Username
Password
Forget Password?
  1. Indices
  2. Commodities
  3. Currencies
Straits Times 3,114.16 -11.98 -0.38%
Hang Seng 26,719.58 -128.91 -0.48%
Dow Jones 26,819.28 -206.60 -0.76%
Shanghai Composite 2,938.14 -39.19 -1.32%
A Marriage Of “Inconvenience” Ends In A “Timely” Divorce
Malaysia Perspective | 24 May 2012
By:

By Predeeben Kannan

The Malaysia Airlines-AirAsia short-term marriage of resources and routes was just another chapter in the dismal state of affairs facing the local airlines industry. Eventually, this chapter was put to a close with dissolution of the inadequate arrangement.

9 August 2011 was an important day for the management of Malaysia Airlines (MAS) [SYM:3786] and AirAsia [SYM:5099]. They had agreed to what many thought was impossible – a share swap arrangement, in which Khazanah Nasional to sell 20.5 percent of its over 68 percent stake in MAS to Tune Air and Khazanah to buy 10 percent stake in AirAsia from Tune Air. As part of the deal, Khazanah was also reported to take a 10 percent stake in AirAsia’s sister company, long-haul low-cost carrier AirAsia X.

The objective of the arrangement (at least in Khazanah’s perspective) was to enable MAS, the ailing national flag carrier, to benefit from a new competitive management culture via the entry of AirAsia’s dynamic leadership. The plan was for MAS to concentrate on the premium travel sector while AirAsia focuses on the short- and medium-haul budget services.

Not a day had passed before statements were issued by the Malaysian Airlines System Employees’ Union (MASEU), which questioned the partnership’s true intentions and benefits to the MAS employees. Continuous dissatisfaction about the meddling by the new management and the security of jobs at MAS, prompted MASEU to have several meetings with Prime Minister Datuk Seri Najib Tun Razak to voice discontent over the security of the national carrier’s workforce.

The union’s efforts seemed to have paid-off. Khazanah, acting as parent to MAS, issued a statement on 2 May with regard to the termination of the share swap deal with AirAsia major shareholder Tune Air. It was reported that both Tan Sri Tony Fernandes and Datuk Kamarudin Meranun resigned from the MAS’ board the same day, while Datuk Mohamed Azman bin Yahya followed suit and resigned from the AirAsia’s board.

Though both airlines agreed to continue co-operating – underpinned by the signing of two memorandum of understandings for joint maintenance services and the establishment of a special purpose vehicle to extract procurement synergies such as fuel oil, aircraft components and parts – the special relationship and genuineness factor seemed to have ended with the termination of the share swap agreement.

Handing Over The Red Flag
Bleeding in red ink is nothing new to MAS’ operations. The airline has been a loss-making corporation for most of its active lifespan, with just several short spells of profits. Therefore, the decision by MAS to remove the “red” stripes and logo for the new A380 Airbus planes were seen by some as an indication that the management was unhappy with the continuous bleeding the airline had underwent over the years.

In the late 1990s and early part of the 2000s, MAS went through several bad spells due to a worse-than-today’s economic landscape and bad management. These circumstances caused MAS to operate in the red, and in turn paved way for the infamous Malaysian government takeover from Tan Sri Tajudin Ramli in 2000. Then, the government bought back Tan Sri Tajudin Ramli’s shares at RM8 each – more than twice the prevailing market price of RM3.62. In 2006, Datuk Seri Idris Jala introduced his Business Turnaround Plan 1, which led the airline to experience a short reprieve in 2007 when it recorded profitability. He also initiated MAS’ Widespread Asset Unbundling programme, which led to the airline taken out from the “life-support” system for the first time in more than a decade.

How things have changed. Today, MAS is once again a loss-making airline. Importantly, it needs to raise enough money for the aircraft it has purchased – including six A380s that are pending delivery this year and the next. Its capital expenditure for 2012 is RM6 billion and another RM3.5 billion in 2013, however, it has just RM1.1 billion in cash reserves and is suffering from a cash burn rate of RM5 million a day.

It was for these reasons that MAS chairman Tan Sri Mohammed Nor Yusof publicly appealed to MASEU to allow the share swap arrangement’s turnaround plan to succeed. “MAS is a very sick patient and its condition is quite critical. Indeed, there is a full range of prescriptions available, but judge us by the result and not by the choice of prescription,” noted Tan Sri Mohammed Nor Yusof in an issued statement.

With the plea falling on deaf ears, the entire foundation of the MAS-AirAsia agreement came falling apart like a building collapsing on its own weight. To add salt to the already critical wound, the airline now faces a possible downgrade by Skytrak, which acts as an important aviation measure for service standards.

Even former Prime Minister, Tun Mahathir Mohamed was disappointed with the dissolution of the agreement between the two airlines. He, for one, strongly believed that the co-operation between MAS and AirAsia should be continued for the benefit of both companies.

“I see people opposing, not the co-operation forged by both, but the manner in which the share swap deal of the airline companies was done. This is what many people protested against. Now that the deal has been cancelled, the co-operation should continue as there is much that MAS can learn from AirAsia,” said Tun Mahathir Mohamed. “(AirAsia’s) Fares are very cheap and are even free sometimes. Logically, AirAsia should be bankrupt but it has been able to provide the same service for the past 10 years. On the other hand, despite the RM3 billion government aid that it has received, MAS is still losing money every year.”

Some Support Gained
However, not everyone was so critical about the unwinding of the share-swap arrangement between MAS and AirAsia. The Singapore-based Centre for Asia Pacific Aviation (CAPA) believed that the collaboration between MAS and AirAsia can continue without a share swap as it is normal for airlines to co-operate and compete against each other at the same time.

CAPA chief analyst Brendan Sobie said, “Airlines collaborate all the time without a share swap. If they can successfully implement the collaboration without the share swap, they should still be able to realise all the benefits of the partnership.” He pointed out, “For example, Singapore Airlines and Thai Airways compete but are both part of the Star Alliance. AirAsia and MAS can continue to operate independently and compete on certain routes.”

Support also came from the Congress of Unions in Government Linked Companies and Privatisation. It welcomed the government’s move to cancel the share swap deal between MAS and AirAsia. Its president Mohamed Shafie Mammal expressed full support for the action taken by MASEU, which led to the cancellation of the share swap deal.

According to him, the matter was raised during a meeting between the Prime Minister and MASEU’s president Alias Aziz on 9 April. “The cancellation offers a big room to the union, and to employees who can now continue to work without having to worry about any possibility that they may face. Therefore, the Congress supports the action taken by the government and express our gratitude to the Prime Minister as this showed the government’s concern about MASEU’s complaints and demands,” Mohamed Shafie Mammal said.

A day after the announcement of the cessation of the share swap arrangement, AirAsia’s share price climbed to its highest since 12 March – jumping 27 sen to end at RM3.60 with 13.75 million shares traded. On the same day, MAS’ shares added two sen to end at RM1.24.

*Information from various sources.

Predeeben Kannan has more than 15 years senior level experience at various media organisations in Malaysia and Singapore. For more dialogue, please e-mail predeeben@gmail.com.


Join The Conversation
The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

All Rights Reserved. Pioneers & Leaders (Publishers) Pte Ltd. Best viewed with Mozilla Firefox 3.5 and above.