This article first appeared in The Edge Malaysia Weekly on January 16, 2023 - January 22, 2023

MALAYSIA-based carriers, which had been loss-making even before the outbreak of Covid-19 in 2020, are racing against time towards profitability amid a general rise in airfares as demand for air travel continues to outstrip supply following the reopening of borders by most countries over the past year.

AirAsia X Bhd — the middle-haul, low-cost affiliate of Capital A Bhd — is off to a good start for the year. It reported a net profit of RM32.83 billion for the 15 months ended Sept 30, 2022, after undergoing a debt restructuring last year, which saw it write back RM33.6 billion in provisions and forgiveness of liabilities.

Meanwhile, low-cost carrier Capital A is targeting to return to profitability in the current financial year, which ends Dec 31, 2023, after slipping into the red in 2019. Its net loss widened to RM2.74 billion in 9MFY2022 from RM2.23 billion a year earlier.

Loss-making Malaysia Aviation Group Bhd (MAG) — the parent company of national carrier Malaysia Airlines Bhd, FlyFirefly Sdn Bhd and MASwings Sdn Bhd — is sticking to its break-even target in 2023 despite managing to deliver a profit in the fourth quarter of 2022. Breaking even will mark a significant milestone in the aviation group’s Long Term Business Plan 2.0.

Its group CEO Captain Izham Ismail believes an inflection point is just around the corner. Two years after MAG successfully emerged from a restructuring involving RM15 billion of debt owed to 75 creditors, the group is expected to report higher revenue and a narrower net loss in the recently ended FY2022, thanks to a resurgence in air travel resulting from the reopening of borders.

Based on preliminary unaudited results for FY2022, MAG posted earnings before interest, taxes, depreciation and amortisation (Ebitda) of more than RM1 billion, a 116% increase over the previous year. The group turned Ebitda positive of RM433 million in FY2021, from a loss or negative Ebitda of RM1.76 billion in FY2020.

The group expects revenue for FY2022 to triple to more than RM10 billion from RM3.96 billion in FY2021 as it adds more capacity and extends coverage. It is also poised to report an unaudited net profit of about RM600 million for 4QFY2022. This would be its first profitable quarter since it underwent a full reset in 2015. Sovereign wealth fund Khazanah Nasional Bhd took Malaysia Airlines private in 2014.

More importantly, MAG’s operations have remained cash-flow positive in the past 450 days. “We hit cash-flow positive in October 2021. Today, we have a comfortable cash position that is expected to tide us over the anticipated economic volatility in 2023,” Izham tells The Edge in an interview.

He declines to reveal the size of MAG’s cash pile, only describing it as being “comfortable” enough for the group so it does not need to draw down on the remaining RM2.3 billion of new capital committed by its shareholder Khazanah for now. In February 2021, the sovereign wealth fund committed to inject a total of RM3.6 billion into MAG to fund the latter’s business until 2025 as part of the debt restructuring deal.

Izham says the group has drawn down more than a third, or RM1.3 billion, of the funds to date. “We spent the money to stabilise the group when borders were still closed [in 2021]. By September 2021, [the RM1.3 billion] had been used up. But since then, we have been generating cash flow.”

In March 2021, former Khazanah managing director Tan Sri Shahril Ridza Ridzuan was reported as saying the capital injection was “to give certainty to the plan” so that creditors could in turn provide discounts, haircuts and partake in debt-to-equity conversions required to fix the balance sheet.

“The whole idea of the RM3.6 billion in new capital from Khazanah is to ensure that MAG continues its business and serves as an instrument of policy to the country. It is not money given to us for ‘shiok shiok’ (pleasure),” explains Izham.

“MAG is on the right path to recovery. The group remains on track to break even in 2023 and will probably attain profitability next year, although we are pushing hard to be profitable [in 2023],” he adds.

