By : Group 5

MAS AIRLINES VS AIR ASIA

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EXECUTIVE SUMMARYThe purpose of this study is to

evaluate the financial performance of two main airline operators in Malaysia namely Malaysia Airlines and Air Asia. The airline industry is a large and growing industry. In the past years, air travel has been growing by 6% a year and scheduled airlines carried more than 1 billion passengers in 2008.

Also in this study, both the companies’ challenges and prospective are discussed

Further discussed in this study is the financial analysis of both MAS Airlines and Air Asia on its profitability and liquidity ratios to evaluate the businesses’ performance.

Conclusion and recommendation on which company investors should invest in constructed using the ratios valuation are then deliberated in the final section of the report

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BACKGROUND OF MALAYSIA AIRLINE INDUSTRY & COMPANIES

(MAS AIRLINES & AIR ASIA)INDUSTRY MALAYSIA AIRLINES AIR ASIA

Growing industry- more than 1 billion passengers in 2008.

Involves large capital requirements.

Two Key Players :- - Malaysia Airlines - Air Asia (Other Player in the industry) - Berjaya Air

All these three companies have different targeted customers, these three airline companies in Malaysia can co-exist with each other without eating over each other’s profit margin.

Began in 1947 as Malayan Airways.

Southeast Asia’s largest airlines & One of the world’s premier international carriers.

Listed on the stock exchange of Bursa Malaysia

(Malaysian Airline System

Berhad)

"World's Best Cabin Crew 2001 -2004" & “No. 1Economy Class Onboard Excellence 2006”.

Route network that spans through more than 20 countries

Low-cost aviation through innovative solutions, efficient processes and a passionate approach to business

“Now Everyone Can Fly”

(competitive edge in terms

of creating awareness of

the brand and budget

airline industry as a whole)

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COMPANIES CHALLENGES & PROSPECTS MALAYSIA AIRLINES

CHALLENGES PROSPECTS

Financial loss of RM1.3 billion in 2005.

People crisis - rated poorly for employee related matters and staff morale was at an all-time low.

Airline slash staff and unprofitable routes and sell non-core assets.

Mounting operational costs - higher operating charges were attributable mainly to the amortization of foreign exchange losses and the abnormal hike in fuel prices in the fourth quarter of 2000.

Initiate efforts to normalize its leverage and capital structure to bring MAS more in line with its competitors in the industry.

Attain world-class standard in terms of operational productivity, service levels and costs. Its focus is on improving quality and efficiency.

Reviewing the viability of the existing fare structure and routes; and the realigning and re-deploying of its aircraft capacity to markets that offer the greatest opportunities.

‘Transformation Programme’, (1) Flying to win customers (2) Mastering operational excellence, (3) Financing and aligning our business on P & L , (4) Unleashing talents and capabilities, and (5) Winning coalitions.

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COMPANIES CHALLENGES & PROSPECTS

AIR ASIACHALLENGES PROSPECTS

Security of their networks - The internet is a public domain and as such is vulnerable to attacks from hackers and viruses

Local competitors in the various countries they are having affiliates or subsidiaries (government)

Constraints - government policies and airport pricing . Different localities and countries have different technological standards, and quality control policies.

Recession, credit crisis and A (H1N1) influenza – a drop in Airline passenger traffic., 3.5 % overall.

Well-rounded and managed business - offering a simple “no frills” service at fares that are on average significantly lower than those offered by traditional full-service airlines.

Gate of profitable opportunities - global exposition, venture into internet booking and ticketless services for their marketing processes, they would be open to electronic commerce business solutions for their enterprise.

The replacement of its aging Boeing B737 aircraft with the Airbus A320 aircraft - opportunity to stamp its dominance as the ASEAN airline. With its unmatched network connectivity, frequency and full-fledged Airbus operation along with its low cost operations and low-fare model, it will enjoy a substantial edge over its competitors.

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FINANCIAL ANALYSIS (RATIOS)

Calculation and comparison of ratios which derived from the information in companies’ financial analysis.

