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Quake adds to aviation challenges

By MIN HUN FONG | REUTERS

Published: Mar 17, 2011 23:13 Updated: Mar 17, 2011 23:42

KUALA LUMPUR: Japan’s earthquake adds to the aviation industry’s challenges for 2011 even though its impact won’t be as severe as last year’s Icelandic volcano eruption, the managing director of Malaysian Airline System (MAS) said.

Azmil Zahruddin told Reuters in an interview that it was too soon to determine how the quake will affect earnings of carriers, but will certainly be a factor weighing down profitability come the end of a “challenging” 2011.

“From an aviation standpoint, the impact to us is probably much lower than something like the ash cloud in Europe, though I do feel bad saying that. That’s not to underestimate the disaster itself,” Azmil said.

“Our flights were initially disrupted…essentially flights are back to normal, but we are monitoring the situation and radiation.”

The cloud of ash from the Icelandic volcano eruption that created a no-fly zone above Europe in April cost the industry over $1.7 billion in lost revenue, but the Japan quake was unlikely to have a similar effect, analysts said.

The quake will still weigh down investor and travelers’ sentiments, which may have an indirect impact on MAS, the Malaysian national carrier, although it was too soon to say.

“Demand is still not as strong as what it was, Europe is still looking quite weak, US is recovering but from a low base, Asia is still okay, but I think with what happened in Japan, the indirect ramifications are uncertain yet,” Azmil said.

“And there are still question marks over short- to medium-term demand. That coupled with high fuel prices is something to be concerned about.”

Despite a challenging 2011, Azmil said he was confident that MAS is suitably prepared for a stronger future.

MAS is coming off a decent FY2010, which saw its net profit surpass street expectations of a net loss. Its operating profit for the full year had more than tripled from the previous year, coming in at 137 million ringgit ($44.9 million).

MAS’ recovery is in line with the airline recovery story in the region as neighboring competitor Singapore Airlines reported a 20 percent increase in normalized net profit and Hong Kong carrier Cathay Pacific reported a record half-year profit.

However, oil costs and the disasters in Japan and political uncertainties in the Middle East threaten to derail the recovery at MAS, which underwent a restructuring in 2006 after a massive loss of 1.3 billion ringgit in the previous year.

Nonetheless, Azmil said much has changed in MAS in the last five years and that the company is in a much better shape now.

“The danger of this business is that you can get consumed by the short-term stuff,” he said. “But we also still have to look at the medium and long-term. There have been a lot of things that we’ve done to really put MAS in good shape and we’ve done a lot to streamline the cost structure.”

Azmil stressed that customer satisfaction is the key focus for MAS at the moment, and part of that entails expanding its destinations and the upgrade of its fleet.

MAS has taken delivery of four new Boeing 737-800s so far this year, and expects three more. It will also take delivery of six new Airbus A330s starting in April, as well as the A380 in the second quarter of 2012.

The new planes have opened up new medium-haul destinations, such as the Kota Kinabalu (in East Malaysia) to Perth route as well as the Kuala Lumpur-Kunming (China) route.

The price of crude will again be the dominant factor in determining airline profitability in 2011.

The price of WTI crude for May delivery has been rising since Q4 of the last year, although it fell recently following fears of the impact of the Japan quake on growth and energy demand.

MAS has hedged 25 percent of its fuel requirement at $88 per barrel for 2011, but it is exposed to the market for the remaining 75 percent.

Azmil said MAS’s prospects will be largely determined by fuel prices, its single largest cost, which will in turn determine whether it will increase fleet capacity this year.

MAS had earlier said that it planned to increase its fleet capacity by 4-10 percent in 2011, but Azmil said it could now be a “nominal” increase depending on 2011’s performance.

For more information visiit: http://arabnews.com/economy/article320682.ece

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