By Chan Quan Min
Malaysia Airlines’ latest restructuring plan is not likely to see the airline file for bankruptcy, at least not in the near future, as despite years of unprofitability the airline is still financially solvent.
Surprising for an airline that has been unprofitable or barely breaking even for five long years, Malaysia Airlines is sitting on a cash pile of RM3.4 billion as of March 31.
And at current cash-burn rates of approximately RM450 million per quarter, according to Maybank aviation analyst Mohshin Aziz, it will take “a little over a year” before Malaysia Airlines goes into financial distress.
Mohshin defines financial distress as having a cash balance of less than RM1 billion, a level where cash flow issues could impact flight operations.
Even then, Malaysia Airlines might not be considered insolvent. To be considered insolvent, and thus open to file for bankruptcy, the airline must show that it is unable to pay its debts when they fall due, according to insolvency practitioners.
The process by which a company goes into bankruptcy is known as liquidation or winding-up in Malaysia’s common law legal system. Any of the creditors of the company, the company itself or the Official Receiver can file a winding-up petition to the courts.
A long and drawn out process, bankruptcy is the option of last resort. A better and more likely option for Malaysia Airlines, given that is has the luxury of time – it won’t run out of cash for another year at least – is a deep corporate restructuring.
‘Bankruptcy’ is never preferable to a takeover
News reports have been perhaps too quick to call for bankruptcy or a ‘reboot’ of the national airline. Starting over with a clean slate is an enticing idea but terribly complicated to execute.
Najib Abdul Razak
While Malaysia Airlines has only officially stated it is in the midst a “thorough review of its business plan,” speculation has instead taken over with even the prime minister Najib Abdul Razak saying bankruptcy could be one option.
Najib’s comments come after several government officials, among them transport minister Hishammuddin Hussein said Malaysia Airlines would not be getting government help.
Given that bankruptcy is not technically possible for the one year that it will take for Malaysia Airlines to run out of cash, why play up the issue at all?
One possible reason, somewhat sinister, could be to diminish the public’s expectations ahead of an unpopular move such as a takeover by private bidder.
When the only other option is bankruptcy, or made to appear as such, a corporate predator quickly becomes a white knight.
Already, several key figures have allegedly made approaches to the Ministry of Transport to take over Malaysia Airlines, according to sources quoted by the Edge Financial Daily yesterday.
One of the three of the names being bandied about is not new. Rumours that Umno-linked billionaire Syed Mokhtar Albukhary was after Malaysia Airlines surfaced early last year. The other two potential bidders named in the Edge Financial Daily report are Ahmad Johan of Airod and Indonesian billionaire Peter Sondakh.
What might the restructuring look like?
Malaysia Airlines badly needs a workable restructuring plan to unlock value in the company. The most likely route to be taken, according to analysts, is first cutting back on unviable flights before spinning of profitable units such as its maintenance, repair and overhaul (MRO) division.
“There is the possibility that a cutback in capacity at MAS to mitigate immediate-term cash burn may be imminent,” said CIMB Research, following which, “industry yields may stabilise or even increase on a year-on-year basis.”
Analysts consider Malaysia Airlines ‘load active, yield passive’ strategy to be the source of its woes; a relentless decline in yields or average air ticket prices that has only deepened its losses quarter after quarter.
Whatever combination of moves Malaysia Airlines picks, it has to happen fast. A glance at the balance sheet shows that the airlines still has positive shareholder funds totalling RM3.5 billion. This could fast vanish given the rate at which the airline is losing cash.
One bright spot for investors is that even with the large amount of shares outstanding of 16.7 billion, the product of multiple rights issues, shareholder equity on a per share basis stands at 21 sen, just above the current trading price today of around 17 sen.
You must be logged in to post a comment.