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MAS to keep trunk routes in Malaysia air transport revamp

14-Nov-2005

KUALA LUMPUR (XFNews) - An air transport rationalization plan will likely see Malaysia Airlines (MAS) holding onto domestic trunk routes and giving up less viable domestic service to budget carrier AirAsia, industry sources said.

The plan, expected to be presented to the Cabinet next week, will reduce competition between the two airlines and help government-owned Penerbangan Malaysia Bhd (PMB), the parent of MAS, cut its losses, they added.

It will enable MAS to streamline its operations, freeing the national flag carrier to concentrate on profitable regional and longer haul routes.

Under the present arrangement, PMB books profits and losses on the domestic routes. MAS receives a fee for providing service on those routes but has to pay PMB a "disincentive allowance" if it does not perform up to expectations.

"Essentially, the plan is a win-win for all parties. It will help AirAsia achieve a higher load and yield through economies of scale, PMB cut its losses and at the same time, enhances MAS' operational cost structure," one source said.

MAS, another source said, wants to keep the trunk routes for international feeder connections and is willing to give up the other domestic routes. AirAsia is asking for monopoly rights to fly within East Malaysia and selected Peninsular Malaysia routes to ensure commercial viability.

As for non-profitable rural routes, the industry players are suggesting PMB continue to subsidize them as part of the government's social obligations.

"Since these routes are social obligations, PMB can tender out the services to other airlines on a subsidized basis," the first source said.

"The plan is expected to be presented to Cabinet next week," he added.

Analysts contacted generally see the rationalization plan as a good move for the industry and the public.

An analyst with a local research firm who declined to be named said: "Economically, such a plan is great as it makes sense to get a lower cost producer to provide the services.

"It will also enable PMB to reduce its losses and thereby reduce the taxpayer's burden as the cost of providing the services will fall dramatically with a lower cost airline," the analyst said.

"I think it is also fair that PMB continues its role in providing subsidies for some of the low-load routes as a social obligation," he said, adding this is still much better than having to absorb heavier losses with a higher cost producer.

The analyst said PMB is estimated to have lost 200 mln rgt on domestic routes last year.

He said AirAsia is expected to be biggest winner if the plans materialize while MAS will also stand to gain on efficient operational structure.

OSK Research aviation analyst Chris Eng concurred, adding that the rationalization is likely to be positive for AirAsia as the low-cost carrier will stand to benefit from economies of scale but said the plan is expected to be "largely neutral" for MAS.

AmResearch analyst Nigel Foo reckons that the plan will be a "win-win" for all.

"The bigger picture is that the man-in-the street will benefit from the plan ... AirAsia can fly passengers at a cost 8.4 sen per km, something that MAS, as a premium carrier would not be able to do. This obviously will be good for the man-in-the-street," he said.


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