Solid revenue growth but many airlines are struggling

Airlines globally saw strong revenue growth in July although this won’t last in the coming months, according to the latest Air Passenger Market Analysis report from the International Air Transport Association (IATA). Read the entire report here.

Total revenue passenger kilometres (RPKs) for IATA’s member airlines rose 6.2% year-on-year (YoY) in July. But this was down from the 8.1% seen in June. Capacity rose 5.5% and load factors were up 0.6 percentage points for a record high of 85.2% in July.

That said, IATA revealed global passenger demand was up just 5.3% YoY compared to 8.2% in June.

For many Southeast Asia legacy airlines, there’s no reason to celebrate.

Method to MAB’s madness or just mad?

Take Malaysia Airlines Berhad (MAB) for example.

In a statement to the media on 30 August (a day before Malaysia’s 61st birthday), MAB said its revenue available seat kilometre (RASK) stayed constant at 2% YoY but that jet fuel prices had risen 37% YoY.

MAB went on to say industry-wide overcapacity resulted in demand and yield pressures as well as shortage of pilots. The airline’s CEO described its 2Q18 earnings as a “stable performance”.

In reality, MAB’s performance is anything but stable.

It has come to our attention the airline has yet to file its 2017 financial statement to the Companies Commission of Malaysia (CCM) as is required for all private limited companies.

It is unclear why MAB hasn’t done so as it had complied with the 2015 and 2016 financial statements. See here.

In 2015, the year after the old Malaysia Airlines (MAS) was completely shuttered, the new MAB posted a net loss of MYR1.13 billion (USD275 million) and the following year (2016) the losses narrowed to MYR439 million.

Recall that sovereign wealth fund Khazanah Nasional had injected MYR6 billion into MAB as part of the MAS Recovery Plan (MRP). Some 6,000 MAS workers were retrenched and the airline’s fleet and network shrunk significantly.

We understand that MAB’s financial situation is now critical and that Khazanah Nasional had, over the past few months injected a further MYR300 million to the airline to help with its cashflow.

Its financial health is deteriorating so fast that MAB was believed to have recently brought in a fengshuimaster to its finance department, hoping to generate better fortune for the airline. It’s not clear how much the airline was charged for it.

Despite its perilous fiscal condition, MAB has sent out a request for proposal (RFP) to borrow money from the debt market to pay for nine Boeing B737 MAX planes with a list price of USD1 billion. And it has an MoU with Boeing for eight B787 Dreamliners.

Crazy but true.

The carrier is feeling the brunt of intense competition from low-cost carriers at home and within the region as well as strengthening jet fuel prices. It’s unclear to what extent MAB has hedged its fuel needs, at which price and for how long.

What is evidently clear is that the airline continues to struggle to make ends meet. MAB remains committed to paying GBP1 million (MYR5.3 million) this year to Liverpool Football Club as part of a sponsorship it undertook in 2016.

It’s uncertain why MAB chose to sponsor Liverpool FC: the club has not won the English league title in 28 years. MAB has had poor judgment in soccer sponsorships. Not too long ago it sponsored Queens Park Rangers, a London club owned by Tony Fernandes, the founder and owner of AirAsia (a competitor of MAB). QPR were relegated shortly after and now languish third from the bottom of the English Championship.

Meanwhile, MAB is facing intense safety scrutiny after the Australian Transport Safety Bureau (ATSB) released its findings, and Australian media suggested the failure and incompetence of the airline’s flight crew endangered the lives of its passengers during a flight from Brisbane to Kuala Lumpur on 18 July.

Read the damning full ATSB report here. MAB, however, defended its pilots, saying they were “highly experienced”.

This is the second serious incident involving a MAB aircraft in Australia in 2018. In January this year a flight from Sydney to Kuala Lumpur was forced to divert to Alice Springs when the A330 plane experienced technical difficulties.

THAI 010906

Other carriers feeling the pain, too

Garuda Indonesia and Thai Airways International are also struggling.

The Indonesian flag carrier is shutting its 3x a week non-stop flights from Jakarta to London Heathrowfrom 28 October, a sector that has been in operation from April 2017. The airline is using a Boeing B777-300ER for these flights.

Garuda reported a USD116 million loss for the first half of 2018, compared to a USD282 million loss in 2017. It blamed stronger fuel prices and rupiah (IDR) depreciation for the losses. The airline is delaying taking delivery of new aircraft in 2018 but will take three Airbus A330neos in 2019 and five Boeing B737 MAX in 2020.

Garuda has also shelved plans for a global USD500 million bond issue.

Over in Bangkok, Thai Airways International last month reported a USD93 million loss for 2Q18, citing higher jet fuel prices, low demand and intense competition as the reasons. Load factor fell from 78.5% in the same period last year, to 75.8%.

The carrier is undergoing structural changes, although nobody (not even the management) is quite sure when it will end.

THAI is looking at new leadership, with a new CEO supposedly to be installed sometime this year. The airline, whose cashflow isn’t in the best of shape, has plans to spend USD3 billion on 23 new aircraft.

Crazy but true.

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