Malaysian Airlines earnings set to show financial burden of loss of MH370

Wed May 14, 2014 5:00pm EDT

* Analysts say situation too uncertain to make estimates

* Q1 earnings due after Malaysia stock market closes

* Carrier looking to sell stake in engineering unit- sources

By Anshuman Daga

SINGAPORE, May 15 (Reuters) - Malaysian Airlines will report first-quarter earnings later on Thursday that are set to provide confirmation of just how badly the already loss-making carrier's finances have been hit by the vanishing of flight MH370 on March 8.

Struggling for years to cope with high costs and nimbler regional and international rivals, Malaysian Airline Systems Bhd's quarterly performance has been made so uncertain by reduced traffic and potential costs linked to the jet's unexplained disappearance that analysts say they simply can't issue January-March estimates.

The carrier known as MAS reported a net loss of 343 million Malaysian ringgit ($106 million) for the last quarter of 2013, squeezed between AirAsia Bhd on short-haul routes, and Gulf carriers and AirAsia X in the medium and long-haul market. The first-quarter numbers are expected after the close of trading on the Malaysian stock exchange on Thursday.

Its worst quarter on record was in October-December 2011, when a series of one-off provisions related to jet deliveries and maintenance pushed it to a 1.28 billion ringgit net loss.

The airline said last month that passenger numbers dropped sharply after MH370's disappearance, its load factor - or percentage of seats sold - slipping to 74.1 percent, close to January 2013's record monthly low of 73.9 percent. Analysts expect the uncertainty over MH370 to continue to deter travellers from using the airline, 69 percent-owned by Malaysian state investor Khazanah.

"If there is new political will to restructure, MAS can be saved from itself, and our forecasts, target price, and perhaps even our recommendation may be raised," CIMB said in a report this week. But the brokerage, which has a 'reduce' rating on the shares, said the path forward remains risky.

Analysts have long urged change at the carrier. As part of a strategic overhaul of the company, MAS is looking to sell a stake in its profitable aircraft maintenance unit, sources told Reuters this week.

UNCERTAIN TIMES

Regular customers like Ray Tan highlight the problem facing MAS. For the past two years, the Singapore-based technology executive flew MAS for business trips to Kuala Lumpur every fortnight.

Since flight MH370 disappeared, though, he has shunned the airline.

"If it's just the incident alone, I would think it's an isolated one, but right after it, there were a couple more breakdowns with the planes and that kind of really eroded confidence I had for MAS," said the 31-year-old, who won't even take the airline for leisure now.

Since last year, MAS has adopted a strategy of lowering fares to try and bolster traffic. Yet hampered by a strong trade union, it has also been unable to slash costs and improve productivity.

Analysts have argued that bringing in private investment and reducing the role of state investor Khazanah might promote change at the airline, improving competitiveness.

That prospect appears remote. Khazanah attempted to cut its stake in MAS in 2012, but the airline's main union successfully blocked a share swap deal with AirAsia that would have brought in a profitable airline with experience of competing aggressively.

"Their operating costs are still so high, they need to relook at the business model," said Kuala Lumpur-based Ang Kok Heng, chief investment officer at Phillip Capital. "Whatever restructuring they go through, they will have to overcome union opposition which is very difficult to do."

With no near-term improvement seen, investors including Khazanah may see the value of their holdings further eroded.

Since MH370 disappeared, MAS shares have slumped as much as 20 percent. Its market value has tumbled about 80 percent over the past five years, while the broader Malaysian market has risen about 80 percent.

($1 = 3.2385 Malaysian Ringgits) (Additional reporting by Al-Zaquan Amer Hamzah in KUALA LUMPUR; Editing by Rachel Armstrong and Kenneth Maxwell)