KUALA LUMPUR: Airlines are bracing for an industry upturn in 2010 after going through its worst crisis ever, clipping the wings of many carriers.

No airlines were immune to the global financial meltdown, and the outbreak of H1N1 and fuel hedge losses only added further injury.

Some 14 airlines ceased operations this year, which also saw one of the best-managed airlines in the world, Singapore Airlines (SIA), posting its first losses since the SARS crisis in 2003.

On the local front, however, the fortunes were mixed for Malaysian Airline System Bhd (MAS) and AirAsia Bhd.

MAS posted operational losses over the first three quarters of the fiscal year ending Dec 31, 2009 while AirAsia managed to stay profitable throughout the nine-month period.

Looking back, MAS managing director and CEO Tengku Datuk Azmil Zahruddin said although the crisis turned out worse than it had expected, the airline had done what was needed to ride through the economic turbulence.

MAS’ strategies include the reduction of up to RM1 billion in costs, which was part of its Business Transformation Plan (BTP), a legacy of former boss Datuk Seri Idris Jala.

Tengku Azmil said MAS had also cut capacity and grounded three of its B747s while its regional peer Singapore Airlines grounded 17 B747s.

“We are in a better state compared to other airlines. We are not as bad,” Tengku Azmil told The Edge Financial Daily.

He added the airline, just like its other peers, had to sacrifice yields and discounted fares to woo more flyers amid the downturn.

Tengku Azmil said the national carrier’s focus now was to prepare for the industry’s recovery, which he estimated would come full swing earliest in the second half of 2010.
He said it is already seeing a pick-up in passenger traffic, signalling recovery was underway for the sector.

To prepare for the industry upturn, Tengku Azmil said MAS was already gradually increasing its frequencies on selected routes after slashing 12% to 13% capacity in 2009.
“When we increased capacity by 10%, there was a 20% increase in (passenger) traffic,” he added. However, he said MAS would not be increasing capacity “recklessly’’.

The situation was rather different for low-cost carrier AirAsia, which flew through the turbulence almost effortlessly as consumers switch to the budget carrier due to the slow economy.

Its group CEO Datuk Seri Tony Fernandes said in 2009, instead of cutting capacity, it increased capacity by about 20% quarter-on-quarter, while maintaining a commendable average load factor of over 70%.

He said the budget carrier had also boosted its ancillary income, which now accounts for 16% of its revenue.

“We defied gravity. We were able to finance nine of our planes with Barclays during a crisis. Tell me which other airline can do that?

“We really stood out in 2009. This did not come overnight. This shows that AirAsia has been a very strong brand that can be monetised,” he said in a recent interview.

Next year, the greatest challenge for the airline would be getting new routes, Fernandes added.

One development to look forward to in 2010 is AirAsia’s tie-up with JetStar, the low-cost unit of Australia’s Qantas. The budget airline would make an official announcement on the tie-up next month, Fernandes told The Edge Financial Daily.

He said the joint-venture agreement, which has yet to be formalised, was aimed at lowering the operating costs of both airlines.

“At this time of reducing costs, it makes sense for us to combine purchasing opportunities and sharing of ground handling and computer systems. This can be a precursor to possible revenue collaboration,” he added.

Fernandes, however, declined to comment as to whether the latest partnership could be a precursor to a full merger with Jetstar.

He said it was ‘‘possible’’ that both airlines could arrange a joint purchase of jet fuel, which accounts for the bulk of any airline’s operating expenditure.

Amid intense competition and rising costs, airlines are looking at collaborating with their peers to cut costs and increase revenue.

Several airlines were forced to consolidate to survive during the financial crisis.

However, unlike these ailing airlines, AirAsia managed to stay profitable this year while most of its peers flew into the red.

An AirAsia and Jetstar partnership could possibly be one of the most meaningful tie-ups in the region. AirAsia has the lowest unit cost in the world, Jetstar has dominance over some of the profitable routes Down Under while Qantas has a network to Europe and the US.

Another notable event for the industry was the relaxation on foreign ownership in Qantas by the Australian government — a move seen facilitating a possible merger of the airline if circumstances render consolidation a viable option.

Interestingly, Qantas has had talks with national carrier MAS on possible collaboration on maintenance, repair and overhaul activity, but did not materialise.

The year 2010 should nonetheless present a window for MAS to revisit these talks with Qantas or other airlines.

Both MAS and AirAsia embarked on fund-raising programmes in fiscal 2009 as they prepare for rising operating and capital expenditure next year.

AirAsia, which is aggressively expanding its fleet, had raised some RM500 million from a share sale, as part of its objective to have RM1 billion in cash by end-2009.

The budget carrier had also delayed the delivery of 16 aircraft for 2010 and 2011, a move favoured by analysts who were worried about AirAsia’s high gearing.

MAS, meanwhile, recently proposed a rights issue to raise some RM2.67 billion to partly finance its purchase of planes. The carrier’s largest shareholder is Khazanah Nasional Bhd, with a 69.33% stake.

Early last year, MAS placed a firm order for 35 B737-800s with an option for another 20 aircraft. The total cost of the 55 aircraft is US$4.2 billion (RM14.7 billion) at list prices.

In December, it placed a firm order for 15 A330 wide-body planes plus another 10 options at a total list price of US$5 billion. These planes are due for delivery 2011 onwards, along with another six A380s.

To finance the other planes, Tengku Azmil had said it would take on new debts and sign on sale and leasebacks contracts. He estimated MAS would have a gearing of 1.3 times by 2016 with such financing profile.

“We have been shrinking our network since 2005. We have considered we now have the ‘licence’ to grow and we want to grow again,” Tengku Azmil said at a recent press conference.

ECM Libra in a recent note said the news did not come as a surprise, considering MAS’ depleting cash pile due to outlay for settlement of expired derivatives as well as premium for the restructuring of its fuel hedge contracts.

It noted that on net cash basis, MAS’ coffers had fallen from RM3.2 billion to RM700 million over the same period.

“At the present cash burn rate, MAS’ cash pile could be depleted by mid-2010,” it said.

The research house maintained its sell call with an unchanged target price of RM2 on the counter, as it remained concerned about aggressive fare cutting.

However, another analyst said given the recovering environment, the discounting of fares may have reached a plateau.

MAS has had three sells, one hold, one underweight, and one underperform calls since December, with target prices ranging from RM1.96 to RM3.50.

SIA has had two buys, one sell, two neutrals and two outperform recommendations, with target prices ranging from S$11.50 to S$16.60.

Qantas had had one outperform, one neutral and two buy calls with target prices between A$3 and A$3.61.

It looks like recovery is truly underway for the industry, and it would be interesting to see how well airlines take advantage of the upturn.