This article first appeared in The Edge Malaysia Weekly on May 9, 2022 - May 15, 2022

MALAYSIA Aviation Group Bhd (MAG), which narrowed its full-year net loss for 2021 by 60% over the preceding year, remains on track to achieve break-even in 2023 as part of its Long Term Business Plan 2021-2025 (LTBP 2.0). However, group CEO Captain Izham Ismail warns of headwinds from fuel and foreign exchange (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, posted a net loss of RM1.65 billion for the financial year ended Dec 31, 2021 (FY2021), a significant improvement on the year-earlier RM4.1 billion net loss when it was dealing with the effects of a slowdown in the global economy and travel restrictions.

Izham, who is also the managing director and group CEO of national carrier MAB, says the net loss for FY2021 beat its internal estimates for a RM1.94 billion net loss as it benefited from the results of a debt restructuring exercise that has seen the group’s liabilities reduced by over RM15 billion and RM10 billion in debt cut. A RM3.6 billion capital injection from its controlling shareholder Khazanah Nasional Bhd also gave the group a shot in the arm.

The group turned earnings before interest, taxes, depreciation and amortisation (Ebitda) positive to RM433 million in FY2021, compared with a negative Ebitda of RM1.76 billion in FY2020.

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

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

He says in FY2021, 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 for year to date up until March 2022.”

Apart from the successful restructuring, he attributes the positive Ebitda recorded in FY2021 to strong cargo revenue performance and stringent cost management.

Despite lower passenger traffic and reduced capacity for MAG of 62% and 70% respectively in 2021 due to continued travel restrictions, the group managed to make more money from its air cargo segment given high global demand, which led to increased freighter and belly utilisation via passenger-to-cargo flights. MABkargo’s revenue jumped 52% year on year to hit a record RM3 billion in FY2021, compared with RM1.98 billion in FY2020, with yields growing by an average of 12%.

Izham also attributes the improvements in cash flow to MAB going to the market responsibly, with its “yield active, load factor passive” strategy, adding that it is “working well”. MAB recorded 57% higher yield in passenger revenue last year.

A successful restructuring propelled its full-service peer Philippine Airlines to post a profit for the first time since 2016, with its parent PAL Holdings Inc reporting FY2021 net profit of PHP59.1 billion compared with a net loss of PHP71.8 billion in the previous year.

Low-cost airlines such as financially distressed 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 FY2021 net loss of RM3.12 billion is expected to narrow to RM1.5 billion and RM9.9 million in FY2022 and FY2023 respectively before turning a net profit of RM120.5 million in FY2024.

“We remain bullish on MAG’s future [and] cautiously optimistic about the environment. Returning to positive cash flow is a critical milestone on the road to recovery for airlines. The restructuring [that MAG] undertook in 2021 gave us the opportunity to repair our balance sheet holistically and address decades-long legacy issues,” says Izham.

“Lower operating costs from the cost-saving initiatives across the group and lower leasing costs post the successful restructuring 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 travellers eager to resume their travels.

“Since the announcement, ticket sales have been showing substantial growth of more than 100%.

“We are currently looking at very encouraging advanced booking on MAB, with a more than 80% load factor on most flights. Top destinations include Kuching, Kota Kinabalu, Sandakan, Tawau, Kota Baru and London. We are progressively ramping up our capacity in view of the opening up of borders to international destinations as we anticipate travel demand for international travel to pick up in the coming weeks,” he says, adding that the airline is expecting to restore more than 70% capacity to pre-pandemic levels this year.

Still, he cautions that even as the drivers of domestic economic activity are getting stronger, the group faces headwinds from high fuel prices and overcapacity. “This will put tremendous pressure on our financial performance as we must carefully balance increasing capacity and profitability.”

According to him, fuel price at current levels of US$110 to US$130 per barrel makes up 40% to 45% of the group’s total operational cost — an increase of about 35% to 40% from a year ago. Energy information provider Platts’ price data shows that jet fuel price was US$174.40 per 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 is also facing headwinds from fluctuations in currency exchange rates as the bulk of its expenditure or 47% is in US dollars; thus a weaker ringgit will have an adverse impact on the group’s financial performance, says Izham.

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 of air travel continues. “Impacts from the conflict in Ukraine on air travel demand were quite limited overall while Omicron-related effects continued to be confined largely to Asian domestic markets,” it said.

Asia-Pacific airlines saw a 197.1% rise in March traffic, measured in revenue passenger kilometres, compared with the same month in 2021. This was an increase over the 146.5% gain witnessed in February this year versus February 2021.

On the progress in finding a strategic investor for MABkargo, Izham says the group continues to evaluate opportunities for strategic partnerships for its various businesses. Last year, MAG hired Standard Chartered Bank to explore strategic options including a potential stake sale to strategic investors for MAG’s profitable wholly-owned air cargo unit.

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

Last October, Bloomberg, citing people familiar with the matter, reported that MAG had been weighing the sale of a minority stake in its air cargo unit to a strategic partner.

Izham told The Edge in a December 2021 interview that forging strategic partnerships is aligned with the group’s LTBP 2.0’s five strategic pillars: to become a premium Asia-Pacific carrier, recapture the domestic and Asean market, drive deeper commercial partnerships, diversify its revenue streams, and make digital the cornerstone of its business.

MABkargo offers belly space capacity on the MAB passenger fleet as well as dedicated freighter space with three Airbus A330-200 freighters. MABkargo’s last filing with the Companies Commission of Malaysia shows that its net profit surged 94% to RM351.12 million in FY2020 from RM180.54 million in FY2019, while revenue rose 56% y-o-y to RM1.98 billion from RM1.27 billion.

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