August 21, 2014 / 4:16 AM / 3 years ago

UPDATE 3-AirAsia's prospects seen improving as MAS prepares restructuring

* Fare wars in Malaysia expected to ease

* MAS overhaul likely to result in capacity cuts-analysts

* Malaysian business key profit driver for AirAsia

* All AirAsia’s overseas affiliates in the red in Q2 (Adds buyside comments, more company quotes)

By Al-Zaquan Amer Hamzah and Anshuman Daga

KUALA LUMPUR/SINGAPORE, Aug 21 (Reuters) - Budget carrier AirAsia Bhd’s quarterly results point to early signs of a recovery in its Malaysian market ahead of a restructuring by Malaysian Airline System Bhd (MAS) that is expected to reduce intense competition in the sector.

With MAS already squeezed by three years of losses due to price wars on local and long-haul routes, analysts expect the biggest competitor to AirAsia and long-haul arm AirAsia X Bhd to trim unprofitable routes as part of an overhaul.

Over the last few years, both MAS and the AirAsia group have added seat capacity to grab market share, with last year’s entry of Malindo, an affiliate of Indonesia’s Lion Group, putting further pressure on yields in the Malaysian sector.

“I think the worst should be over for AirAsia. Their competitor is in a weak position. What we worry about is if the competitor has deep pockets and is deeply motivated to compete, but MAS is not strong financially,” Ang Kok Heng, chief investment officer at Philip Capital, said on Thursday.

Thomas Yong, chief executive at Fortress Capital Asset Management, said the improving industry yields might spur the money manager to reconsider investing in the aviation sector.

“Potentially, we think the yield compression will be getting better,” he said, but added that inbound traffic, especially from China, was still weak.

AirAsia’s net profit jumped more than five-fold in the quarter ending June, stoked by foreign exchange gains, deferment of taxes and a small increase in the number of passengers. Operating profit, however, declined 17 percent, burdened by losses in its Thai affiliate.

In an encouraging sign for Asia’s biggest budget airline, its average fares charged in Malaysia fell only 1 percent year-on-year versus a 9 percent decline in the previous quarter. The improvement came as “irrational pricing of competitors is diminishing,” AirAsia said.

“We are beginning to see some rational competition, which I think after the MAS privatisation, will only improve quite dramatically. I suspect capacity will be taken out,” Group CEO and co-founder Tony Fernandes told analysts in a conference call late on Wednesday.

AirAsia’s Malaysian airline business is profitable, but the company’s airline joint ventures in Indonesia, Philippines and Thailand all made losses in the second quarter.

CUTTING SEAT CAPACITY

Passenger traffic at MAS has suffered since flight MH370 disappeared on March 8 and after the downing of flight MH17 over Ukraine on July 17. The carrier is now in the process of being delisted by state investor Khazanah Nasional before a comprehensive restructuring likely to be announced this month.

AirAsia’s net profit rose to 367.16 million Malaysian ringgit ($116 million) in the three months ended June from a year ago. Its shares have fallen 25 percent over the past year, versus a 4 percent rise in the broader index.

In a report titled “Malaysia Air’s pain could be AirAsia’s gain,” Goldman Sachs analysts said last week that in any restructuring effort, MAS will likely remove planes on unprofitable routes and rationalize its fleet, noting that the carriers had a route overlap of 73 percent.

Examining previous turnaround initiatives by MAS, it said the carrier had been most aggressive in scaling back domestic seats offered.

MAS declined comment on its restructuring, but the airline’s management has been working on a plan that could cut the national airline’s over 19,000, largely unionised workforce, freeze pay, speed up retiring older planes and retrofit some of its current fleet to add seats, people close to the airline have told Reuters. (1 US dollar = 3.1660 Malaysian ringgit) (1 US dollar = 11,698.0000 rupiah) (Additional reporting by Yantoultra Ngui; Editing by Stuart Grudgings and Matt Driskill)

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