The level and historical trends of these ratios can be used to make inferences about a company’s financial conditions, its operations and attractiveness as investments.

LIQUIDITY Ratio

Gives a picture of a company’s short term financial situation/solvency

PROFITABILITY Ratio

Which uses margin analysis and shows the return on sales and capital employed (ROCE)

SOLVENCY Ratio

Gives a picture of a company’s ability to generate cash flow and pay its financial obligations

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FINANCIAL ANALYSIS (LIQUIDITY RATIOS) YEAR 2009

RATIOS MALAYSIA AIRLINES AIR ASIA

1. CURRENT Ratio :Current Assets

Current Liabilities

4,733,1305,504,240

2,220,9721,709,688

Current ratio for Air Asia is higher than MAS Airlines. Air Asia has more ability to payback its short term liabilities with its short term

assets.

2. Acid-Test Ratio :Cash + ReceivablesCurrent Liabilities

(2,664,859 + 1,395,889)5,504,240

0.74

(746,312 + 721,028)1,709,688

0.86

Short term liquidity for Air Asia is more than MAS Airlines.

3. Receivable Turnover : Ratio

SalesAverage Net Receivables

11,309,855 1,395,889

3,132,901 721,082

MAS Airlines is more effective in extending credit as well as collecting debts.

0.86

1.30

8.10 4.34

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FINANCIAL ANALYSIS (SOLVENCY RATIOS) YEAR 2009

RATIOS MALAYSIA AIRLINES AIR ASIA

4. Debt to Total Assets Ratio :

Total DebtsTotal Assets

7780080 8527676

877740011398420

Measure amount and proportion of debt within liability of firm. High ratio = greater degree of outside financing to total assets.

High Rate ; High Risk AIRASIA has a lower percentage asset that provided via debt.

0.91 , 91%

0.77, 77%

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FINANCIAL ANALYSIS (PROFITABILITY RATIOS) YEAR 2009

RATIOS MALAYSIA AIRLINES AIR ASIA

1. PROFIT MARGIN ON SALES :Net IncomeNet Sales

493,10611,309,855

506,267 3,132,901

Air Asia is better than MAS Airlines in keeping its earnings of every dollar from sales,

2. RETURN ON ASSETS :

Net IncomeAssets

493,106 8,527,676

506, 267 11,398,420

MAS Airlines is more effective in its management of assets used to generate earnings.

3. ASSET TURNOVER :

Net SalesAssets

11,309,855 8,527,676

3,132,90111,398,420

The amount of sales generated for every dollar/ringgit’s worth of assets ratio for MAS Airlines is better than Air Asia.

0.04 0.16

5.78 4.44

1.33 0. 27

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FINANCIAL ANALYSIS (PROFITABILITY RATIOS) YEAR 2009

RATIOS MALAYSIA AIRLINES AIR ASIA

4. RETURN ON EQUITY :

Net IncomeShareholder’s Equity

493, 106 747,596

506, 267 2,621, 020

Profitability generated using the shareholders’ funds invested in MAS Airlines is better than Air Asia.

5. EARNINGS PER SHARE

29.3 20.6

Net income earned from each share of common stock in MAS Airlines is higher than Air Asia.

66.0 19.32

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BENCHMARKING (INDUSTRY RATIO)

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CONCLUSION & RECOMMENDATION

Both MAS Airlines and Air Asia future strategy are in line with the program to lower costs, keeping fares competitive, increasing revenue,

and delivering five-star products and services.

Overall, MAS has performed well in the current year of 2009 and it has a good prospect in the Malaysian Airline Industry. These are evidenced by the results in LIQUIDITY, PROFITABILITY & SOLVENCY RATIOS of the company which is more favourable as compared to Air Asia and the Industry rate as a whole. Furthermore, MAS Airlines is a Government- linked company (GLC). For having such important connection with the government, MAS could take advantage in running its operations to be more effective and efficient.

Therefore, it is recommended that prospective investors should invest in MAS Airline to expect considerable returns.

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THANK YOU FOR YOUR

ATTENTION

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