- It was reported by newswires last night that MalaysianAirlines System (MAS) is scrapping plans to set up a new regional premiumcarrier. Coincidentally or not, the move comes hot on the heels of Qantas'decision to hold back plans to set up an ASEAN-based regional premium carrier.

- To recap, Qantas last year announced plans to set up acarrier based in ASEAN. The plan came amid worsening operations in Australia;Qantas was looking at a lower cost base for its operations and wanted to tap onthe growth in Asian travel. Qantas was previously considering setting up itsnew airline either in Malaysia or Singapore. In March 2012, however, talks withMAS fell through, reportedly due to disagreements on capital investments andstake size.

- On the bright side, we believe the creation of a newairline would probably have required heavy investments in re-branding MAS'sshort-haul services and would have increased the risk to its brand visibilitycompared to maintaining the current short-haul business under MAS's existingbrand name, which has been around for decades long.  

- However, the decision to scrap the premium regionalairline plan also seems to suggest that MAS is facing strong resistance fromits employees, particularly in regard to new terms and conditions attached toproposed changes. Reports have it that earlier plans to set up a regionalpremium carrier would have required MAS's staff assigned to its shorthauloperations to sign a new contract with the new carrier under new terms and conditions,which among others, would have involved up to 30% pay cuts, a rigid performance-basedreward system and entailed weaker influence of staff unions.

- While it is difficult to ascertain how MAS plans to moveits short-haul business going forward, we believe MAS giving in to its union'srequests seem to suggest difficulties in implementing changes. We see this as arisk to its  turnaround plan ' staff costis the second largest chunk of opex (14% of cost), while staff productivity ispoor, relative to regional peers. We maintain our HOLD rating on MAS with anunchanged fair value of RM1.25/share. Given that our earnings forecast does notincorporate any upside from the regional premium airline, we make no changes toour projections.

Source: AmeSecurities