Who benefits from the MAS, AirAsia share swap?

By Jahabar Sadiq
Editor

August 09, 2011

AUG 9 — The jury is still out on whether the proposed share swap between Malaysian Airlines Bhd (MAS) and AirAsia Bhd will benefit the beleaguered flag carrier as its in-house unions threaten strikes and voting for the opposition if the Najib administration goes through with the deal today.

Both MAS and AirAsia shares have been suspended for trading until this evening pending an announcement that could see the low-cost carrier’s main shareholder, Tune Air Sdn Bhd, get 20 per cent of the national airline. The unlisted Tune Air is jointly owned by Tan Sri Tony Fernandes, Datuk Kamarudin Meranun and Datuk Aziz Bakar.

The Malaysian Insider has reported that the share swap will eventually see MAS reclaim its position as a premium airline, leaving low-cost operations to be dominated by AirAsia, Asia’s biggest budget carrier that was just a two-plane operation when Tune Air bought the airline for RM1 in 2001.

Some analysts and MAS staff have argued that the government needs to rescue the airline that has been bleeding red ink in the past few quarters rather than sell a stake to “the enemy” as AirAsia has been known since it became a runaway success.

But can Putrajaya throw good money after bad into a virtual airline that has had its books cleaned up in 2002 under the wide asset unbundling (WAU) exercise. That restructuring was engineered by the BinaFikir consultancy, then led by Tan Sri Azman Mokhtar, the current managing director of Khazanah Nasional Berhad, MAS’s ultimate main shareholder.

After all, the state-owned airline has already had two rights issues since the WAU, raking in RM1.6 billion in 2007 and RM2.67 billion in 2010 to fund its operations and fleet purchases. How much more money is required to stop the airline from bleeding red ink after a rather peaceful flight under former managing director Datuk Seri Idris Jala?

The past financial fixes haven’t helped MAS. Another round of money won’t either, an industry source told The Malaysian Insider despite a touted RM8.4 billion aircraft renewal programme.

“Most of the past solutions for MAS, either the WAU or Jala’s business transformation plan, were financial in nature to keep the airline in the black. But what is needed are operational fixes,” he added.

Saving MAS

Government officials familiar with the deal said Khazanah and AirAsia have been talking about a tie-up on five separate occasions but have never been able to come to terms. Among the issues are pricing and reaction from MAS in-house unions and the Malay ground that could have political repercussions for the ruling Barisan Nasional (BN) government.

“It has never been easy and even this deal is not easy. But the choice is clear, take this deal and save MAS with the government keeping the majority stake or let it bleed and 20,000 people lose their jobs,” said a government source who spoke to The Malaysian Insider on condition of anonymity.

The source also dismissed talk of selling out Bumiputera equity, saying Khazanah will still keep the main stake through its wholly-owned unit Penerbangan Malaysia Bhd (PMB) while Tune Air itself has a majority Bumiputera shareholder through Kamarudin and Aziz.

“Yes, Tony is the public face of AirAsia but it’s Kamarudin who also runs the operations,” he said, adding this gives a chance for the state-run airline to work with entrepreneurial Bumiputeras rather than just the bankers and accountants who have run MAS.

The government source noted that Fernandes was named Airline CEO of the Year for 2009 while AirAsia has won the World’s Best Low-Cost Airline award for 2009 and 2010, proving world-class talents are at MAS’s doorstep.

He also pointed out that picking Tune Air to help save MAS would benefit both airlines in the long run, despite talk that the premium market is shrinking and the tie-up was effectively a cartel.

“There is demand for a premium airline. Just look at the Gulf carriers such as Etihad and Emirates. They are breaking into the premium market that is controlled by Singapore Airlines,” the source added.

It is understood that Emirates will soon start flying its Airbus A380 on the Dubai-Kuala Lumpur route, cutting further into the premium market that MAS once dominated. Gulf airlines are now using their fifth-freedom rights to ply the Dubai-Kuala Lumpur route and beyond — the same right that benefited MAS and Singapore Airlines in the past.

As to whether the share swap will lead to a cartel, an industry source said both companies will keep their respective boards and compete on some routes but still benefit from several synergies.

So, who benefits from the deal?

ECM Libra, in its research note, said the partnership would allow AirAsia to continue what it does best with less predatory competition, while MAS can concentrate on serving the premium segment with better revenue yield.

It also said that there are opportunities for cost-savings as both airlines would be able to bargain better for future aircraft purchases, as well as minimise duplication of resources such as that in the maintenance, repair and overhaul (MRO) area.

AirAsia currently outsources its MRO to Singapore but the share swap deal could push the low-cost budget carrier to use MAS services instead.

An analyst agreed the partnership will allow MAS to cut the queue for aircraft such as the A380 as AirAsia is one of Airbus’ largest customers with more than 200 orders and options.

“MAS used to have clout with the airplane makers but its scant purchases over the years has diminished that,” the analyst said, pointing out that MAS will only start getting the A380s next year, some four years after the initial delivery scheduled for May 2008.

“MAS can get more aircraft, faster and cheaper, if AirAsia is in the picture,” he added.

Co-operation and competition

The analyst also said market segmentation will help both carriers benefit from the range of travelling types in the 21st century, saying MAS could potentially be the premium long-haul and short-haul airline to AirAsia’s budget service for both markets.

“Some prefer to go business class and refuse to take AirAsia even for short-haul flights. Perhaps Firefly can fill that market. The possibilities are limitless,” he explained, saying this would still mean competition for passengers in the Malaysian market.

Opposition lawmakers have said the impending share swap could lead to a monopoly or cartel but the analyst noted that Singapore Airlines has announced it will set up a low-cost carrier while Australia’s Qantas already operates a budget service under Jetstar.

“There’s always some competition. Don’t forget that AirAsia is Asia’s biggest low-cost operator and that is what makes it an attractive option for travel,” another analyst said, adding it will remain a strong force in the growing regional passenger market as it services all 10 Asean capitals.

Realising KLIA’s potential

One main beneficiary will be the KL International Airport (KLIA) which can now act as an inter-lining hub for both premium and low-cost carriers.

“It gives travellers more options especially when KLIA2 starts operations. People can pick and choose if they want to go premium or low cost in one hub and even buy a combination of tickets from one source,” an aviation analyst said, referring to the new low-cost terminal being built now.

He noted that KLIA had never fulfilled its promise as a hub as it lay between Bangkok and Singapore, the traditional hubs for European and Asian airlines. “The tie-up can push KLIA to be a major hub,” the analyst said.

He pointed out Singapore Airlines will probably operate on the same lines once it launches its budget carrier. “It makes sense. Budget airlines will feed premium airlines and vice-versa especially if both operate from one hub,” he added.

Malaysia wins?

In the end, he said, Malaysia will benefit from having two airlines that can cater to all segments of the passenger and cargo market.

“Both sides can win from this deal as it can resolve MAS operational issues. That’s the one thing that has dragged it down,” the analyst said.

A government source agreed, saying: “The bottom line is the bottom line must be black. There are very few options left for MAS.

“The WAU and the other financial fixes didn’t keep MAS up in the air long enough. It’s up to Tony and Kamarudin to make it work this time,” he added.