Malaysia Airlines has been the biggest victim of the budget airline onslaught in Asia.

An airport staff waits for passengers at Malaysia Airlines' check-in counter at the airport in Beijing on Monday. European Pressphoto Agency

The disappearance of Malaysia Airlines 3786.KU -4.00% flight MH370 will add to the growing financial problems at the country's state-run airline, which is already mired in steep losses.

Malaysia Airlines has been the biggest victim of the budget airline onslaught in Asia. Though well respected for its high levels of service, the carrier has had a particularly difficult time playing defense in its backyard against the rise of AirAsia 5099.KU 0.00% Bhd., the region's biggest low-cost carrier, which operates mainly from its Kuala Lumpur hub.

Shares of Malaysia Airlines fell as much as 20% when markets opened Monday, wiping out more than $100 million off its market capitalization following news of the missing plane over the weekend. The plane had 227 passengers including 12 crew members aboard, when it departed from Kuala Lumpur to Beijing on Saturday.

"I'm expecting it to affect consumer sentiment," said Daniel Wong, an analyst at Hong Leong Investment Bank, 5819.KU -0.28% who cut his price target on Malaysia Airlines' stock by 30% to 0.20 ringitt in the wake of the incident. "People will get very wary of Malaysia Airlines' branding and will likely go for other airlines." That will likely force the airline to offer cheaper tickets or other promotions for the next year, until the incident fades from memory, he added.

Hong Kong-based travel agency Package Tours (HK) Ltd. said it has received some enquiries from customers requesting to be rebooked on other airlines for flights to Kuala Lumpur instead of Malaysia Airlines. "Most customers remain rational and agreed to carry on their trips with Malaysia Air if they can't get a seat with other carriers," the company's business consultant Chun-Ning Yuen said.

Nasdaq-listed Ctrip.com International, one of China's biggest online travel websites, said it hasn't seen significant requests from Chinese travelers for cancellations and rebookings. "There has been no major difference between the cancellation rates before and after the accident," a spokesman said.

However, the outlook for the government-based airline remains clouded by intensifying competition from low-cost carriers. Budget airlines were virtually nonexistent in Asia just a decade ago, but now command an over 50% share of all air passenger traffic in Southeast Asia, thanks in large part to the success of AirAsia, which is helmed by a charismatic former Warner Music executive.

Malaysia Airlines' flights within Asia suffered as AirAsia slashed ticket prices on many key domestic and regional services, while its once prized long haul flights reeled from a sharp slowdown in passenger demand in the aftermath of the global financial crisis.

AirAsia's more recent foray into the medium-range services—those between five and eight hours flight time—has further weakened the competitiveness of Malaysia Airlines on flights to Japan and Australia.

The carrier, which is 61.4% owned by Malaysian sovereign-wealth fund Khazanah Nasional Bhd., has been unprofitable for the last three years, though the airline has recently said it was finally expecting better times ahead with more demand for premium travel. The airline has also been considering a major fleet renewal project to order new short-haul and long-haul aircraft, executives said earlier. They said they are confident that premium passengers would pay more to fly Malaysian Airlines if they offered better services.

Still, to stem losses, the carrier in 2012 cut flights to Cape Town and Buenos Aires, and said it would end flights to Los Angeles in April—the airline's only North American destination—having served the city since 1986. The flag carrier's choice of fleet expansion was also questioned by analysts when the airline opted to buy several Airbus A380 superjumbo jets, which carry over 450 passengers. Analysts were skeptical whether the airline has any routes that require such substantial capacity.

"Malaysia Airlines has a good safety (record) and a great crew but the wrong people are running it," said Shukor Yusof, an analyst with Standard & Poor's's Equity Research. "People with no clear vision of what the industry is looking at…. They are way behind the curve."

"The financial outlook, notwithstanding the MH370 incident, is dismal. It is pointless to complain about AirAsia, high jet fuel prices and an uneven playing field," Mr. Yusof said.

Malaysia Airlines' problems have been exacerbated by government interference in its operations and stiff union resistance to cost-cutting overhauls. In 2013, Malaysian Airline System Bhd., the firm that operates Malaysia Airlines lost 1.17 billion ringgit, or nearly $360 million, compared with a 432 million ringgit loss in 2012. In 2011, it lost 2.52 billion ringgit, its biggest ever loss.

"The main problem for Malaysia Airlines is their legacy cost structure," said Sharifah Farah, an analyst at Affin Investment Bank, 5185.KU +0.74% citing long-term contracts and union difficulties that have weighed on profits for years, allowing intense competition from low-cost carriers such as Air Asia to swipe market share. "These problems are not new," she says.

In 2011, AirAsia's chief executive, Tony Fernandes, agreed to a share swap to help relaunch and rebrand Malaysia Airlines with a fresh advertising campaign. The deal unraveled the next year with Mr. Fernandes blaming unions for blocking badly needed changes in its operations. Malaysia Airlines' managing director, Ahmad Jauhari Yahya, recently began another attempt to revive the carrier's fortunes.

The financial problems facing Malaysia Airlines don't necessarily suggest that safety standards at the airline have been compromised and there is no evidence the crash is tied to its financial woes. It has a high safety rating—a six-star rating out of seven—according to a review in January by airlineratings.com, which rates airlines by various categories.

But the airline has suffered two deadly crashes in the past. In 1977, a Boeing BA -0.25% 737 was hijacked and subsequently crashed in the south of the country, killing all 100 people on board. Then in 1995, a Fokker 50 operated by the airline crashed during an approach to the airport at Tawau, in the state of Sabah, killing 34 of the 53 people on board.

The Malaysian flag carrier, established in 1937, flies to 80 destinations across the globe. The carrier operates a fleet of around 88 aircraft, including six Airbus A380 jets that are its flagships. It also has Boeing 747-400, and Airbus 330 widebody jets and Boeing 737 single aisle jets that fly on shorter routes.