RPT-UPDATE 3-Lost flight MH370 tips Malaysian Airlines toward another year in red

Fri May 16, 2014 6:33am EDT

(Repeats item issued on Thursday, with no changes to text)

* Q1 net loss 443.4 mln rgt vs 278.8 mln rgt year ago

* Cancellations and China sales slide since MH370 lost

* Carrier likely won't return to profit this year - CEO

* In talks with banks on strategic overhaul - sources (Adds chief executive comments from analyst call)

By Al-Zaquan Amer Hamzah and Anshuman Daga

KUALA LUMPUR/SINGAPORE, May 15 (Reuters) - Malaysian Airlines said the "dramatic impact" of the vanishing of flight MH370 pushed the serial loss maker to its worst quarter in over two years, with a sharp drop in passenger traffic likely preventing it from returning to profit this year.

In a statement on Thursday, Malaysian Airline System Bhd (MAS) said its first-quarter net loss expanded by nearly two-thirds to 443.4 million Malaysian ringgit ($138 million) from 278.8 million ringgit a year earlier.

Already beset by high costs and stiff competition from regional and global carriers, MAS has lost money for the last three years. In a conference call with analysts, chief executive Ahmad Jauhari Yahya said the airline will likely miss its target of returning to profit in what will be an "uphill struggle" through 2014 after the March 8 loss of flight MH370.

MAS, 69 percent-owned by Malaysian state investor Khazanah, didn't provide financial targets for 2014, but said it's preparing a new business plan to try to cut costs. Reuters reported earlier this week that the airline is in talks with banks for a strategic overhaul, which may include the partial sale of its engineering unit and an upgrade of its ageing fleet.

"Two months on, negative sentiment and perception still outweigh, and this has impacted our company. Our turnaround plan for profitability by end of 2014 is probably now not achievable," CEO Jauhari said.

MAS said it saw high numbers of cancellations and a decline in long-haul travel after flight MH370, bound from Kuala Lumpur to Beijing, disappeared with 239 people including crew aboard. Sales in China slumped 60 percent in March in response to the loss of MH370, MAS said: The majority of the passengers travelling on flight MH370 were Chinese.

The hunt for the missing jet continues more than two months after its disappearance. MAS recently recommenced marketing activities, and the carrier said it hoped sales could improve later in the year.

"Sales prior to MH370 were only 4 percent short of target and we were on track to make up that shortfall at (Malaysian travel trade fair) MATTA, happening in mid-March. Then MH370 happened," Jauhari said. "Brand building has to be prioritized now. All our sales channels have been re-activated to regain momentum."

The airline said costs associated with MH370 are expected to be covered by insurance. "Where we have lost out is the revenue opportunity," Jauhari said.

Analysts - who had not provided first-quarter financial estimates because of the uncertainty surrounding the airline - expect the disappearance of MH370 to continue to deter some travellers from using the airline.

"Even without this incident, they would have to come up with some plan to fix the problem," said Tan Kee Hoong, analyst at Alliance Research. "But this will give them an opportunity to do something about their losses. They (management) can use this as a reason to restructure the company."

COST PROBLEMS

MAS has been squeezed between nimbler rivals such as AirAsia Bhd on short-haul routes, and Gulf carriers and AirAsia X in the medium and long-haul market.

Since last year, MAS has adopted a strategy of lowering fares to try and bolster traffic. Yet hampered by a strong trade union reluctant to embrace new working practices, it has struggled to slash costs and improve productivity.

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

"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, speaking before the first-quarter results were released. "Whatever restructuring they go through, they will have to overcome union opposition which is very difficult to do."

Asked when MAS will proceed with acquiring new generation aircraft, and seeking government approval for purchases, Jauhari said, "I think we will look that as part of our overall network revamp anyway." The carrier will evaluate purchasing strategy this year, he said.

Operating costs rose 6 percent in the first quarter, mainly due to higher fuel expenses and a weakening of the ringgit against the U.S. dollar, the airline said on Thursday.

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. MAS last raised funds almost a year ago through a $1 billion rights issue, backed by Khazanah.

NEW STRATEGY

MAS said on Thursday it needs a thorough review of operational processes and current plans to survive the "harsh business environment".

That echoes previously unsuccessful attempts to turn the company around. MAS unveiled a business plan in late 2011 that failed to achieve its target - turning a profit by 2013, by ending unprofitable routes and investing in new aircraft.

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.

The airline had said last month that its passenger numbers for March had dropped close to a monthly low in the wake of MH370's disappearance. Its next traffic update, on seats sold in April, is due within days.

Formerly regular customers like Ray Tan highlight the scale of 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.

($1 = 3.2190 Malaysian Ringgits) (Reporting by Al-Zaquan Amer Hamzah in KUALA LUMPUR and Anshuman Daga in SINGAPORE; Editing by Kenneth Maxwell)

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