ECM Libra Research has revised Malaysian Airline System Bhd’s (MAS) FY08-FY10 earnings forecast upward by 5% to 7% on the back of higher fuel surcharge but slightly offset by lower passenger traffic growth.

Maintaining its buy recommendation for MAS at RM3.20, the research house said the revision had minimal impact to its discounted cash flow-derived valuation of RM5.40, implying a 10 times price earnings ratio to FY09 earnings.

“Our buy call is maintained, premised on crude oil pulling to an average price of US$100 (RM330) by FY09,” it said.

The research house said soaring oil prices had taken a toll on airline companies in recent months, resulting in a number of airlines filing for bankruptcy while others are struggling to maintain profitability.

“Surviving airlines are forced to increase its fuel surcharge, introduce/increase baggage surcharge, downsize their network and reduce workforce,” it said.

ECM Libra said fuel surcharge remained one of the most direct approaches to pass on higher cost.

“MAS will raise its fuel surcharge by an average of 35% on majority of its routes, except China routes, with effect from June 27.”

“The increases in surcharge on particular routes are benchmarked against other airlines to ensure its competitiveness,” it said.
The research house said passenger throughput continued to grow over the past two years despite numerous fuel surcharge hikes, showing that the demand for air travel being somehow upward-sticky.

“However, with the world economy headed for a slowdown and inflation spiralling, passenger growth is likely to slow down correspondingly. We are revising our passenger growth assumptions downward by 1% to account for this,” it said.

ECM Libra said that apart from raising fuel surcharges, MAS would also leverage on other initiatives to lessen the increasing fuel cost pressure including increasing fares by 5% to 15%, reducing capacity on selected routes during low seasons and other fuel efficiency programme as highlighted in its business turnaround plan.