SARS impact on industries
The Star (BizNews) - Saturday, 19 April 2003

The outbreak of the deadly virus has sent airlines scrambling to cancel flights to those countries most affected by the disease.

By DARSHINI M. NATHAN

 WHEN it rains, it pours. Up until recently, the whole world was obsessed with the impact the US-led war on Iraq would have on the global economy.
Then, unsuspectingly, a distraction emerged of a deadly kind known as SARS (severe acute respiratory syndrome).

As concerns over the atypical pneumonia has resulted in not-so crowded malls and airports, and many other public galleries, the fear of lower private consumption and slower growth is getting real.

Whereas all hope was previously pinned on the Asian region to keep the global economy afloat, pundits are now tripping over themselves in their haste to downgrade earlier growth forecasts for economies in the region.

Closer to home, the tourism, airline and entertainment industries are some of the more direct and obvious casualties of the deadly outbreak of SARS.
But observers are claiming that the impact on other areas of the economy will start to become increasingly evident if the spread is not contained soon.


Tourism

Like Hong Kong and Thailand, Malaysia too appears most susceptible to damages wrought by SARS given tourisms' important role in its economy.

The sector accounts for 8 per cent of real gross domestic product (GDP), 17 per cent of real private consumption and is the country's second largest foreign exchange earner.

Unfortunately, visitors from SARS-affected countries make up the bulk of visitors to Malaysia.

Last year, tourists from China, Hong Kong, Singapore, Thailand, Indonesia, Japan, Taiwan and Vietnam accounted for 80 per cent of total inbound tourist arrivals to Malaysia.

According to the Culture, Arts and Tourism Ministry, tourist arrivals from China, Hong Kong and Taiwan have fallen some 80 per cent following the outbreak of SARS.

An economist expects tourist arrivals to decline by 14 per cent to 11.5 million visitors this year. This means that the local economy stands to lose an income of some RM3.4 billion, which is equivalent to 0.8 per cent of real GDP.

This has led one research house to believe that the tourism sector will be given a booster shot in the form of fiscal pump-priming measures expected to be announced by the government soon.

There is also likely to be greater emphasis and thus additional measures on promoting domestic tourism as a means to offset the expected decline in international tourist arrivals.

Airlines

Whereas intra-Asian travel was until recently thought to be the saving grace for regional airline companies, the outbreak of the deadly virus has sent airlines scrambling to cancel flights to those countries most affected by the disease.

Malaysian Airline System Bhd (MAS), for one, had altered its strategy and was banking on its Asian routes to cushion the impact of revenues lost as a result of a prolonged war in Iraq. The Asian flight segment contributed almost a third of MAS' revenue in financial year (FY) 2002.

Because of SARS, the company has thus far cancelled a total of 716 flights to Asian destinations such as China, Hong Kong, Taiwan, Thailand, Indonesia and Singapore.

Although the measures are necessary, they will by no means enhance the carrier's bottom line.

Not surprisingly, G.K. Goh Research analyst Azam Yahya has come up with an earnings downgrade to reflect a six-month impact of the virus outbreak and the war on the company's FY04 net profit forecast, which it has slashed by 39 per cent.

Some other brokerages are claiming that their initial forecasts are now considered to be on the optimistic side and thus they too are likely to come up with downgrades in the weeks ahead.

There is some reprieve for the airline in the sense that the market development programme which it is a part of has been suspended for three months.

This will provide MAS with greater flexibility in setting its own fares in response to market demand rather than adhere to the agreement that sets the minimum prices for airfares among the 26 signatories.

Some observers also say the airline's cargo division could stand to benefit from the cancellation of passenger flights.

Lower belly hold capacity on passenger flights generally leads to higher demand for freighter flights.

MASkargo, the carrier's cargo unit, has reportedly seen a strong surge in volumes handled recently. The suspension of passenger flights by regional competitors due to SARS and the war had also prompted MASkargo to add on more freighter flights to Europe and China starting early this month.

Airports

Slower international tourist arrivals are expected to impact negatively on Malaysia Airports Holdings Bhd's international passenger volume.

According to the Transport Ministry, the Kuala Lumpur International Airport has already seen a 28 per cent drop in its passenger traffic over the past six weeks as travellers cancel their trips due to the deadly virus.

The government's move to temporarily restrict the issuance of visas to tourists from China and Hong Kong can only be expected to exacerbate the situation for the airport operator.

MAB chairman Tan Sri Basir Ismail was quoted saying that it (MAB) may have to look at means of getting assistance from the government to cover its losses.

