ECM Libra Research has downgraded Malaysian Airline System Bhd (MAS) to a sell at RM2.70 with a target price of RM2.44, as it cuts its estimates and pegs the target price to one time price-to-book value (P/BV) on concerns that the falling load and high fuel cost pose high risks to the airline’s earnings.

“For exposure to airline stocks, we recommend investors to sell MAS and switch to AirAsia Bhd as the latter will benefit from down trading and its low-cost structure will also enable it to weather the effect of falling demand and increasing competition more effectively,” it said.

The research house said MAS’ FY08 results were below its own but in line with market expectations.

“Similar to other airlines around the world, MAS’ 71.8% year-on-year (y-o-y) decline in bottom line was a result of a triple squeeze, that is, high effective fuel cost despite crude oil prices falling to US$40 (RM148) per barrel level as most airlines have oil hedges around US$100 per barrel; falling margins following the removal of fuel surcharges, and falling demand as the global economic slowdown adversely impacted business as well as leisure air travel.

“Amid such a challenging environment, no dividends have been proposed for FY2008. We have accordingly removed our dividend estimates for the future,” it said.

Reflecting overcapacity and falling demand, Asia-Pacific passenger traffic and freight volume have tumbled 9.7% and 26% respectively in December 2008, said the research house.

“Likewise, MAS was not spared as passenger seat factor declined from 70.8% in 4Q07 to 65.3% in 4Q08 even after an 11% cut in capacity ASK (average seat kilometre) from 14.1 billion km to 12.5 billion km.

“Cargo division fared much worse as capacity was cut 23% y-o-y although cargo load factor did hold better, improving from 64% to 65.6% in 4Q08 due to the aggressive cut,” it said.

ECM Libra said the MAS management had alluded to at least another 5% and 20% cut in
passenger and cargo capacity respectively in 2009.

“For the cargo division, management also does not rule out the possibility of cutting capacity by as much as 40% going forward,” it said.

The research house said that although MAS had achieved 60% improvement in yield (revenue per km or RPK) since FY05, this may come to an end in 2009 due to competitive pricing with the lowering of fuel surcharges for its international routes and complete abolishment for domestic routes.

“Furthermore, MAS is at a disadvantage to AirAsia as the former has hedged 64% of its 2009 fuel requirement at US$100 per barrel (crude oil) while the latter benefits from full exposure to much lower spot prices which is currently around US$45 per barrel,” it said.

At last Friday’s close, MAS shed two sen to RM2.68.