Despite tailwinds from continued high passenger traffic and airfares, Izham refrains from committing to an overly bullish outlook against the backdrop of soaring fuel prices, which are linked to the war in Ukraine, along with high interest rates, foreign exchange (forex) volatility and talk of a global recession. These headwinds could delay MAG’s full recovery, he says.

As fuel and other goods get more expensive, analysts have grown more concerned that more consumers could put off discretionary spending, such as travel. In view of this, 2023 offers no respite for the airline industry.

“When running an airline business, there is never a day you can take a break. We are working 24/7. The market is extremely volatile,” says Izham.

“At MAG Group, an aircraft takes off every three minutes. Safety is our concern. Customer expectations are constantly high. The job is getting tougher by the day. There is no downtime per se.”

MAG was one of the first Asia-Pacific airlines to complete a debt restructuring exercise during the pandemic.

“I would say MAG as a company has reinvented itself. It is a totally different company today. It is lean and agile and it balances between investment and prudence. It balances between gaining credibility from shareholders, stakeholders and consumers. No doubt it has been a difficult journey, but the restructuring in 2020, with the support of our creditors, has given MAG a lifeline and a chance to redeem itself,” says Izham.

“If the restructuring hadn’t happened in 2020, MAG would have still struggled in 2021 and 2022, and even in the foreseeable future. In 2020, we were able to restructure our balance sheet, reduce our debt-to-Ebitda ratio by 49% and lower the lease rates of our aircraft by an average of 20% to 25%. That gave MAG a fighting chance [to survive]. The organisation has capitalised on that and we are what we are today.”

Izham has been watching the entry of new airlines with some concern as it could create a potential overcapacity in the industry — an issue Malaysia-based airlines were grappling with, on top of thin margins, before the pandemic.

“It is a concern. These [new players] will drive overcapacity in the market, especially the domestic and Asean markets, which in turn will cause yields to collapse. So, I hope the players in the local aviation industry will go to the market and put in capacity cautiously. Otherwise, it would be a ‘killing field’ again like in 2019,” he says.

Having launched in December last year, low-cost carrier MYAirline Sdn Bhd flies to eight destinations across the country from its hub at klia2 in Sepang, using a fleet of three A320-200s. It is reportedly looking to commence international operations by March, with Indonesia, Singapore, Thailand and Vietnam among its target destinations.

While critics have pointed to the quick rebound to profitability among airlines such as Singapore Airlines and Philippine Airlines, Izham says the expectation was high for MAG to return to positive territory in 2022, looking at the momentum in the first quarter of last year.

The group had expected the momentum to carry through the year, but Russia’s invasion of Ukraine in February 2022 changed that, setting the group back as the price of jet fuel skyrocketed above its budgeted US$87 per barrel level, putting pressure on its operations on top of a stronger US dollar and high interest rates.

“Higher jet fuel prices and interest rates, as well as forex [fluctuations], drove our cost of sales up by about 35% to 40%. Hence, we went to the market to at least cover our cost of sales and deployed our capacity smartly,” he notes.

However, the higher airfares and additional revenue from increased capacity weren’t enough to offset the headwinds. The group’s profit and loss statement remained in negative territory last year, even though its losses have been reduced. It posted a net loss of RM1.65 billion for FY2021, a significant improvement from the previous year’s net loss of RM4.1 billion, when it was dealing with the effects of travel restrictions and a slowdown in the global economy.

“[If the war in Ukraine hadn’t happened] our conversation today would have been different. Probably it wouldn’t even be an interview, as I would be throwing a party,” says Izham.

According to him, the weakening of the ringgit against the US dollar had put pressure on carriers like Malaysia Airlines, as about 50% to 60% of its costs are in US dollars. In 2022, the ringgit lost as much as 14% against the greenback at the peak of the dollar strength in November.

Like many other airlines across the globe, MAG stopped fuel hedging in 2021 and 2022, and instead turned to fuel surcharges to cushion against the increased costs. But this year, it is looking to resume its fuel hedging programme.

