investing in companies with loads of debt and GLCs and is a reason why I totally shun away from putting any form of money into the aviation industry whether it is for short term gain or long term basis. My strategy is simply to avoid debt laden companies (D/E ratio) as part of my risk mitigation. Consider the below DE ratios (the higher ratio the more debts it has vs capital):

Malaysia Airline System: 1.477 with net profit in the red (in the RM millions range).
AirAsia Berhad: 2.039 but net profit of over RM1bil.
Thai Airways: 2.204 but also earning money over RM5bil.
Ryanair Holdings: 1.101 
Southwest Airline: 0.649 
Cathay Pacific: 0.713
Singapore Airline: 0.153 (the only one standing apart from the rest)

MAS airline is the only airline in the list that is bleeding and limping. But both airlines: *AA and MAS face a lot incoming debts*, the deal has to happen. The problem with MAS is not because of competition, nor high fuel cost (which is frequently being reported by the media). MAS is not making money because of political/govt interference in the management of the airline. E.g. SkyChef catering biz of the airline is linked to a relative of a govt personality way back in 2006. I bet the other services like maintenance, vendoring supplies to etc are now all linked to cronies some way or another. Will this deal spread the cronyism disease AA management side one day? This is MAS's benefit.

Why is this deal so important for TF?? TF is making a huge gamble to be in the business with the government. He used to be competing with MAS which was easy in the first place hence most of AA's profit is within the country only not overseas. Now he wants to take on the big guns. Read this article carefully: http://biz.thestar.com.my/news/story.asp?file=/2011/6/24/business/8966621&sec=business. As of 31 March 2011, based on data from their 1st Quarter report, AA’s capital commitments stood at RM 19 billion. With that announcement, another RM 54 billion is needed and now roughly RM 75 billion will be spread over a 15 year period ending 2026. Short to say, AA needs to earn as much as Thai Airways does right now, a whooping RM 5 billion per year to meet these dues. Now consider this, for the last 5 years, AA only managed to grow its profit 10 fold  from ~100 million to roughly 1 billion. Second, it's cash holdings has grown only x6 in the same 5 years but its debts has x7 from 1 billion to 7 billion. To me it is unsustainable, borrowing more money on top of money, a bubble in the making. Where does the money come from then? Khanazah...which is of course from us taxpayers la. Win-win for both of them and Kanneh the rakyat will most likely end up as the losers. Government should stick its hand out from the business sector. Now I will suspect that *both* will come and "Minta Nasi". Sien lorrrrr.

Maggie Wu

Flying Above The Rest AirAsia

Before I dwell deeper into AirAsia's financial performance, why not take a snip at its strategy. AirAsia is quite well known to be a "blue ocean" company as their concept is similar to Southwest Airline's model. The below strategic profile illustrates how both these low budget airline company's effective strategy in reinventing the airline industry via value innovation.

Key lesson that every great strategy must have a focus and the above value curve clearly shows it. AirAsia has untapped uncontested market space and making competition irrelevant as the average airline can't compete as they invest in all airline industry competitive factors. AirAsia like Southwest Airline focuses on three core factors: service, speed and flight frequency.

I would think CEO Dato' Tony Fernandez actually copied the model (though he established the company before the book was published) but took a step further by modifying it to stand apart. Four actions of eliminating, reducing, raising and creating, he managed to differentiate AirAsia's profile from the industry's usual profile.

Eliminate

Over the counter booking system, Free F&B on the flight

Reduce

Seat quality & less on flight attendant

Raise

Flight frequency to popular destinations & speed of air travel

Create

Online booking system
Point-to-point travel between cities instead of hubs

But like all blue ocean businesses it will become a bloody red one after more players copy the model (e.g. SIA's Tiger Airways & FireFly) and thus change is imperative. Right now AirAsia is looking good as recently it far exceeded market expectations when its core net profit increased 10-fold to RM270 million in 3Q'10 beating all analysts estimates by RM146 million to RM200 million. It is also the cheapest low-cost carrier (LCC) stock based solely on its PER of 7x while Tiger's PER is 17x and Ryanair (Europe's LCC) at over 15x. More about its financial next round.

How will AirAsia evolve to fend off competition? It comes in the form of free. Ryanair is already starting to draft creative ideas by actually making air travel absolutely free! Instead they derive their earnings from ancillary income (Money earned by an organisation through an activity that lies outside its normal core activity and purpose). Such as baggage check in, food & beverage on flight, advertising and have even mooted out the idea of having in-flight gambling. Free is become a trend nowadays and in 2009, "Freemium" was the word of the year and also hold the record of being the second most notorious word after "Fuck". See how big companies make money from free? Facebook, Google, Skype & Pandora (Internet based but we should see other industries follow suit one day).


Is MAS doing any better? Oh please, this is another retarded GLC. MAS is taking delivery of three Boeing 737-800 (US$80mil/each) end of this year with another 32 more in the next four years. This is in addition to another 15 more Airbus A330-300s (US$200mil/each) plus 6 units of A380-800 Super Jumbos (US$330mil/each) within the 2011-2015 timeframe. Spending model does not translate into revenue earning capabilities especially when there is no clear marketing strategy (btw MAS is an average airline on the strategy canvas). Perhaps like Syabas, MAS will be coming around to the government with a bowl in hand to ask for bailout. This is according to Sakmongkol AK47 in which I believe is credible source. 

Let me put some numbers into perspective. The cost of buying these new aircrafts will be approximately RM23bil spread over 5 years (RM4.5 bil/year), MAS has RM2bil in borrowings but only RM2.2bil of cash. For the last 5 years, MAS's profit minus loss after tax is -RM500mil. Now you tell me how to save MAS? Just die la, like Proton and most GLCs you are a national liability not an asset.