Affin-UOB Research is expecting a 5 per cent contraction (based on regression analysis) in MAB's international passenger volume in 2003, based on a 13 per cent decline in tourist arrivals for the same year.

In addition, the research outfit reckons a downward revision to its FY03 earnings estimate for MAB by 18 per cent is justified, as lower passenger volume is also likely to affect the operator's other aeronautical activities, airport retail sales and hotel operations.

And if the airport operator is banking on domestic passenger volume to bolster its operations during this time, a slower GDP growth for 2003 is expected to lead to a slower 2 per cent growth in domestic passenger volume at MAB's airports this year.

Leisure and entertainment

This is one sector that has taken a direct hit from the spread of SARS. With foreign visitor arrivals down sharply and the government's move to freeze the issuance of visas to tourists from China and Hong Kong analysts are claiming that the earnings estimates for Genting Bhd and Resorts World Bhd certainly warrant a re-look.

Visitors from Singapore and China - two countries that have been hare hit by the virus outbreak - account for a large portion of the overseas visitors that frequent the casino it Genting Highlands.

A foreign research outfit says the eventual impact of SARS on the group's casino and resorts revenue will depend on the duration of the outbreak, its impact on regional economies and visitor arrivals to Malaysia.

But for now, the research house has already moved to slash by hall its assumption of foreign tourist arrivals to the casino in FY03.

Furthermore, it has lowered its FY03 earnings per share forecast by 16 per cent for Genting and 27 per cent for the 56.5 per cent-owned Resorts World.

Resorts World is also believed to be carrying an added burden currently owing to its 34 per cent interest in associate Star Cruises Ltd.

Some 30 per cent of the company's cruise capacity is positioned in the Asia Pacific region, namely,

Singapore, Hong Kong and Vietnam. It hasn't helped that two members of its crew were suspected of being probably SARS cases only last week.

A research house has thus taken to assuming that the occupancy rate for the cruise liner's Asia Pacific operations will fall to 50 per cent from 85 per cent for six months owing to the outbreak.

However, it reckons that the negative impact on the company's FY03 earnings could possibly be lessened should the disease be contained sooner than expected and the company moves to reposition its routes so that it targets markets that are less affected by SARS.

Until then, the research outfit reckons a net loss of US$11.4 million is more likely for the luxury cruise operator in FY03, instead of an earlier anticipated US$33.3 million net profit.

Retail

With no end in sight to the spread of the disease, it has been noted that consumers are making it a point to stay away as much as possible from crowded places like supermarkets, shopping malls and restaurants.

Pure retailers like Jaya Jusco Stores Bhd are apparently already feeling the pinch, as it has nothing else to fall back on except... you guessed it, retail sales.

According to a research house, the store has seen sales fall about 10 per cent on average so far this April, compared with the corresponding period last year. It reported that sales have fallen across all outlets, with 1 -Utama being the hardest hit.

As a result, the research house has not dismissed the possibility of a potential downgrade to its projected 12 per cent earnings growth for the current financial year ending February 2004.

Food and beverage outlets are also likely to feel the effects of consumers keeping away and lower tourist arrivals.

Brewery

There have been no reports of widespread quarantining or infection here but there is a possibility that the decline in tourism numbers could already be dampening beer sales at entertainment spots.

Malaysia's move to restrict the entry of visitors from mainland China isn't expected to offer any help in boosting tourist arrivals in the country either.

A research house hasn't as yet anticipated a drop in draft sales from the SARS scare, but it reckons entertainment outlets are likely to be hit should there be a sudden deluge of cases reported here.

Education

This is one sector that has yet to reel from the effects wrought by the deadly pneumonia-type virus. But industry players and analysts alike have not dismissed the possibility that some damage could be done if the scourge prolongs.

For now, the temporary freeze on students from SARS-affected countries is likely to bear only a minimal impact on those private colleges with student intakes from China.

According to Affin-UOB Securities, it is understood that Inti Universal Holdings Bhd has 100 outstanding students from China, whose student visas are likely to be revoked.

"This number, however, represents only 0.7 per cent of Inti's total student population and hence produces only a negligible impact on group earnings," it says.

Currently, foreign students comprise 17 per cent of total student population of 14,300, where 800 consist of Chinese students already studying at Inti's campuses.

Surf88.com believes the temporary freeze will not have an impact on Inti's April 2003 intake and the next enrolment in August will only be affected if the freeze is extended past June.

Meanwhile, Stamford College Bhd has reported that the epidemic has yet to affect its intake of students from China, but it claims that the intake would be affected if the freeze prolongs.