“Hedging is important [to cushion against fluctuations in jet fuel prices]. Historically in 2019, Malaysia Airlines hedged between 15% and 20% of its projected fuel consumption,” says Izham.

“Bankers have been knocking on our doors since we turned cash-flow positive in October last year. Our lower risk profile is particularly attractive to them now.

“We are currently in the final stage of working out a fuel hedging mechanism and we hope to hedge a certain amount of fuel in 2023 in a progressive manner. When it comes to hedging fuel, it is driven by governance. It is not the CEO who can make the call. It has to be approved by the board.”

Meanwhile, aviation consultancy Endau Analytics founder and analyst Shukor Yusof says 2023 will remain a tough year for Malaysia-based airlines given the “higher jet fuel prices and interest rates, which could be compounded by natural disasters brought about by climate change and new geopolitical conflicts that have far-reaching consequences for the global food chain”.

Maybank Investment Bank Research aviation analyst Samuel Yin Shao Yang, however, expects airfares to ease a tad as airlines reinstate capacity. “With our expectation that the ringgit will trade at an average of 4.50 against the US dollar and jet fuel price will average at US$110 per barrel, we expect Capital A to break even by 3Q2023. Our jet fuel price assumption is premised on Brent crude oil price of US$95-US$100 per barrel and jet fuel-Brent crude oil crack spread of US$10-US$15 per barrel,” he says in a Jan 9 report.

Despite the lingering macroeconomic headwinds, China’s reopening on Jan 8 has given the region’s travel industry some hope and optimism. In the three years since China closed its borders, Malaysia Airlines had redeployed its capacity to Doha, Haneda and Bangladesh, says Izham.

In 2019, China accounted for 17% of Malaysia Airlines’ total capacity. Its current capacity into and out of China is running at less than 2% of that year’s capacity.

While the market in China is a key one for Malaysia Airlines, Izham says the national carrier is not in a rush to ramp up the number of flights or capacity in the country.

“Malaysia Airlines will deploy capacity to the market responsibly and cautiously. We now fly twice a week to Guangzhou. We have started flights to Xiamen, Shanghai and Beijing. We will slowly increase our capacity in China from 2Q2023 onwards,” he adds.

Under a route rationalisation exercise in 1Q2023, Malaysia Airlines will suspend its Kuala Lumpur-Brisbane direct flights in March, freeing up capacity. It plans to redeploy the aircraft to China.

“Network-wide, capacity deployed to date reached 85% of 2019 levels. In 2023, we are looking to increase the group’s capacity to 94%. This shows that even with fewer assets [aircraft], we fly more. Unlike the old Malaysia Airlines, when we had a lot of assets, we flew less. This is called ‘sweating your assets’,” says Izham.

The group is due to take delivery of 25 Boeing 737 MAX jets from June this year. In August last year, it acquired 20 new Airbus A330-900 (A330neos), of which 10 were purchased directly from the manufacturer on a sale-and-leaseback arrangement with Avolon, while the other 10 aircraft were leased directly from the aircraft leasing company. MAG currently operates a fleet of 100 aircraft, comprising six A350s, twenty-one A330-200s/300s, forty-seven 737-800s, seventeen ATRs, six Twin Otters and three A330 freighters.

MAG recently disposed of all six of its A380 superjumbos, grounded by Covid-19 in March 2020, back to Airbus. The condition was part of its request for proposals to aircraft manufacturers Airbus and Boeing for 20 new wide-body aircraft, according to Izham. However, he declined to say what Airbus paid for the A380s.

Already, the group has been working on its next business plan to take it from 2025 to 2030 under LTBP 3.0. “We are three years ahead of time. [The LTBP 3.0] will look into the growth of our aircraft fleet and capacity. We envision growing our narrow-body aircraft from 46 currently to about 60 by 2030, and our wide-body aircraft from 27 to 40,” says Izham.

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